3 Value-planning tests when acquiring an innovative company

M&A is a fantastic source of innovation-led growth. For established buyers, young, innovative start-up targets are tricky to bring on board. Each is unique, so there isn’t a standard pathway to post-acquisition integration.

Getting it right takes thought and a lot of care. Acquiring an innovative company can drive high-value outcomes but carries a lot of risks along the way. In this article, I will share some experiences and unpack some of the post-merger challenges that can be avoided with some early thought. I’ll encourage you to focus on pre-close planning and preparation, and share a few tools I find helpful in making the most of these exciting opportunities.

Test #1 - does it contribute to the strategy?

This is fundamental and goes back to the original deal logic. Does the target company help to improve the competitive position, develop new products or enter new markets? Or do they provide  much needed new capabilities, specialist facilities or skills to fill known gaps?

These foundations are often under-served, and I have found great value in taking a step back, pre-close, to confirm the deal logic and get everyone on the same page.

I like to run a quick workshop to kick around the ideas, expose any assumptions and document the deal logic. This includes a few searching questions:

• how well defined and documented is your own strategy?

• what does the target bring to the table?

• do you have the means to adopt and exploit the opportunities?

This is all about turning a loose collection of ideas into a single vision of the opportunity. I dip into  a basket of tools to help this process. Standards like GAP analysis, Ansoff and Boston matrices, Porter’s Five Forces, PEST and SWOT can all contribute if used well.

Like any strategic project, a bit of structured thinking at the beginning sets the scene for the work to follow. Most importantly, it provides critical challenge of the buyer’s own starting position, and exposes some gaps in knowledge for the due diligence process. Surviving this challenge puts the buyers in a strong position to progress having confirmed the validity of the overall deal logic.

Test #2 - can it create real value?

Doing the deal is not a magic wand that solves all a buyer’s problems and moves them into a new place. There is a necessary integration and transformation project to follow before things are aligned, operating, and performing under the new form.

Value is not guaranteed, and there are risks. The two companies will be mismatched, probably in many ways. Cultures, working practices, management methods and controls will certainly be different, and many things will have to change. Doing this whilst still trying to keep up performance and momentum of both parties is tough. It takes focus to drive value, and knowing where the value is most likely to come from is a great starting point.

I use more diagnostic processes here, either through workshops, desk research or interviews with key people. The goal is to understand how value will be created, where it comes from, and what the constraints might be. There are many tools that help me in this, including:

• value chain analysis

• business models canvas

• product development roadmaps

• market maps

The trick here, and this is where external support can help a lot, is to avoid the optimism bias that can creep in to deals like this. Whilst it might seem like a good idea on the surface, there is a lot in the detail that the buyer will rely on to generate future value. Some of that sits within the target, but a lot also characterises the buyer. A bit of searching self-analysis does a lot of good here, but is often overlooked in the race to get the deal done.

Test #3 - how can we assure the value?

Whilst they approach the deal for its obvious opportunities, how often do buyers step over the line to be confronted by a series of potentially disruptive effects when the real work starts? Does this risk the success of the combined business, either in value or time to achieve?

When large, stable companies buy small innovators, the overlaps are few. I have already mentioned matters of different cultures, working practices, business systems and controls. A post-merger integration (PMI) project is essential, and this is almost always more difficult, takes longer, and costs more than expected.

The PMI needs to acknowledge a number of threads:

• setting and selling the new structure to everyone involved

• understanding the gaps and changes that will be needed

• bridging between the difficult cultures and working styles

• protecting and retaining the key assets

• informing, managing and reporting to a wide range of stakeholders

• protecting business as usual during the transition

It is a complicated project, and will be new challenge, even for experienced project managers without this specialist experience. This is a whole package of interesting challenges and useful solutions. I’ll dig a bit deeper here in future posts.

Before you start

Like all complex projects, a PMI delivers as a result of the planning and preparation that goes into it. There are lots of parts overlapping, some known, some assumed or forecast, and many with a strong human element to add some variability into the mix.

This article is part of a series that will cover the greater topic of M&A involving small, innovative companies. For more information, or to chat about how these ideas and this experience can be applied in your situation, please get in touch here.