by HPA Project Leader Larry Maher
Let’s face it, the traditional M&A playbook can get stale. Many firms remain stuck in a reactive M&A cycle, relying on investment bankers to push deals their way. While this bottom-up approach can yield occasional finds, it’s only one component of a successful M&A program. Reactive evaluation can limit your opportunities and expose you to more competition and higher prices for deals.
Instead, businesses should build a more holistic approach. Our recommendation is to start with a portfolio review and complement your bottom-up opportunism with a strategic, top-down approach to achieve more ROI-friendly results.
Regardless of scale, and whether you’re aiming for a single, transformative acquisition or strategic “string of pearl” acquisitions, a top-down approach unlocks opportunities that can take your business beyond the reactive network. Here’s a step-by-step guide to a proactive approach that has worked well for HPA clients:
Conduct a comprehensive portfolio review.
Before you begin pursuing potential acquisitions, take a long, hard look at your own businesses. Start with a definition of your core business and competencies, and a complementary assessment of the strategic fit and value of the company’s current divisions. Then assign each of your business units a clear portfolio role (e.g., invest to grow, run for cash, turnaround, divest) to help prioritize where M&A can create the most value.
Map out where to play and how to win.
Based on your portfolio analysis, it’s time to craft a strategic roadmap. This roadmap answers two key questions:
Where should you focus your M&A efforts? Leverage your portfolio roles and adjacency assessments to pinpoint the most lucrative playing field.
What are your current strengths? Objectively assess your core competencies and how you can add value to potential acquisitions. Ensure you have a good understanding of your strengths among your leadership team and have alignment on how you can create value through acquisitions.
Think beyond your current offerings with an adjacency assessment.
While prioritizing the core first is essential with M&A, and considering your company’s current portfolio objectives, you may identify adjacent businesses that could create optionality (think: 1+1=3) with your existing ones. Synthesize what makes sense along with what might be unexpected and innovative. This is where getting creative and taking a calculated risk is worth consideration. It’s also key to make sure you understand current multiples for these potential adjacencies and whether there are adequate targets available within your ability to fund.
Get clear on your ideal acquisition.
Here’s when you put the insights from your assessment and strategic roadmap to work by identifying industries, geographies, deal size, and other important considerations like relationship to the core, cultural fit, margin profile, and other considerations. Putting these parameters in place will be instrumental in screening potential M&A candidates and focusing your diligence efforts on the right opportunities. In the meantime, it’s worth reading this piece from HPA Senior Advisor Alex Nesbitt on Why Intentions Matter in Making Mergers Work.
Make the first move.
With your strengths, synergies, objectives, and ideal target profiles in place, develop a target list of firms, even if they’re not on the market. Again, this strategic, top-down-first approach will help you avoid the competitive bidding that frequently accompanies banker-brokered deals. Armed with your list, it’s time to proactively reach out to target business owners to identify if they’re interested in selling. You can also leverage relevant industry associations and conferences to jumpstart M&A discussions.
Connect with a banker … just not any banker.
Investment bankers aren’t out of the picture. With a clear understanding of your M&A goals, you can build relationships with bankers who specialize in the types of deals you’re looking for. Ideally, you’ll be able to articulate your preferred targets, allowing them to identify opportunities that similarly match your needs. When you know what you’re looking for, bankers may leverage their networks to unearth off-market targets you wouldn’t see otherwise.
The bottom line on bottom-up M&A.
To get the most value, M&A needs to be on your company’s terms. This process doesn’t have to be about bidding wars and inflated prices without clear strategic oversight. Instead, with a more proactive approach, you can gain a strategic advantage with selective M&A.
If your company doesn’t have the requisite expertise to pursue strategic M&A, hiring a consultancy like HighPoint may help get you started. Our team of practical strategists with insider credentials understand how to establish priorities and guide decision alignment on impactful M&A. Contact HighPoint Associates today to kick off the conversation.
Larry Maher is a Project Leader and consultant for HighPoint Associates. Prior to HPA, Larry was the VP of Business Development and Strategy for Colonial Group, Inc. and was responsible for investment portfolio optimization, M&A target identification, due diligence, and evaluating organic investment opportunities. Larry’s previous roles also include leading strategy & M&A at Aaron’s, strategy and corporate innovation at Kimberly-Clark, corporate strategy for Target, management consulting at McKinsey and PWC, and financial and IT audit at Arthur Andersen.
