Programmatic M&A = Decisions + Process

In recent months I have had several conversations with companies, advisers and investors on the topic of how to build a programmatic M&A capability. In the context of M&A “programmatic” indicates regular and sustained acquisitions of small companies as against the strategy of pursuing sporadic large acquisitions.

McKinsey have published some good papers on this here and here. They make many excellent points which I can also attest to from my direct experience of having been on a journey to build such a programmatic M&A capability. Indeed, it can effectively enable leapfrogging the competition to create new capabilities & offerings, expansion into newer markets, and faster growth.

A lot of the conversations tend to focus on the “process” of M&A - raising very pertinent questions for anyone setting out to use M&A as a sustained tool for long-term growth. (See footnote below on typical M&A process questions.)

However, a critical aspect that often gets overlooked is how decision-making can better enable successful programmatic M&A. While it merits a longer discussion, here are three pointers to decision-making in the context of sustained strategic M&A:

1.  Decision makers need to bring – or develop over time - direct experience of buy-side strategic M&A in the same industry.

• Honestly assess your real current expertise: Strategic M&A presents a learning curve for the organisation. Unfortunately deal experiences of other kinds – client negotiations, VC/PE investments, having invested in and sold a business, investment banking etc. – are too dissimilar to be good guides to decision making for programmatic M&A. Objectively evaluate whether you have done at least 5 similar acquisitions in the same industry in the last 2-3 years? If not, expect to learn. (See footnote below for reasons for decision-making biases.)
• Identify your decision-making strengths: Decision makers (board, investment committee, business leadership etc.) must identify areas that will immediately benefit from their skills sets (e.g. evaluating people, assessing strength of client accounts, assessing market potential, coaching the local team etc.) - and focus energies on such topics.
• Seek expertise: Rely on those with a relevant track record of strategic M&A on other topics (e.g. valuation, deal structure, business case, incentivisation metrics, market perspective, integration plan etc.).
• Expect periodic refresh: As new people get elevated to positions of decision-making, the risk of bad decisions should be acknowledged. In large corporates this can happen whenever there is a big reorganization (which, let’s be honest, happens every few years in every large company). I have directly seen periodic loss of institutional expertise in decision-making - resulting in dis-proven theories being resurrected every few years.

2.  At mid-sized businesses it is even more important for decision makers to agree on strategic priorities for M&A.

• In large multinational corporations, there typically is a natural segregation between the business operators and the dwellers of the ivory tower. This can help avoid conflicts of interest and also provide continuity of learning in decision-making.
• Whereas, in mid-sized businesses it is common that people close to business operations are also decision-makers as part of the C-suite or as key influencers. The challenges this can create range from groupthink to everyone having a veto.
• The solution to this is indeed an alignment at the very top – C-suite and the board – on priorities and on criteria.

I am reminded of a global corporate that had 57 strategic M&A priorities at one time. In addition, whilst there was a stated desire to do larger acquisitions, there was also a committee to approve small deals faster! The result was an impression that the ability to convince the right people was more important than focusing on any priority area; and that small deals were easier to get done even if they didn’t fit the larger objectives.

3.  Clearly outline what the investment committee will say “no” to - and look beyond attractive pricing for saying "yes".

• Price isn't everything: If the list of strategic priorities is too long or the criteria too fuzzy, no one knows what should qualify and what not. In such situations, attribute substitution is a common occurrence, i.e., proxy criteria emerge to substitute the real ones. Price is frequently such a proxy – the decision might mistakenly end up being about whether the price is right rather than whether the target company is a good fit. This can lead to confusion and frustration all around.
• Assess opportunity loss: If the agenda is to grow faster in a new market or to add new capability through M&A, then the opportunity cost of not doing the right deals may be greater than that of not acquiring a company at a lower price. Taking an early leadership position in a new market can sustain lead position for the long term.
• Evaluate leadership in addition to operations & financials: Decision makers should enforce assessment of the quality of an acquired leadership team. The success of any small business is inextricably tied to how good the top team are – and your own ability to smoothly integrate and to deliver synergies will be determined by that incoming team too. This is especially important because sometimes the business operators responsible for an acquisition may recoil from acquiring a leadership team as good as themselves or may be reluctant to have to share the pie with equally capable others.
• Don't default to "no": Finally, for those unaccustomed to programmatic M&A, it can be easier to say "no" to everything and there will always be reasons for it - no deal is perfect and the opportunity cost only measurable in hindsight. In such cases, it pays to keep your eyes firmly on the prize while seeking consistency & discipline in decision-making.
• Of course, all this does not mean paying above the odds or at the desperate end of the buyer market, so one must have the discipline to walk away if sellers have inflated expectations. However, make price decisions linked to what the acquisition can do for your business success over 2-3 years beyond pure multiples arbitrage.

In summary, when looking to build an engine for programmatic M&A it pays to focus at least as much on ensuring good decision-making as on getting the process right.

Footnotes:

a) Programmatic M&A process questions: Typical questions I am asked include variations around way to source deals, the right size for M&A team, criteria for evaluating companies, valuation multiples, quantum of synergies to expect, achieving successful integration, parameters to measure performance, aligning global strategy to local and allocating capital etc.

b) Cognitive biases in decision making: This is especially critical because we all have an exaggerated belief in our own judgements & abilities even where we don’t have the required background (see: overconfidence effect, illusory superiority bias). It gets further amplified for senior decision-makers due to the halo effect whereby everyone assumes that your success as a leader in one area implies expertise in all other unrelated areas too. Cognitive biases like groupthink and attribute substitution are also mentioned above in the article.