Modern M&A strategies for business buying

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The Survey:

In 2018 Deloitte surveyed the Investment Banking industry.  The survey asked Investment bankers, “What are the strategic drivers motivating your purchases this year?”  In other words, what are you looking for in your next business investment?  The top 5 results:

  1. 20% - Technology Asset Acquisition*(see note:)
  2. 19% - Expanding Customer Base
  3. 16% - Expanding product or services lines
  4. 12% - A Successful Digital strategy
  5. 9% - Talent Acquisition

*Note: This is up from 16% in 2017

Numbers 2 & 3 have been traditional strategies for buying a business. 

 Want to double your customers? Buy a competitor.  Want to sell your customers more products? Simply buy a company that already provides your customers with products or services, that you don’t sell today.  Numbers 1 & 4 are new, uniquely information-centric and have been slowly sneaking up the list.  We’d also like to get your thoughts on the topic for the Executive Outlier community.  Do you believe these non-traditional strategic drivers are worth considering in the future? Then we’d like to hear more from you.

The Example:

Gallup and others that track industry trends tell us that 50% of IT Projects fail. 

Early in my career, I was on the team that built one of the first (and arguably the best) enterprise online banking platform, for Washington Mutual (now Chase). It took Washington mutual three years to build & deploy a 100% reliable digital banking platform.  At the time, Washington Mutual was the largest savings and loan in the country.  The bank invested 95% of the banks capital budget for over two years on this project.  The platform easily supported over a million customers accessing the system every 15 minutes in the first year. Imagine investing over a billion dollars into a project with a 50% chance of failure? 

During the banking crisis in 2008, JP Morgan Chase bought Washington Mutual.  As part of that sale, JP Morgan Chase also received the online banking platform that Washington Mutual had just built.  At first, Chase didn’t understand what they had bought.  That is until they saw the data.  The data share the costs savings, the competitive advantages gained, and intellectual property (IP). Within a year the Washinton Mutual technology platform and several digital strategies were being used across the entire JP Morgan Chase organization. 

Until buying Washington Mutual, JP Morgan Chase was years behind and years away from finishing their online banking system.  With the purchase, JP Morgan received a tested technology platform that could be scaled up to meet the needs of all JP Morgan Chase customers.  Arguably preventing the potential customer churn as online banking became a critical piece for more and more Chase customers.

Why is this so important?

Statistically, there was a 50% chance that JP Morgan Chase would have failed to build a successful banking platform.  Buying Washington Mutual mitigated this risk almost completely.  In the Delloit survey, we see that more and more Investment bankers have learned what JP Morgan Chase learned in 2008. Buying a business for it’s Digital Strategy (like online banking) and the technical assets that support that strategy are just as valuable as buying a business for a new customer base.

Why should you care?

As an investor, buyer or seller you are looking for a competitive advantage.  Sun Tzu, in The Art of War, recommended that investing time and energy in preparation before the battle was the most important competitive advantage.  For Sun Tzu this knowledge would win the battle often without fighting.  As you know, for the investor, this preparation is called due diligence. 

IT Due diligence, is a part of due diligence that gives an understanding of the technology assets and digital strategy potential of the organization.  IT due diligence is a level of due diligence that most buyers of mid-market companies don’t do.  As a result, sometimes they win, and sometimes they lose.

Sun Tzu would probably advise that the more you know about the technology assets and digital strategy(s) (as well as the traditional aspects of the organization you already review) the more often you will win.  This ability to reliably pick winners and losers becomes your competitive advantage.  The question is whether you will start now or wait until your competitors develop that advantage first?

Find someone who can give you this advantage

Unless you are an expert in technology and digital strategy (and nobody is an expert in every aspect of business technology and digital strategy) you will need some help in this area. To help you out,  we have created this, IT Due Diligence Firm Assessment form.  Use this form to help you pick an IT Due Diligence firm.  Someone who can help you better identifies winners and losers.

Or contact us before you buy…

James Murray

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Do you have any thoughts on this?  We are looking for thought leaders on topics like Due Diligence and business transition especially if you have experience (good & bad) investing in businesses.  If you have wisdom and brilliance, we would be happy to get you in front of our audience of owners, buyers, sellers, and investors in mid-sized businesses.  Check out the how to become a Guest Author.

Who are Executive Outliers,

When asked what we do? We describe ourselves as a technology company that specializes in business transition. 

Working with our clients, we provide information that helps them

  • pick winners (and avoid losers),
  • help them negotiate the deal and
  • help them make their money back faster.

Contact us before you invest or buy

Topics: Business Transition Business buying strategies IT Due Diligence Due Diligence