Top 5 Merger & Acquisition (M&A) Strategic Drivers

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M&A Strategies for Buying a Business

Why do Investment Bankers buy businesses? Beginning in 2018, according to a survey done by Deloitte, the top strategic drivers motivating business buys in 2018 has been:

(20%)     Technology Acquisition*
(19%)     Expanding Customer base
(16%)     Expand Product or Service lines
(12%)     Digital Strategy
(9%)       Talent Acquisition

   *Up from 16% in 2017

Buying a business has always been an good strategy to,

  1. Quickly expand the buyers customer base.
  2. Quickly add products & services to increase spend per customer.

For the buyer, this means instant growth and income in less time and with less potential risk.  Reducing growth time by years.  For mid-size businesses this has been especially true.  As an IT expert the surprise for me was realizing that Investment bankers are using the same strategy when it comes to technology assets and digital strategies. 

Successful business technology has become mission critical to an organizations success.  So critical there's even a question whether technology experts should be in charge of the technology.  

Here's a possible scenario: What if a successful company has outgrown its own technology?  Instead of improving worker productivity, the technology becomes a bottleneck in the organization.  A bottleneck controlled by technology experts.  Experts who traditionally have focused not on the mission but on the technology for technologies sake.  When IT departments become the biggest bottleneck, profitability is lost and risk increases.  We call this an IT Hostage situation.

Once Management is an IT Hostage, there are really only two options.  First, Allow the technology team to build new systems from scratch and increasing that dependency on the IT Team.  A team that management feels is holding them hostage.  The second option is to buy a working technology system.  Preferably a system that is scalable and already profitable for it's owners. 

The Risk of doing it yourself...

According to Gallup, 50% of all IT project deployments fail. After hearing this statistic, I did an informal survey of about 20 project managers. Most were surprised the failure rate wasn’t higher.

This problem is compounded because the IT department is not the only department with this problem. 

  • 70% of business projects will fail.
  • 27% is the average cost overrun for any successful business project.
  • 75% of Business and IT executives assume project failure before the project even starts.

This problem has always exist in all industries and in all businesses. 150 years ago Andrew Carnegie built the American Steel industry. He was quoted saying, "... he had failed at 49% of what he attempted to do."  Andrew Carnegie the ultimate (and richest) executive outlier of his time.  Yet only succeeded 51% of the time.  He expected failure almost 50% of the time.

This high failure rate may be why the average tenure of Enterprise organizations is less than 5 years.  It may also explain why so many business executives are so adverse change.  Imagine flipping a coin and betting a million dollars on 10 coin tosses.  Doubling the bet of each successful flip.  Even Andrew Carnegie only expected to win 5 of those coin tosses.

The Outliers

It is interesting to note the Outlier statistics.  These are companies that win so consistently they are considers statistical anomalies.  As anomalies they are ignored by statisticians.  So you may not have heard that,

  • 2.8% of companies have a 100% track record for:
    • Successful project deployments.
    • Projects completed under budget.
    • User acceptance.
    • Better than expected;
      • EBITDA optimization.
      • Internal and external risk mitigation.

It's too bad that we don't focus on the monotonously reliable statistical outliers.  Instead we focus on the CEO that just happened to with the proverbial coin toss two or three times in a row each year.  Then ignoring when the company goes under a few years later. 

Even for the outlier companies, the question remains; “...Is it better to build it yourself or buy a business which has already successfully built an essential technology asset?

If it is true that 50% of technology projects fail, why not buy a proven system that is already in place? In the best situation, build on the success of those executive outliers that have already built a successful business or technology system.  

why not buy a proven technology system that already works? ...

The Risk

Historically this strategy of strategically buying a businesses is not without risk. Technology may be a science, but deploying and maintaining technology is not. Compare what you know about accounting systems. Even with strict standards and strict business certifications, no two businesses run their accounting systems in exactly the same way. 

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The same is true in technology. Computers have not been around long enough to establish an industry standard as tight as an accounting standard yet. That means that a technical asset could be a lemon in disguise. 

How does the monotonously reliable, executive outlier address this risk?  The answer is by asking questions like,

  • Will this technology scale or hamstring my business?  
  • Do the seller's technical systems communicate with the buyer's technology? 
  • What is the risk in the organization?
  • Are these risks the seller may not even realize?  (...usually yes.)
  • If so what are they?
  • Has the seller been leaving money on the table, that I can start taking advantage of after I buy? (...usually yes.)
  • Is there a missing opportunity that I can exploit? 

The answers to these and many other questions should be addressed during the IT Due Diligence portion of the due diligence phase when buying a business.  A good IT Due Diligence firm is the only way to successfully answer this question.  Average business bankers will skip IT Due Diligence.  While the Executive Outliner has someone in their pocket.  Someone who can give them that edge that only 2% (or less) of companies have.  

Conclusion

Top M&A strategists have added technology as a strategic driver. Historically, investment bankers have purchased a business for a new product line or to expand a customer base.  This was done in order to scale the business quickly while lowering risk.

Investment bankers are now looking at business technology in same way.  Saving time by buying monotonously reliable technology that is already in place.  Why risk building it yourself if there is a 50% chance of failure?  Asking the question, will this technology leapfrog in front of my competitors? 

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Obviously,  it is important when investing in a business, to have the best information possible during the due diligence phase.  This includes an understanding of the true value of the technology assets. As well as an understanding of the assets potential for raising or lowering the EBITDA multiplier?

Are you and Executive Outlier looking for a competitive edge?

Download our IT Due Diligence Firm assessment form. Don't assume the millennial living next door is a good judge of business technology. Our form will help guide you away from the pitfalls of hiring the wrong IT Due Diligence firm.  Instead allowing you and your firm to remain the Outlier when compared with your competitors.   If you do, Due Diligence you need IT Due Diligence as well.

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