Performance Improvement of a Platform Business While Acquiring Additional Targets
If you have worked in M&A for any considerable amount of time, it is no doubt a phrase you have heard or quite likely to have uttered during the integration phase of a project. The saying refers to a collective understanding that the anchor business which you are looking to consolidate around, to create heft in the market, already has performance, structural or talent gaps that need to be addressed. It is a concept that private equity principals and acquiror management teams have learned to get comfortable with but often they do not address head on. Putting blinders on the “sailing while building the ship” issue can cause deal value erosion and will only exacerbate latent problems without having a plan to address it.
Why does this occur?
It is common for private equity firms who want to enter into a new market or industry space to center their strategy around an anchor acquisition. Of course due diligence will be performed on the investment as in any other transaction, but how does one deal with the operational skeletons that are uncovered in the DD process? How are you going to scale this business that is still using Google sheets for its accounting function despite reaching millions in revenue? What will you do given that the business is already operating in three geographies but has never had a COO in place to manage the global operations? You have just received the IT due diligence report and the document is flashing with all the red flags around IT security failures.
If this was a one-off acquisition one could afford to devote the time to ensure all operational gaps are tended to in the fullness of time. However, with exit strategies and scaling in mind there usually is not any time before the next target acquisition needs on-boarding. Hence, the shipbuilding analogy. We have already set sail from the port and the ship’s main mast is in pieces on the deck!
This is not an issue that investment firms alone have to manage. Corporate acquirors in their own right can have a blind spot (or two) in their parent company while still going full speed ahead with an acquisition strategy.
So is it realistic to wait and perfect the anchor business before moving forward with the next acquisition?
Realities of waiting
The honest answer is probably not. The fact that someone is operating in a growth industry means by definition that it is a heavily evolving space. This translates to a necessity for moving with speed and certainty when looking to scale inorganically. All business leaders know the benefits of being a first mover in any marketplace and the ability to occupy a central space whether that be in relation to geography, intellectual property supremacy or vertical integration of a product.
Further, there is no profitable market that is devoid of competition. As such, a bling target acquisition will be the object of desire of many players. Therefore, businesses have to be ready to pounce when given a window of opportunity for a target that will propel their next phase of growth. Waiting can mean that the window of opportunity shrinks to a point of infeasibility.
So what do you do if your investment strategy dictates that you can not afford to wait?
Planning, planning, planning
Number one is to avoid the “ostrich head in the sand” strategy. we have often seen business leaders and principals look operational problems in the face and choose to avoid addressing them, knowing full well that this will only come back to bite them six months down the line. Here is our advice:
Label your problem - as stakeholders in a serial acquisition strategy we all need to be conscious of the problems that are lurking in both the acquiring business as well as the target businesses - we have to make them a key part of the integration project;
Share your problem - the issues need to be apportioned correctly between the players - we have managed this successfully by ensuring that an “Integration Schedule” is included in the Share Purchase Agreement for the transaction, in that way the target entity will be on the hook for taking on certain operational actions before completion can take place - this way the acquriror is not inheriting a whole host of problems while also trying to right its own ship;
Create accountability around the problem - there has to be a concerted effort to address the issues in the parent entity as well as the newly onboarded subsidiary - this will invariably mean creating an integration management office (IMO) to list and address the latent issues on both sides - the IMO can be staffed with external advisors, internal employees or a mix of both;
Track the solving of your problem - as part of the establishment of the IMO there has to be a way to track and report back the progress that has been made in the shipbuilding process so that you can know which direction you should sail to next!
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