How do you grow a $150 million company to a $1 billion company? That was a question the CEO of one of our clients posed recently.
The management team had a revenue target of $400-$500 million from its core products. Even if it achieved that stretch goal, the company would still fall well short of the CEO's $1 billion revenue goal--a gap that it would have to fill with new products.
The management team had settled on the framework of a strategy comprising a roughly 50/50 combination of organic growth and acquisitions/joint ventures.
There was just one problem: Its innovation pipeline was dry, with no new products in development. In addition, the company had made only one acquisition in its history, so it didn't exactly have deep M&A experience.
The management team was asking the right questions about how to move forward:
- -Is M&A the right growth strategy, or can we achieve our targets with licensing?
- -Should we diversify our portfolio to mitigate risks?
- -How do we build our innovation pipeline?
- -How do we compete with the industry behemoths?
Our role was to survey the market for potential acquisition/JV candidates and guide them through an alignment process on where and how to expand. We proposed a three-step approach to determine the best acquisition/JV growth plan. It's a plan that can work for any business looking to crank up its growth engine:
- Assess and map the market
- Evaluate potential deals using pre-agreed criteria
- Prioritize a target list for proactive pursuit based on those criteria
Market Assessment and Mapping
In the market assessment and mapping we are looking to answer two questions:
- Is this market attractive to niche providers in
- Is this market attractive to our client in particular?
Our client has historically produced and sold niche alternatives to established, highly priced and richly-marketed products. Therefore, to answer question A we need to assess a broad range of markets for such characteristics as:
- Heavy levels of brand spending
- Persistent long-term product purchases from end customers
- Customer insensitivity to price
- Problems or feature gaps in the established products that a niche alternative may profitably address
A market with those characteristics should be attractive to niche providers in general.
For generally attractive markets, we then answer question B: Is this market attractive to our client in particular? We map markets according to their adjacency to the client's core markets. Our hypothesis is that, when they are able to serve the same or similar customers with adjacent products, our client will be more credible and capable at creating value from an acquisition.
Deal Evaluation Criteria
Of course, even if a market is attractive, there may not be attractive deals that would allow our client to enter profitably. We are creating a "box" of detailed criteria (deal size, scope of agreement, ability to control, economics, etc.) into which prospective deals must fit.
This box will serve us both proactively (to identify a set of acquisitions to pursue in attractive markets, that we believe will fit into the "box") and reactively (to quickly and efficiently filter out inbound deals that do not fit into the "box").
It is early days with this client; we will keep you posted on progress. And of course, even the most attractive deals in the most attractive markets can destroy value if there is not a well thought out synergy and execution plan. More to come on that topic as well.
How have you approached acquisition-led value creation? Please let us know your thoughts at email@example.com.