Michelle DeBella is the CFO at JumpCloud and former leader at some of the most well-known names in Silicon Valley.
We all know the headlines: The blockbuster merger and acquisition deals that redefine industries—the kind that bring to mind Disney/Pixar’s animation dominance or Google/Android’s global platform. But the graveyard of M&A failures is equally vast, from the AOL/Time Warner debacle to the rapid decline of the Kmart/Sears merger. As CFOs, how do we navigate this landscape to consistently drive value?
Whether M&A is on your radar right now or you’re still unsure if you want to make M&A a part of your business strategy, here are a few tips to help you identify and capitalize on potential business and financial benefits and synergies, all while mitigating risk.
1. Use the Four T’s Framework.
The primary business and financial goals of any M&A transaction should be the creation of an enduring and sustainable business model that creates long-term value. Companies that are most successful at M&A have adopted some kind of framework to help them evaluate these opportunities.
Many variations of frameworks exist, but I like something I call the Four T’s Framework. It is composed of our co-founder and chief technology officer’s favorite T’s (territory, technology and talent) and one of my own (total addressable market, or TAM).
Territory: Expanding into new territories through M&A offers the potential to reach a wider customer base and fulfill the needs of current customers across borders. However, international expansion often requires significant investment in building brand awareness and adapting business models to align with diverse foreign regulations and economic, political and social norms.
Identifying M&A targets with strong alignment to your existing product, business model and customer segments can significantly accelerate this geographic expansion and even provide access to new talent pools.
Technology: If you need to add breadth or depth to your long-term technology or product road map, think about the costs of building versus buying. An M&A target with a market-ready product (or one that is further along in the development life cycle) that can accelerate your technology or product capabilities in a cost-effective way can drive efficient revenue growth, customer satisfaction and customer retention.
Talent: M&A can also be an effective talent acquisition strategy, expanding your geographic footprint or quickly assembling teams with unique skills that complement your current team.
Total addressable market: Some acquisitions allow you to expand your TAM (or at least your serviceable addressable market (SAM) within your TAM). This can happen by adding complementary products or services that target new customer segments (for example, moving from mid-market to enterprise or from B2C to B2B).
It can also involve adding new distribution channels that complement your existing ones, such as combining retail sales with an online presence or using global distributors alongside your direct sales efforts.
2. Don’t skimp on due diligence and risk assessment.
Whatever the key driver of pursuing an M&A transaction, remember that the company you acquire or merge with should drive long-term, sustainable value over and above the cost of the deal. And we’re not only talking about the deal consideration or the cost of financial risks.
In addition to doing diligence on their past financial performance, future financial projections, liabilities and future obligations, and tax implications, be sure your due diligence covers the other quantitative and qualitative drivers (or detractors) of value, such as:
• Strategic risk: Is there strategic fit with your business model and potential synergies?
• Legal and regulatory risk: Understand their compliance with laws and regulations, compliance with vendor and other contractual obligations, and the incremental cost effort of doing business in a new country or jurisdiction, which could include the legal, compliance and tax implications of new legal entities.
• Operational risk: Don’t forget to evaluate their operational capabilities and maturity within the industry, the maturity of their organizational structure and processes, the quality and efficiency of their products and technology, and their technology infrastructure and its integration with your operating model.
• Cultural fit: A culture mismatch can negate a deal’s strategic fit and synergies. Teams used to collaboration won’t integrate well with hierarchical decision-making, and teams valuing structure will face culture shock in a fast-paced, fail-fast-and-iterate environment. Take time to truly understand underlying company values and culture.
3. Ensure cross-functional partnership before and during integration.
While strategic alignment and due diligence are crucial for identifying the right M&A target to advance your business priorities, the real “magic” often happens after the deal closes. Even the best corporate development teams, finance professionals, advisors and legal counsel alone may not be enough to ensure long-lasting value.
Make the time to lock in value creation by inviting cross-functional business partners—sales, marketing, product, human resources and IT—to the table before the deal closes, and keep them engaged through integration. Cross-functional planning and post-deal integration execution are critical to creating synergies in your operations, systems and culture.
M&A Strategy
If you’re willing to put in the work, a clear M&A strategy and framework to identify M&A targets—coupled with great due diligence before the transaction and well-planned and executed post-deal integration—can accelerate your growth, innovation and business value far into the future.
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