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M&A Integration: Creating Value From High Priced 'Tuck-In' Acquisitions

Tuck-in acquisitions are on the rise

20Apr

The landscape today

Transactions today are complex, technology innovation and disruption are making the valuations of small companies appear big and that of big companies appear small. Today, small-sized targets are neither small on price or complexity; value needs to delivered by integrating differently, given synergies do not exist in the conventional way. These so called 'tuck-in' acquisitions protect or enhance the economic logic in the buyer’s industry and purchase prices are very high. Investors are demanding quicker ROI and there is pressure on the executives to deliver transaction value. The 2014 acquisition of WhatsApp (<5 years old, 55 employees, recent VC funding value was at $1.5 billion) by Facebook for $19 billion is a classic example - investors were so skeptical over the deal creating value >$19 billion impacting a share price drop of 5%.

Challenges with tuck-in value creation

The size of these companies typically create underinvestment in areas like IT and other back office functions considered conventional sources of cost synergy, making revenue growth the primary value creation play. Most organizations have been through some form of cost reduction, reengineering, restructuring and countless other cost optimization projects, whether or not they were triggered by M&A. These are known game-plans, with a solid experience base to build on. Revenue synergies, on the other hand, are often more dependent on variables requiring new skills, new methods, new products or services, new channels, or even a new customer value proposition. Delivering revenue synergies with 'tuck-ins' requires buy-in from the target company and rapid ability to rally your customers, brand, channels and sales force backing the new value proposition. Integrating for value requires a different approach than conventional functional integration.

Integration strategies for tuck-ins

  1. Product centric - Acquiring companies tend to leave products standalone after the acquisition leaving and often leaking value. There are several ways of integrating products for value and they center around understanding source and sustainability of product during the diligence, creating a product road map for preserving key elements of value and enhancing other areas such as portfolio fit and profitability by Day One. Create opportunities for product bundling, rationalizing products or features very quickly and understand opportunities for new product development as a long term play. Bundles and pricing can drive a lot of incremental value if executed well.
  2. User value centric - The new lever in the era of user, content and data monetization enabling a variety of business models from advertising, subscriptions, x-selling, up selling etc. Total users and active users present unique sources of value. In Facebook's case, the market eventually recognized that with WhatsApp’s >450 million active mobile users and rapid user growth, Facebook was acquiring a potentially formidable competitor and strengthening its own mobile position at the same time. The price paid for WhatsApp was ~$42 per mobile user and ~3.5x less than market was placing on each mobile user of Facebook itself ($141 at that time) or Twitter ($124 at that time). Understanding the key attributes of user data, its value by segment and monetization potential should inform the integration plan.
  3. Channel centric - Channels or route to market are a key value driver, and certain products are well suited to specific channels. As a new product is embedded into the portfolio, leveraging the buyers channel for scale or reaching new customer segments is critical. A key aspect to delivering value is to make sure that customer segments, brand, products and pricing align very quickly to support the channel early in the transaction cycle and clear barriers such as channel conflicts, efficiencies and carry factors.
  4. Talent centric - Tuck-ins come with two clear value plays i.e., product (or technology) and talent (acqui-hires, the new funky industry name for it), success of one without the other is questionable but the major difference is that talent centric transactions are originated from product teams (usually not corporate development) and talent can be reassigned to work in various parts of the business irrespective of the target's product. Retaining these individuals is key and cultural diligence early on helps identify risks with talent including implications on current talent strategy, retention planning, career paths, integrating stay incentives and risks of alienating existing talent. Acceleration opportunities for products, go to market, impact on recruiting budgets etc. need to be measured quite rigorously to capture and report value to shareholders.

As the velocity of disruption increases and the war for talent intensifies, the volume and value of tuck-in acquisitions will continue to rise with investors demanding more transparency and quicker returns. This will get acquiring organizations to rethink their integration playbooks.

All views expressed are my own and have do not reflect views of FTI Consulting in any way.

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