BOSTON — Depending on the kind of programmatic mergers and acquisitions you do, a slowdown in the economy could be a good time to step up your efforts, CFOs and other executives said at the MIT Sloan CFO Summit yesterday.
During the last downturn, when companies were pulling back from M&A activity, private equity firms swooped in and snapped up companies at a discount. "Private equity got in early, before others did, and got good deals because they were willing to take risks," said Christopher Montgomery, managing director of the Americas division of UBS.
Most programmatic M&A activity falls into two categories: roll-ups and growth. Roll-up programs tend to be safer and lead to slower, measured growth, because they involve the systematic acquisition of smaller companies competing with you in your area of core competency.
That’s a strategy MKS Instruments, which provides process control solutions to manufacturers, deployed to grow into a company generating $2 billion in revenue a year, said Seth Bagshaw, the company’s CFO and senior vice president.
Growth-focused M&A activity involves going outside your areas of core competency and is riskier but can also lead to far bigger rewards if you get it right. "You want to skate to where the puck is going," said Ken Stillwell, CFO of cloud business software company Pegasystems.
With growth-focused M&A, you’re looking for strategic adjacencies to your core competency areas so you can move your business into new, complementary areas. "What are adjacencies on the edge where you get some leverage and your story still holds together?" said Stillwell.
Unless you’re a giant company with widely divergent business interests, you want to stay away from acquisitions that would compete with your other assets, he said.
Any CFO who’s overseeing programmatic acquisitions will want to have an integration team working in concert with the other teams involved in scouting out and undertaking the due diligence on deals.
The integration is key, because how well you absorb the company into your operations determines whether the deal ends up growing your company in a way that increases your profitability.
The toughest part of integration isn’t the systems but the people, especially when it comes to technology companies, because its the key people who make or break the companies’ success.
"When buy technology companies, you don’t want to break [the people who create value]," said Bagshaw.
Some of the deals he’s worked on ran into trouble mainly because the acquiring company didn’t integrate key people into the new structure quickly enough. "You need to find a home for the good ones," he said, referring to the key people at acquired companies.
Companies with good M&A processes in place are always scanning the environment relevant to their area of focus, identifying the companies that could make good acquisitions, and have a strategy for when to make their move.
The goal is to know more about the companies than the market and, in your own way, more than the target companies’ executives.
If you know the target company well enough, you’ll know what its untapped value is and how you can access that value in a way other companies can’t. That’s why deals that make little sense on the outside — like a recent $4 billion acquisition by PayPal of a company that makes only a fraction of that in revenue a year and appears unlikely to make a profit in the near future — might make a lot of sense.
"It’s always been about if I have a way to get more value out of that company than the market understands," said Stillwell.