Are you prepared for a long life together?

By

EY Global

Multidisciplinary professional services organization

4 minute read 26 Apr 2018

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For corporates not familiar with acquiring young businesses, the learning curve is steep. Find out how to prepare your business.

M&A is back on the corporate growth agenda, but one reason why acquisitions of start-ups sometimes fail is because the acquiring company doesn’t take into account the challenge of blending two different cultures following the acquisition. But integrating acquisitions quickly is also the fastest way to monetize the investment. So before companies even approach a potential target, they need to be clear on what it is they need most from the purchase and what value they are willing to risk losing by moving quickly to integrate it.

Benefits for investors, growth for businesses

Businesses acquire start-ups for many reasons. Some companies see them as a strategic route to growth, others as tactical opportunities to quickly build scale. Others view M&A as a means to buy into new technologies or services for their long-term growth potential or sometimes simply to keep competitors from snapping them up first. Still other companies look at M&A as a way to make up for lost time, replenishing their pipeline of product ideas.

What is clear is that M&A has become an important tool for businesses striving to keep up with the accelerating pace of competition, technological innovation and business disruption.

In this accelerated business environment, errors are more costly than ever. Acquisitions fail to achieve full anticipated value for many reasons, so deciding whether to attempt one begins with having clarity on a range of considerations. These include knowing exactly what you are buying, why you are buying it, what it will cost, what your alternative strategies are and what your integration plan is.

Integration matters

An early post-acquisition challenge, and probably the most important one for the acquiring business is overcoming the potential for a culture clash. Many start-ups, or small, boutique businesses, thrive on an entrepreneurial, free-thinking environment for generating innovative ideas, so preserving this is critical to making a successful contribution to the larger business.

Indeed, for some companies, acquiring staff with a specific skill set, in a particular geography, with intellectual property or for change leadership — sometimes known as acqui-hiring or talent-hiring – can be the main reason for making the acquisition.

But many businesses, particularly established or traditional ones, still narrowly focus on generating almost immediate ROI, or have cumbersome processes that can impede the development of the new products and services in which many start-ups specialize. This can create frustration for staff at the acquired company, and can lead to early staff departures and value leakage.

To avoid misunderstandings, corporates need to communicate with all stakeholders at an early stage, preferably before making the acquisition. They also need to look carefully at the type of staff members the acquired business has and assess how much they should be integrated into the wider organization.

Two women working on a project

Consider a stand-alone

Another solution that acquirers should consider is the possibility of buying a start-up and then operating it at arm’s length. This improves the chances of preserving what’s most valuable in the acquired business by helping their staff experience the least amount of disruption to their routines and practices.

Deciding to what extent the larger company should integrate its acquisition is another challenge that corporates need to decide on from the outset to keep all stakeholders, including the acquired company’s customers, supportive.

Scott Moeller, Director of the M&A Research Centre at Cass Business School, suggests the level and pace of a business integration should take into account the corporate’s rationale for making the acquisition. “If you want to maximize the value of the acquisition early on — for example if you are buying an asset or a brand — the approach is likely to be to integrate quickly.” But if the acquisition is intended to acquire talent and the ability to innovate and develop new ideas, he believes an “incubator fund” approach, where the business remains independent, may be a better way to run it.

Serial entrepreneur and Consulting Associate Professor at Stanford University Steve Blank says that deciding which of these post-acquisition strategies to use also depends on the target company’s stage of development. “If the start-up hasn’t yet found a repeatable sales model — if they are still searching for customers and a way of breaking into the market — it’s best to leave it as a stand-alone business,” says Blank. “This way, the acquirer can provide a corporate concierge that frees the start-up to figure out their own business model.”

Jam today, or jam tomorrow?

Ryan Burke, Global Growth Markets Leader, Transactions at EY, says: “This is an enduring feature of the market. As long as there is abundant capital around in the form of plentiful equity, liquid debt markets and large amounts of cash on corporate balance sheets, plus a need to innovate, M&A still remains the fastest way to jump-start R&D.”

However, when making innovative acquisitions, before committing to the relationship a clear integration strategy is necessary to achieve long-term value and success beyond sealing the deal.

Summary

Before committing to an acquisition, come up with a clear integration strategy to set up your business for long-term value.

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By

EY Global

Multidisciplinary professional services organization