Robert Hyde realized he needed a new strategy.
“We can create new products, but it takes a lot of energy and effort to build and launch a product, and there’s only so much you can do at any given time,” says Hyde, the CEO of Payment Source, a company that provides alternative payment solutions. Payment Source got its start selling prepaid payment cards and vouchers when it first launched in 2014, and it quickly expanded its product offerings to manage tax payments as well as facilitate e-commerce payments and digital wallets for retailers. But that winning strategy could only take the company so far. “You get to a point where you can get stuck,” he says.
So Hyde looked to another strategy: growth through acquisitions.
“We kind of naively said, ‘OK, let’s go buy a company,’” Hyde says. “But we didn’t have a good sense of who we wanted to buy, why we wanted to buy them, even who we should consider.” In fact, pursuing growth via M&A brought a whole new set of questions to consider: How could the company identify the right targets, and what did they need to do to ensure a successful acquisition?
Hyde’s not the only founder who has found himself navigating this space. Amid the current gloomy economic conditions — rising interest rates, inflation and wages, as well as economic uncertainty driven by trade wars and geopolitical conflict — some leaders are eyeing M&As as a growth strategy. And for good reason. According to PwC’s 2023 M&A Outlook, “the fastest way to transform a business is through M&A, divestiture or other deals.”
But developing a strategy for acquisitions can be intimidating, especially for first-timers, says Dennis Ensing, an experienced entrepreneur and C-suite executive who has been involved in over $500 million of financing and M&A transactions over the past decade. “Often, when CEOs think about doing an acquisition, the companies they get introduced to may only be a fraction of what’s available and may not be at all consistent with who they should be looking at,” Ensing says.
That’s why they need a plan.
Payment Source CEO Robert Hyde
For many companies, acquisitions are a route into new international markets. Virtual healthcare and wellness platform Dialogue acquired U.K.-based wellness platform TicTrac last year, while mobile store management software company Tulip purchased Boston-based retail SaaS company Blueday Inc. and California-based scheduling and resource management system Timekit.
But many founders don’t think about an acquisition strategy until the opportunity to buy another company comes along — which means they are usually more interested in making a particular deal work than ensuring it makes strategic sense. This is the exact wrong way to pursue M&A, Ensing says.
Instead, companies considering M&A need a clear sense of their business strategies, and how and where an acquisition can help them achieve those objectives. Some companies might be looking to increase their revenue by acquiring a company with a complementary product so they can access new customers. Others may be looking for a new product to offer their existing customers. Or, they could be struggling to hire skilled employees. In those cases, targeting a particular company for an acquisition can be used as a recruitment strategy. This can be helpful in sectors where skills are in high demand (think generative AI experts), but it’s a tricky strategy to pull off — it can be very unsettling for people to work at a company that’s getting acquired, which increases the risk of extremely valuable employees leaving just after the deal is completed.
“That’s why we really want leaders to sit down and do their homework,” says Ensing, who now works closely with promising tech companies at MaRS, helping them execute dozens of successful mergers in the past decade. “They need to be able to explain if an acquisition makes sense to achieve their strategic objectives.”
Ensing points to his most successful deal, where his executive team at TransGaming successfully argued for pursuing a particular company by demonstrating how it would add revenue, increase profits and even have a multiplier effect on the company’s valuation. In the end, the acquisition did deliver a triple benefit to the company’s bottom line.
Once a CEO determines the strategic reasons to pursue M&A, they’ll have a clearer understanding of what kind of company they should go after. Many Canadian companies look to acquire another Canadian business. If the goal is to enter a new market, however, it might make more sense to widen the search.
There’s also the issue of what a company can afford to spend. But there’s no rule of thumb to determine how much a company can stand to invest in an acquisition, Ensing says. “Affordability largely is about the experience they have integrating an acquisition, available capital and/or financial leverage and post-closing cash flow.”
Startups should take care not to overpay. A recent Financial Times article argued that, despite the oft-quoted stat that 70 percent of mergers fail, thereby destroying value, companies are spending more and more on M&As, to the tune of $5 trillion in 2021. It’s yet another reason to prioritize strategy.
Next, companies need to make a plan — and formally document it in a playbook. Hyde’s includes a breakdown of Payment Source’s criteria based on the company’s strategic objectives, a clear profile of the ideal target, the steps the company intended to take during the acquisition process and the deliverables associated with each step. He also rejigged the company’s organization structure to create a new position, chief growth officer, so that there was an executive responsible for Payment Source’s acquisition strategy.
Your playbook should also include an integration plan, Ensing says. This should tackle what the due diligence process will look like, how you’re going to handle cultural integration, who will be responsible for integrating the two businesses, what governance will look like, as well as any risks or issues that your integration team will need to look out for.
BioConnect CEO and chairman Rob Douglas
Once companies have done the pre-work they can start looking for potential targets. Even then, it can be challenging to identify solid leads. Security software company BioConnect hired an advisor to build an algorithm that would help identify the ideal target. Chairman and CEO Rob Douglas wanted to zero in on companies with more traditional value propositions focused on one-time hardware-only sales and with owners in their late 50s and 60s who didn’t have a new generation to pass their businesses on to. His logic was that those types of CEOs were likely looking ahead to retirement and would be more open to having a conversation about M&A. This criteria yielded a long list of potential options that needed to be narrowed down.
As part of the offerings of the MaRS Momentum program, which aims to help promising startups scale to $100 million in revenue, Ensing stepped in to assist both BioConnect and Payment Source by generating a short list of potential targets and even doing some outreach on behalf of each CEO. None of the prospects he identified for either company were listed for sale — after all, most successful deals result from a series of sensitive conversations with fellow founders who may not have ever considered selling their business.
During these delicate conversations, it’s important to go beyond the obvious due diligence and get to know the leaders, says serial media and technology entrepreneur and MaRS volunteer advisor Roger Parry, who is a chairman of several companies, including YouGov and Oxford Metrics, as well as non-executive director of Uber UK. “To reduce the risk — and there’s always a big risk — you need to really try and get to know your target well,” he says. “You need to understand their motivations. You need to understand their objectives. And ideally, your own management team should, if possible, talk to some of their customers and suppliers to really understand how that business functions before you actually consummate the deal.”
So far, BioConnect has completed two acquisitions and it’s looking to make several more over the coming years. But it can take a while to find the right candidate.
“That’s one of the reasons why we tell companies to start to build your thinking early around how and where M&A makes sense,” Ensing says. A roadmap is essential in helping founders understand how an acquisition can help achieve their corporate strategy — and when it’s just not right.
“Some companies get lucky and something comes along that is a perfect fit, but this is an iterative process. I don’t think you really know whether your playbook is up to snuff or not until you start evaluating some candidates. That’s why it takes time.”
MaRS Momentum program works with high-growth Canadian companies to accelerate their path to hitting $100 million in revenue. Is your business Canada’s next anchor company? Find out more and apply to join the program.
Illustration: Monica Guan; Images: Unsplash