Michael's M&A Playbook: Reason #1 for M&A - Time To Market
There are many reasons why companies think about mergers and acquisitions, but the primary motivation for why M&A makes sense is that you can accelerate the time to market. It is the reason #1 in M&A before industry consolidation (i.e., horizontal M&A), cost improvements (i.e., synergy capture), and turnaround (e.g., buying, restructuring, and selling of distressed companies). When you believe that now (or soon) is the right time to launch a product or service in a specific area to potential clients, then M&A is a powerful tool to achieve this quickly. You can develop almost everything by yourself if you have enough time, but other market players may be faster than you. Remember that one of the reasons for competitive advantage is to be faster than others. Here are a few tips on how you can analyze the time-to-market effect.
5 Tips to Better Analyze the Time-to-Market Effect in M&A
Define the base case carefully and compare it to the M&A scenario - In every business case calculation, you compare how an investment can achieve better cash flows compared to the base case. Consider carefully whether the base case is the current situation or should be adjusted. For example, there are circumstances where the base case should go down because of substitute products. In other instances, the base case can grow for a few years before substitutes are available. Let's think about a time-to-market analysis. The base case, which is an internal growth plan, can assume that you hire people and develop products/services over the following years to enter a new market. Then compare this internal growth plan with the M&A business case. You will have higher cash outflows at the beginning (i.e., the M&A expenses and the purchase price), but you will most likely also show earlier cash inflows from the target company. Include a terminal value for both cases. The terminal value is the cash flow calculation beyond the specific planning horizon. Since M&A transactions usually take more than a few years to make financial sense, calculate scenarios for ten years or longer to see whether the M&A business case results in better returns.
Calculate scenarios in the base case with time-to-market improvements - You can do many things to achieve a faster time to market. For example, you can increase team collaboration, simplify R&D and operational processes, work closely with customers during the R&D phase to get quick market feedback, use more automation, combine internal teams with external experts, or implement continuous improvement methods. In your base case, you can assume a step-by-step improvement in the time-to-market process because of a learning curve, but don't be too optimistic.
It is challenging to grow with different products/services - If the main reason for the M&A transaction is to grow your business with other products/services, it will (usually) take some time until you are successful in the market. Be careful with your assumptions in your base case when you are the new player. New products/services are an area where M&A often shows better results than developing and marketing it from zero by yourself.
Include a risk percentage in the M&A case - An M&A transaction can be complex and challenging. Even if you get more information during the due diligence, it is still limited information based on limited access to key employees at the target. One of the learnings from my M&A transactions is that it always turns out differently after the closing. Include a risk percentage to reduce the M&A business case. The more aggressive you are in the assumptions, the higher the risk reduction. I have seen up to 25% reductions in such cases (e.g., high restructuring savings).
Work closely with marketing and focus on reasonable assumptions, not precision - Usually, marketing is responsible for the time to market. They work together with R&D teams to develop the products, with operations on client services, and, of course, with sales. This may be different in your organization. Whoever is responsible in your company for the successful go-to-market strategy, ensure that you work closely together with them to get the best estimates of the base case and the M&A scenarios. We all want to be as exact as possible but remember that we talk about forecasts and scenarios for multiple years. Focus on precision in the next 12 months and reasonable assumptions for the mid and long-term plans. Don’t get lost in pseudo-precision in the outer years of the plans.
M&A can be a Time-to-Market Strategy
All companies want to reduce the time it takes to develop and introduce a new product or service on the market. Continuous improvement projects can help to shorten it significantly over time; however, M&A can be a powerful tool to accelerate the time to market tremendously. I hope that these tips help you to be successful with your next M&A project.
Feel free to contact me to discuss specific mergers and acquisitions examples.
