At NightDragon, Corporate Development and M&A is a core playbook that we use to help our companies think about ways to accelerate growth. We work closely with them to develop their M&A strategy, source targets, evaluate transactions, and drive a successful integration – with the goal of creating another muscle the company can leverage on its way to becoming a market leader. This is the first in a series of short blogs that will address the entire Corporate Development and M&A lifecycle, where we hope to provide a unique perspective on different ways to think about inorganic revenue growth.
Having led Corporate Development and M&A at fast-growing companies such as FireEye and Dropbox, as well as working at more mature companies such as HP and Juniper Networks, I’ve been able to see the immense benefits (and risks) that acquisitions can bring to the acquirer. Here are a few themes I’ve seen throughout my career working with acquirers as small as 100 employees to as large as 300,000, with a specific focus on providing a brief framework for high-growth companies considering acquisitions as part of their strategy.
WHY ACQUIRE?
Oftentimes, high-growth companies disregard acquisitions as a distraction. If the business is growing nicely on its own, why take on the additional risk of an acquisition? Here are a few proven benefits that acquisitions have created for high-growth companies:
- Accelerate product development: Time to market and access to talent are two reasons why a company can fail to reach its potential. Acquisitions are a way to bring on new talent or acquire technology that can quickly accelerate the development of certain products or features.
- Acquire product: While a high-growth company may have its core product humming, a multi-product strategy is critical to create long-term, sustainable growth. Acquisitions can help bring on that second product line to expand into adjacent markets, improve up-sell / net retention rates, and create further stickiness within the company’s customer base.
- Win the market: While the riskiest of all the strategies, a properly timed acquisition can also position a company to win the market by getting to a significant scale, removing current or future competition, and establishing itself as a market leader. A high-growth company also often has an ability to leverage valuable currency in the form of its own stock, enabling them to be aggressive on bigger targets.
These benefits can greatly outweigh the risk an acquisition brings, and a carefully structured M&A strategy can further minimize those risks.
FOCUS YOUR WHY.
Acquisitions, by nature, are disruptive to a business. In any acquisition, it is critical to clearly define the why, which will ultimately dictate the how and the when. These frameworks will help a business move through the disruption and focus on the ultimate long-term benefits to the business.
The “why” for an acquisition can often be bucketed into the following categories:
- Talent: Often used as an alternative for hiring, a company may look to acquire a team of talented engineers, product managers or designers more quickly than they could hire on their own to fill open roles. It may also leverage an acquisition to acquire key organizational leadership, especially in highly competitive talent environments.
- Technology: Companies may seek to acquire technology that can be leveraged to accelerate their product roadmap, decreasing time-to-market and product development risk while increasing near-term revenue.
- Product: An acquisition target can broaden the acquirer’s product portfolio, adding proven and market-ready products for the acquirer’s salespeople to up-sell into its customer base.
- Business: An acquisition can drive business growth through increasing revenue growth or adding additional go-to-market capabilities. Doing this through acquisition can often be much faster than doing so organically. A great example of this is leveraging acquisitions to increase international presence or expand to other customer segments.
- Market: Companies may acquire to gain a significant presence in new and adjacent markets, with the goal of expanding the company’s current total addressable market while also tapping into revenue and cost synergies.
Focusing your “why” on one of the categories enables you to have a consistent framework to look back to during the entire lifecycle of the acquisition – not only with defining your M&A strategy, but also with target identification, due diligence, integration strategy, and even the negotiation of the definitive agreements.
In addition, the most common point of failure in acquisitions is creating alignment across stakeholders and decision makers at both the acquirer and the seller. Part of this is due to miscommunication, but a big part of it is also prioritizing the wrong initiatives. This is especially important in high-growth companies, where many engineering organizations may have a “not-invented-here” mentality. Focusing your “why” helps to simplify the messaging and ensure that these stakeholders and decision makers are working on the right things to ensure the success of the acquisition. For example, if your “why” is Technology, then you will want to measure your acquisition based on product integration milestones rather than financial metrics. If your “why” is Product, while product integration can be a longer-term goal, you should prioritize near-term milestones on enabling your salespeople to sell the target’s product and realizing near-term revenue.
WRAP-UP.
Acquisitions are risky. And from time to time, they will fail. By focusing the acquisition rationale on the “why”, companies can reduce this risk and use acquisitions as a growth lever rather than a last resort option. This enables them to remain nimble and opportunistic, while also setting the foundation for longer-term sustainable growth. And while there are certainly a lot more issues to consider, this brief framework can help companies think about right questions to ask when thinking about their M&A strategy.
Stay tuned for more Corporate Development-related topics from the NightDragon team! Thanks for reading!
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