M&A Expert Value Creation Points - Part 1, The Target List

Most sell-side focused M&A investment bankers, particularly those of us that lead with our sub-sector or sub-domain expertise, emphasize the strength of exiting relationships. The standing presumption is that if you've spoken with all of the strategic buyers' corporate development contacts on recent deals, and have a personal relationship with each, then picking up the phone is easy. And there's certainly some merit to the length and strength of a speed-dial list, but when we ask the question, "Which are the most logical buyers for your company, beyond those that have spoken with you in the last 6 months, or the ones that you think we already know?", that's when the conversation really gets interesting.

Once we've been hired, one of the first orders of business is the development of a target list. It might sound like a straightforward exercise: add up who you know, who we know, the obvious buyers, and the Private Equity funds that have existing platforms in the space, and put a pretty bow on it. But that assumes the obvious, easy, low hanging fruit is the totality of the buyer universe. At first blush, that may be true. What it ignores, however, is the opportunity to think more broadly about how certain other groups of buyers may perceive value in the company. To get there, you really have to put your thinking cap on. It's necessary to think beyond the obvious; in some cases re-factor the way the product value is stated, and in other cases, even the vertical or segment representing the company's present focus.

Let's make this a bit more concrete. Imagine we're taking a SaaS software provider to market, and that the very most obvious buyers are larger competitors with more comprehensive platform offerings, seeking the opportunity to acquire customers and upsell them to a more complete suite. In some cases, these particular buyers don't perceive maximal synergy, because for them, this solution does not represent a hole in their existing platform. Regardless, these remain the most obvious buyers, and they are typically your largest and best-known competitors. They sometimes possess different customer size focus -- imagine mid-market versus enterprise, for example -- or geographic focus, but in the end, at a technology and functionality level, the solution that they are buying duplicates something they've already developed, and presumably wish not to replace.

But what about a different group of buyers that doesn't already own this element of their solution, or may benefit from the customer base or in other ways, but for whom the base case rationale is less obvious? For these potential buyers, surfacing a rationale for acquisition requires a lot more thinking, knowledge of market dynamics, and often some inductive reasoning to infer the potential buyer's growth strategy. In some cases, it may even require packaging up the rationale, and injecting it into a dialogue with the VP of Corp dev, so that they can go away and rally internal support for the idea. What is really happening here equates to a fleshing out of our client's stand-alone corporate product / market strategy, because in each case, the alternative to selling to a buyer that can realize on any given thesis, is to take advantage of that same market opportunity directly -- either through new product development, or partnership, or both. Once the first potential buyer that might adopt this rationale for acquisition has been identified, all of their similarly motivated competitors can be added to that same sub-group on the target list. And so on this process is repeated, until the target list is significantly longer, and the number of possibly interested buyers is much greater.

Having recently hired a transaction advisor, most CEOs don't expect that the process of building out the target list to be so illuminating relative to their product / market strategy; but done right, it certainly does, and should provide for a significant expansion of the buyer universe which transcends the first-order list of obvious names.