In 2022, I switched from international technology M&A advisory to working with platform companies as an investor and board advisor. Taking stock of 15 years as an M&A partner, I realised that in almost all deals with an outlier valuation, a relationship between the buyer and seller existed. To share my learnings, I summarised my view on transformational M&A. Transformational M&A results in a ‘10X’ value creation opportunity and brings the best exit opportunity for founders both from a valuation and an impact perspective.
The M&A playbook of investment banks and corporate finance advisors consist of a structured process starting with an information memorandum, a long list of potential buyers and a data room. The M&A deal is managed as a project whereby the approach, fee model and deal outcome are optimised for a 4-6 month process. I call this approach the ‘transactional M&A model’.
In my 25 years as an M&A advisor, I have experienced that that the transactional M&A model works successfully if three conditions are met:
- The company has experienced management and the performance is robust with preferably high cash flow.
- The market is consolidating with one or more strategic buyers and the company attracts private equity interest.
- The valuation fits in the median EV/EBITDA multiple range adjusted for company specific circumstances such as performance or growth.
If these conditions are fulfilled, the company is transactable and most likely the transactional M&A process will deliver the expected results. However, not all M&A opportunities fit in the transactional M&A model. Often for a good reason.
For mergers or acquisitions that are transformational to the buyer and the joint business case is a multiple of the stand alone performance, a ‘transformational M&A’ approach will put the value creation opportunity first. Taking the value creation opportunity as a starting point, will bring the best exit opportunity for founders both from a valuation and an impact perspective.
In this article, I will provide a fresh perspective on a tailored M&A process for transformational M&A deals.
Transformational M&A
The most notable M&A deals are transformational to the buyer. Through an acquisition, the buyer accelerates a business proposition, enters a new market or is future proofing a legacy business.
The key characteristic of a transformational M&A deal is that the valuation and deal structure are based on the joint business case rather than the stand alone performance. High multiples and outlier valuations are justified by a ‘10X’ business case.
The foundation of transformational M&A is trust
If the majority of the valuation is based on a 10X business case, it is not enough to extrapolate the existing business, processes, and capabilities. A rigor due diligence process, preparation of a merger plan and alignment on joint development roadmaps are pivotal to future success. A proven partnership, personal relationships, and the due diligence process go hand in hand with developing a trust level needed to make the deal truly transformational.
Most transformational M&A discussions are exclusive
Given the importance of business case planning and the alignment on development roadmaps, most big tech companies only negotiate M&A deals in a 1:1 setting whereby both teams jointly and often shoulder to shoulder define objectives, roadmaps and priorities. Any 10X business case will justify a premium valuation but a rigor planning and alignment is conditional to succes. In other words: a process whereby buyer and seller exclusively negotiate a deal should justify a premium valuation. How different is this from the common belief amongst M&A advisors that the best deal is negotiated in an auction process.
The transformational M&A process
An exclusive (1:1) M&A process requires a conviction from both the buyer and the seller that a merger or acquisition is the best value creative option for both. If done well, the upside can be a multiple compared to the transactional M&A process which only allows for a short and often competitive due diligence. Founders and business executives should consider an alternative path to conventional M&A which is less transactional and more transformational.
In short, transformational M&A requires on both sides a different approach whereby M&A no longer is seen as a one-off project but as an ongoing process. The implications of the transformational M&A approach are the following:
The buyer perspective
Companies that apply successfully the transformational approach have embedded the M&A and partnership capability in their core business operations. M&A deals are not seen as discrete one-off projects but the end-point of a partnership journey with acquisition candidates. Through a partnership approach buyer and seller get to know each other whilst testing and validating the business case opportunity. The buyer may ending up paying a higher price but the benefits of building trust and mitigating key risk areas outweigh the price of a failed transaction.
Transformational M&A requires a disciplined M&A process with:
- A pro-active scouting process
- A well managed partnership model to validate business cases and to build a trusted relationships with potential acquisition candidates
- A fast track and disciplined due diligence approach to reasonably demand exclusivity
- A clear view on integration (and what not to integrate) putting the value creation opportunity first
- Business ownership, and
- A culture that welcomes entrepreneurs
The seller perspective
Companies with unique IP, capabilities, a platform proposition, or access to a valuable market segment, may experience transformational value creation opportunities when collaborating with other companies that have complimentary IP, capabilities or clients. Often these value creation opportunities result in the best exit, both from a valuation and impact perspective. Assuming that outlier exit opportunities result from existing relationships and partnerships, it is recommended to start engaging with potential acquirers years in advance of the envisaged exit.
Transformational M&A requires founders and business leaders to embed M&A and partnerships into their business processes as opposed to project based transactional M&A. I recommend the following approach:
- Define early-on the potential buyer landscape. Take a broad-based ecosystem perspective and try to develop a view on how the ecosystem will develop.
- Engage early-on with potential buyers to develop a partnership.
- Make investor relations with existing and prospective investors, buyers and partners an integral part of the business operations.
- Prepare a modular company presentation that can be easily adjusted to the situation.
- Prepare a permanent data room and keep it up to date regularly.
Having a company presentation and a permanent data room makes your company M&A ready and will allow you to engage in ‘pre-emptive’ M&A discussions without too much distraction for the core business. Pre-emptive M&A discussions will allow an interested buyer to make a non-binding offer without triggering a transactional M&A project. As the company already has a clear view on the potential buyer landscape and relationships exist with key decision makers, the option remains open to quickly turn to a competitive process in case the pre-emptive is not enough attractive.
Transformational M&A results in a ‘10X’ value creation opportunity and brings the best exit opportunity for founders both from a valuation and an impact perspective.
