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6 Misconceptions About Growth-Stage M&A

by Feyza Haskaraman, Allyson White

In the first half of 2018, M&A activity in the software sector was up 25% compared to the previous year1. Large scale software M&A also made headlines in 2018, including IBM’s acquisition of Red Hat, SAP’s acquisition of Qualtrics, and Adobe’s acquisition of Marketo. Most business leaders acknowledge that M&A is an important growth lever for mature companies. However, in smaller companies, leaders often overlook the importance of M&A as a driver of growth.

At Insight, we’ve seen first-hand the power that M&A can have in scaling fast-growth companies, and we believe that M&A is a crucial growth lever. More than 50% of software companies in Insight’s portfolio have completed at least one M&A deal. These companies are diverse – serving both horizontal and vertical markets, mid-market and enterprise customers, and with headquarters around the world.

When should growth-stage companies consider M&A? Why don’t all growth-stage companies engage in strategic M&A?

Below, we demystify a few common misconceptions that we hear from executives and investors.

Misconception #1: Building is better than buying for growth-stage companies

For all companies, growth is life. Pressure to grow faster in a short time period is stronger than ever. This requires landing more customers, building new product, scaling operations and finding good talent.

Building requires pouring resources into scaling up teams and products. Building is exciting and proven, but it takes time to yield the benefits of investment. M&A – when executed successfully – can enable smaller companies to recruit A-class talent, round out the product suite, expand into new markets, and in a shorter timeline than organic growth.

As an example of building a product suite through effective M&A, eVestment, a former portfolio company, completed seven acquisitions to expand to new markets and customer segments. Five of those acquisitions occurred within a span of 18 months. Through their M&A strategy and excellent execution across both organic and inorganic efforts, eVestment established itself as the leading provider of institutional investment data intelligence and analytics; it was acquired by Nasdaq in 2017.

While building your company, and driving organic growth, you can accelerate time to market and outmaneuver competition if you have M&A in your tool box to add product, talent or scale at the right time. Both can be done in parallel.

Misconception #2: My organization is too small to consider M&A

There isn’t a rule of thumb for the right scale or time to start M&A. In Insight’s portfolio, more than 30 companies with less than $25 million in revenue have made at least one acquisition and many of these companies were even smaller in size.

The main reason executives think their companies are too small for M&A is typically limited management bandwidth and experience with M&A. Most smaller teams have no experience in due diligence and post-merger integration. However, these are not reasons to shy away from M&A as they can be remedied in different ways. If the acquisition is strategic enough, management team can carve out the time to make it happen and surround themselves with the right advisors and support.

Company’s investors can provide advice and expertise on M&A and third parties can help manage the process.

Adam Berger, former CEO of DRI (Digital Room Inc) and current Managing Director at Insight, underlines importance of strategic approach and unproductive nature of concerns around “timing”: “It doesn't matter if your business is small or large; what does matter is that you take a strategic, targeted approach to the M&A process.”

Misconception #3: M&A will distract from our core strategy

M&A – like any strategic initiative – requires dedicated resources and executive oversight. However, leading companies turn M&A into a capability rather than a distraction by building a strong team and defined processes.

Without a defined process, it is easy to lose sight of your goals as teams move quickly during M&A. Best practices include deciding on investment criteria before embarking on a scan of potential targets, industry maps to refine your “shopping list” and pipeline trackers to ensure nothing falls between the cracks. Setting stage gates can move deals through the funnel quicker.

The first step is to create a dedicated and agile M&A task force including strong leaders; high performing project managers ensure that you can move decisions faster and more efficiently. Many transactions fall through, hence the danger of distracting from your core goals with deals that go nowhere. Day to day prospecting should be ring-fenced to a few people so that executives can focus on building organic growth. As opportunities arise, decisions should be made quickly, and the right experts included where needed, without engaging them in tail-spinning deal minutiae. Ensuring that M&A doesn’t distract the Executive Leadership Team requires discipline: we’ve seen many teams chase the shiny object and lose sight of quarterly revenue goals.

Drillinginfo, an Insight Portfolio company, has completed eight M&As transactions to-date with a dedicated M&A team led by SVP of Strategic Development, Tanya Andrien. Tanya, along with Insight’s sourcing team drove the process while getting feedback and direction from the company’s broader team as necessary. Jeff Hughes, CEO of Drillinginfo, explains how having a dedicated M&A leader minimized the distractions from the core business: “Tanya worked with a dedicated Insight sourcing team on a day-to-day basis to build out the pipeline, create priority target lists, and bring the companies of interest in front of the executive team. We spent 30 mins every week as a group vetting the companies in the pipeline. This way, we could spend the rest of our time focusing on core operations and long-term initiatives to accelerate organic growth.”

If you have investment, legal and financial partners, leverage them to help you with sourcing and diligence. Insight, for example, has a sourcing team that helps build out target pipeline for our portfolio companies, and we support diligence and post-merger integration activities.

Investing in people and processes will prevent M&A from being a distraction from core operations but, rather, a capability to leverage.

Misconception #4: Most M&A fails to live up to its promise.

This is almost true. Many integrations don’t realize the expected synergies, revenue growth, or cost savings. However, this doesn’t have to be your experience. Rigorous post-merger integration planning will mitigate most of the risk, along with a designated PMI leader who holds people accountable for the activities required for success.

At Drillinginfo, once the team gets the deals over the line, a dedicated person assumes responsibility of the integration process, and is paired with a General Manager to run the acquired business. The GM is responsible for achieving the financial objectives and integrating the acquired business into the company, and may also serve as a transitional manager for portions of the acquired business. The integration manager builds out workstreams in collaboration with the GM and department leaders, and then manages the workstream process and timelines, sending weekly updates to the executive team highlighting the progress and challenges.

Jeff Hughes, CEO of Drillinginfo, attributes unlocking the full potential of M&A to the post-merger management processes: “By having a dedicated GM supported by an integration manager, we have confidence that there is constant and diligent oversight of the acquired business, with an urgency around integration initiatives. Our approach has met with success: we have met or exceeded forecasted cost synergies in our 8 recent acquisitions, and the acquired businesses have all grown faster post-acquisition than before the acquisition.”

In our blog "It’s the Integration, Stupid”: 8 Post-Merger Integration Mistakes to Avoid, we detail some of the pitfalls that can be avoided, like setting unattainable targets during the negotiation process, spending too little time on retaining talent, and insufficient transparency.

Invest in a strong PMI leader, and empower that person to hold people accountable to the timeline, plan and targets agreed to by the whole team.

Misconception #5: M&A can harm our company culture

We often forget that, no matter what, culture evolves as a business scales. Whether it is organic or inorganic growth, culture can flourish as you gain scale with best practices. The most important component of maintaining and building culture post-acquisition is communication. Creating your communication plan and an extensive FAQ list requires CEO-level attention. Insight Onsite has codified our learning in a post-merger integration handbook that contains actionable, tactical examples. This includes how to mobilize seasoned leaders to ensure that sponsorship exists throughout the organization and how to navigate honest conversations with the employees of the acquired company. For example, providing business cards and email addresses on Day 1 of the acquisition is a small gesture that can make a huge difference. Remember also that M&A can be a great catalyst to recruit new, high caliber talent who can contribute to and enrich company culture.

Kaseya, an Insight portfolio company, has done more than ten acquisitions to-date spanning multiple geographies. Despite the geographical and cultural differences, Kaseya was able to maintain a healthy company culture across several offices in the US.

Fred Voccola, CEO of Kaseya, attributes the company's success to following the guidelines around distributed sponsorship and communication: “We found communicating one message and communicating it often and openly with the employees to be the most effective. After each acquisition, my executive team frequently travelled to the new office and held All Hands meetings where we talked about the company’s vision and values. We ensured that our presence and sponsorship was felt especially in the early days.”

Misconception #6: We don’t have the means to finance an acquisition

Making large investments for earlier stage companies is more challenging given the company’s insufficient track record with financial institutions. This can be a significant obstacle for debt financing.

Find a partner. Financing is one of the places where having an equity partner can be advantageous. A partner like Insight will have connections to major financial institutions, negotiating and structuring expertise and can be a thought partner to navigate the financing of an acquisition. An equity investor will be able to lay out financing options and guide the management team to the most favorable outcome.

Kaseya CEO, Fred Voccola experienced this first hand: “One of the reasons we looked for an investor was to gain access to capital and advisory support to implement an aggressive M&A plan. The market was moving fast, and we needed to get ahead of the competition, yet we did not have financial means to do so. With the help of Insight, we were able to deploy multi-million dollars in our first year and accelerate our growth trajectory by expanding our base of customers and breadth of our products.”

Conclusion

M&A creates a step function in growth. Organic growth can be linear, but M&A can change the playing field. While a powerful lever for scaling companies, M&A is often overlooked because of a mindset that sees M&A as a tool for big companies, not smaller ones.

Insight is a strong supporter of M&A for growth-stage companies. Where executed correctly it can create early market differentiation and a competitive moat.

In parallel with strong organic growth, this is a formula for winning.


This is the 1st article in a series of Onsite blogposts about M&A. Check out M&A Needs a POT (Pipeline of Targets) and Want to Accelerate Growth?  Embrace M&A.If you have any questions related to Insight’s view on M&A or how Insight can partner with you on your M&A strategy, please reach out to ideas@insightpartners.com.   

1 | https://www.channele2e.com/news/ma-activity-rises-in-first-half-of-2018/

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