Every M&A strategy requires a rich Pipeline of Targets (POT). A company focused on M&A needs to build and prioritize a target pipeline based on the company’s strategy and product needs.
Rachel Geller, MD at Insight, interviews Peter Segall, former CEO of HealthcareSource about his experience building and executing a POT. After selling HealthcareSource in 2015, Peter joined Insight as a managing director to mentor and coach executives of Insight’s portfolio companies. Many engage in M&A and build POTs to do so.
Rachel: Could you explain why M&A was a critical part of the strategy at HealthcareSource?
Peter: When Insight invested in Healthcaresource, it was a single product company, a hospital staff applicant tracking system for small to mid-size community hospitals. We had aspirations to build a broader talent management platform. Our goal was to expand our Total Addressable Market (TAM) and sell more to our customers; at the same time we needed to minimize risk by executing on our product and go-to-market strategy. With M&A we could maximize the upside. To accomplish this goal, we began by methodically evaluating targets using a POT decision framework that we created jointly with Insight.
Rachel: Many teams and entrepreneurs find themselves aspiring to this type of M&A strategy but are not sure where to start. Could you give us more details about this process and framework?
Peter: The first step of the POT process was to build a 360 degree market map, a comprehensive view of all the product categories that were adjacent to the core product, and to look at what companies were playing in these product categories. We then applied a set of criteria to narrow this market map to a list of 50 to 60 targets. We prioritized the categories based on which ones would accelerate HealthcareSource’s business growth the quickest, and could be executed smoothly. To give you a bit more detail, the criteria fell into two categories:
- Performance metrics to assess target’s attractiveness to us: product capabilities, market leadership, and financial profile, and
- Risk mitigation considerations to ensure ease of integration: natural technology fit, similar buyer profile, and suitable product bundling for our current GTM model.
We worked with Insight Onsite to prioritize companies in the market map using these criteria. This was our POT. Insight’s sourcing team then reached out to the POT to help us create a shortlist of targets.
Rachel: What was the overall impact from these transactions?
Peter: We completed three acquisitions during Insight’s investment period. These three inorganic growth additions, along with organic product development, enabled HealthcareSource to expand our value proposition from a point solution to a full talent management platform.
M&A contributed materially building company valuation. Through these acquisitions, we expanded our addressable US market by eight times and grew the business significantly over the course of a few years. The inorganic activity contributed approximately half of our growth. The thoughtful process of market mapping, setting criteria to build a POT, and collaboration with our equity partner worked well for us. The results were self-evident.
Rachel: This is impressive and since I was part of your extended Insight team, I remember how exciting it was to partner on these initiatives. Could you talk a little bit about how to prepare your organization for M&A?
Peter: M&A is an ongoing function in the company with no determinate beginning and end. Day one in the job, the management team ought to be discussing the goal, strategy and ecosystem. These are always iterative because customer needs change quickly. Six months after I joined HealthcareSource, we started to think about target categories for acquisition and expansion. We created our POT and we would regularly sit down with the board and review the results of our outreach. Our POT evolved as we learned more and as the market evolved. M&A requires an ongoing mindset in a business and teams must build that muscle early on.
Rachel: That is helpful advice. How would you advise CEOs or founders who are at the beginning of this journey and trying to figure out how to execute on market mapping and prioritizing a POT?
- Understand the ecosystem. You may need to go one, two, three dimensions away from what you're currently selling. To achieve this, management teams should be deeply immersed in their customers’ worlds via meetings, conferences, journals, and other means to understand how their products fit into the broader ecosystem.
- Have a long-term vision for the business. Many times, you're just trying to survive the day. It's important to stick your head up and ask, "What are we playing for here? What's the five-to-ten year moonshot or bold idea that we're trying to accomplish?" An understanding of the ecosystem and the market map, gives you a window into creating the bolder vision that you can work towards.
- Apply heavy doses of practical realism to this process. A lot of factors can make a transaction unattractive. For example being far removed from your current purchasing decision maker, a vastly different company culture, or significant operational issues. These can make M&A risky. On the flip side, a similar or related buyer, a similar or related culture can make the acquisition easier. Many M&A integrations fail because the buyer only focused on the growth profile of the target, and not the other components of what yields good outcomes.
- Be ready and willing to walk away from deals. We walked away from a lot of deals even after they passed our first and second sniff test. You can't go into this with happy ears. You must be disciplined, do strong due diligence and have a deep knowledge of your long-term plans with an awareness of the changes in your ecosystem.
Rachel: These are valuable suggestions and I know that you apply your experience to the companies that you mentor now. Thanks for discussing them with me.
To learn more about our approach to creating and prioritizing a POT, please reach out to us at firstname.lastname@example.org.