Primary drivers in tuck-in versus adjacent acquisitions, and the case for programmatic M&A

How the profile of the CEO and its executive team drive the M&A strategy with the support of their Board

We typically define an adjacent acquisition as one where the target company operates in a different industry from the acquiring company — they are usually different in terms of product, market, or technology.

In such acquisitions, the level of subsequent integration between the acquirer and target is usually low as the companies rarely have an acute interdependence need. Actually, in most cases, the acquirer recognizes the benefits of providing greater levels of autonomy to the target after the transaction. Think of Google’s acquisition of Youtube, and Facebook’s acquisition of Whatsapp.

Important ways in which the acquirer can create value through such and adjacent acquisition include the identification of a good investment opportunity, the negotiation with the parties involved, the design of an effective deal structure, and the possession -for later transfer- of superior management skills.

The knowledge and skills which are relevant to acquisitions aimed at diversification are largely associated with the acquirer's overall leadership and general management abilities.

In contrast, if the target operates in the same industry as the acquirer we usually consider this a ‘tuck-in’ or related acquisition. In such acquisitions, the acquirer and target are typically more similar in terms of their product, market, and technology than in unrelated acquisitions, and the pursuit of operational synergies is an important reason behind the tuck-in.

At the level of the acquirer's leadership, tuck-in acquisitions benefit from a greater knowledge of the firm and industry as the acquirer needs to assess the complementarity or overlapping nature of the respective capabilities and resources of the acquirer and potential tuck-in to really identify appropriate targets.

Post-acquisition, there are usually higher levels of integration between the acquirer and target. One of the chief aims in related acquisitions is the creation of operational synergies which may require greater interdependence between the companies.

In related acquisitions, top managers thus need to be very familiar with the resources and capabilities of their own firm to better understand how to integrate the resources and capabilities of the target.

Whether it is an adjacent or tuck-in M&A, the acquirer's leadership team needs the board’s buy-in on acquisition strategy to avoid surprises later on. Let’s not forget that boards are charged with ensuring material transactions are consistent with company strategy and are the best choice for shareholders among the available alternatives. Based on this ‘duty of care’ they will assess:

• how the proposed transaction aligns with the firm’s strategy
• how the (buy) proposal compares to the alternatives ranging from pursuing the path of internal development (build) or entering commercial arrangements to secure the same benefits (partner)
• the risk of pursuing the transaction, and how completion will alter the overall risk profile of the firm. For example, will dependence on one or more key customers increase? Will exposure to volatile emerging markets decrease? Will integration of the acquired business distract from the execution of the company’s organic growth plans? Will the company’s liquidity be impacted by the transaction?
• whether the firm has sufficient management talent and resource to execute the transaction, staff the due diligence, provide an integration team, and fill gaps in the target’s management ranks
• whether the due diligence has been sufficiently robust to identify potential major risks ranging to, for example, legal compliance, intellectual property ownership, employee and change of control issues with key customers and suppliers whether or not under contract
• whether planned synergies are reasonable, especially in a tuck-in acquisition
• whether the specific terms of the transaction are fair and reasonable in the context of the industry and business in question, and
• the risks to completing the transaction, firms who may be potential interlopers, the anti-trust landscape and the termination rights of the other party have

Best practices on corporate development with the board are:

• Ensure the board has been actively engaged in business strategy discussions and has endorsed management’s recommended approach.
• Have potential acquisition candidates reviewed as part of the company strategy review process and determined whether the candidates fit with the company’s explicitly set forth objectives.

Some companies solely rely on investment bankers to deal with M&A opportunities. However, typically boards dislike the sense that their senior management team is suddenly being dragged into some sort of auction process for a target opportunity at the bidding of an investment banker, especially when it is claimed to be a ‘must have’ acquisition that has come out the blue and has not featured on the board’s internal radar.

If the company is planning to have inorganic growth as part of its overall strategy, a programmatic approach can generate the biggest returns depending on the industry dynamics, for example, the pace of innovation in the industry or the existing consolidation forces.

The two guiding principles in programmatic M&A are:

Strategy and sourcing: connect the company strategy with the M&A priorities, and develop an effective M&A blueprint delineating the limitations of pursuing certain deals and providing a realistic snapshot of market trends.

Due diligence and integration planning : tackle due diligence and integration planning simultaneously, holding discussions far ahead of closing about how to redefine roles, combine processes, or adopt new technologies, especially in tuck-in acquisitions.

It’s important to understand that a programmatic approach aimed at delivering superior returns to shareholders will work only if the company treats M&A as an enduring capability rather than a project or occasional event.

Of course, the programmatic model may not be the right fit for every company. Some businesses may be contending with organizational limitations or industry-specific obstacles (consolidation trends or regulatory concerns, for example). Regardless, it’s instructive for companies with any type of M&A program to understand how some companies are taking advantage of the programmatic approach and consider it for themselves.

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A note from the author, Albert Vazquez-Agusti: Since I was a teenager working with my father at his engineering office, I’ve seen firsthand how technology and innovation impact our work. We have reached a crucial acceleration point where technological change, education, and inequality are involved in a kind of race. I’ve come to realize that the real bottleneck to taking advantage of innovation is the lack of relevant managerial skills to impact business models through new technologies. That’s why I promote the development of people and organizations to support technology adoption to solve small to big problems based on my experience in Fortune 500, SMBs, Private Equity, Start-ups and Venture Capital organizations.