Innovation-driven M&A: Deal Sourcing, Valuation and Integration…with a Difference

In yesterday’s blog, I discussed how M&A is a tactic to execute growth strategy. Now I'd like to talk more about targets and approach.

2 September 2014


In yesterday’s blog, I discussed how M&A is a tactic to execute growth strategy. Now I'd like to talk more about targets and approach.

It comes as no surprise that innovation-driven acquisitions tend to have longer time horizons and highly uncertain outcomes. It takes a lot of commitment, patience and ongoing investment to make these deals work. Successful acquirers build post-deal plans that are agile and flexible. They have several post-deal scenarios up their sleeves that allow them to pivot should deal outcomes diverge from original plans.

The earlier the stage of the acquisition, the longer the time horizon to see value. The larger and more transformative the deal, the greater the planning and scrutiny required. The team needs to work together until all of the milestones are set for the deal to pass.

Tech executives tend to roam down a variety of channels in search of superior innovation potential. They place a lot of reliance on internal channels  their R&D, engineering and corporate development teams  to discover targets, but they also will explore some less conventional. Venture Capital funds often have the best sense of technologies that can be commercialized and the leading start-ups commercializing them.

Another route is to leverage the existing relationships a company has with other organizations to perform informal due diligence on assets that could be potential targets. As a first step, embarking on a licensing deal allows an acquirer to evaluate the management and get a sense of whether the company is the right target. Even without doing a deal, harvesting intelligence from multiple channels and touch points makes the acquirer’s market sense more acute.

Valuation of Innovative-driven M&A

When it comes to valuation of innovation-driven deals, things get tricky. Especially where early-stage targets are concerned.

Lacking either profits or consistent revenues and posting sporadic cash flow makes applying traditional valuation techniques all but impossible. Building a compelling investment case requires deal teams to resort to other measures. A cost benefit analysis of building a product or service internally versus buying it is a typical approach. Inevitably, an acquisition often trumps in-house development and speeds up time-to-market even if the acquirer has the necessary internal capability. And then the real work comes post-completion.

Integration in any deal is tough, but innovation-focused acquisitions pose unique challenges. Driving the business to produce short-term revenues will inevitably clash with the strategic intent of the transaction. With little or no revenue history and longer earn-out timeframes, measuring the outcome of innovation-focused acquisitions requires the development of scorecards that capture and quantify the deal's value-creation rationale. These should include financial metrics, for sure, but should also consider a broader set of strategic milestones such as product development targets, talent retention thresholds, intra-company collaboration levels and technological uptake.

Over to You

Nowadays a company’s success is increasingly dependent on its ability to produce a steady stream of innovation  whether it occurs in product, process or business model.

The value in any innovation-focused acquisition depends on the ability to monetize intangible assets. Longer time horizons and higher risk deal outcomes all conspire to create a number of challenges M&A leaders must manage.

It’s better to develop a detailed M&A methodology and process, involving dedicated teams that extend beyond the corporate development function to involve ongoing engagement from product development teams, the strategy function and senior management until long after the deal is closed.

Casting a wider net in the hunt for truly innovative acquisition targets is key. Ensuring flexible integration planning without losing sight of the original drivers of growth strategy is critical. In managing these variables successfully, the tech sector’s hit rate of successful innovation-driven deals is generally impressive. Now it’s everyone else’s turn.

Allan Cunningham

Allan Cunningham

Allan Cunningham is a senior media executive who has spent the last 15 years of his career working for some of the world’s most respected M&A and Private Equity media companies including Dow Jones’s publications Private Equity Analyst and VentureWire and most recently, The Deal. He has built a number of successful digital and event content businesses, both subscription and sponsor-supported, delivering information and content-marketing services to clients in the M&A and broader deal ecosystem.

Stay IN the know

Sign up for our newsletter for must-read market analysis and thought leadership, delivered right to your inbox.