Small gains, big wins

An innovation-led growth strategy can be framed in terms of two distinct choices: Where to play and how to “win.” Opportunity areas for M&A value creation include:

• Enhance the core: These are the capabilities that serve existing markets and customers and optimize existing offerings and operations. Companies can augment these capabilities by acquiring an innovative product or technology to enhance their existing market offerings. Most disruptive innovation investments tend to occur in this segment.

• Move into an adjacent segment: Innovation investments like these expand existing businesses into “new to the company” segments. This includes product or service extensions aimed at capturing a new segment. Companies can “win” by either acquiring a disruptive startup or acquiring new capabilities that would allow them to enter a new segment.

• Create a new transformative business: These types of investments are about transformational or breakthrough offerings for markets that are yet to mature. These are often the most difficult, due to the risk and complexity of such investments. When industries are on the cusp of fundamental disruption, the incumbents often make transformational investments.

Once the innovation-led growth strategy is clear, the next step is to build a sustainable opportunity pipeline, which includes:

• Disruptive market sensing: Companies should develop market-sensing capabilities that not only monitor shifts in disruptive technologies, but also in consumer behavior and the impact of cross-sector convergence on the future of various industries.

• Ecosystem engagement: Through an active ecosystem engagement program, companies can identify potential relationships with startups, technologists, futurists, universities, leading venture capital firms, accelerators and incubators, government representatives, and even other corporations.

• Innovation hubs coverage: A crucial part of a company’s strategy should be forging connections across key innovation hubs, including the United States (Silicon Valley and East Coast), Israel, United Kingdom, Germany, France, Netherlands, China, India, Japan, and Canada.

While evaluating an organization’s readiness to engage in disruptive M&A, company leaders should consider the following:

• Strategy: Is the parent company’s senior management clear about the vision and goals for specific transactions? Can they clearly communicate this to target acquisitions?

• Leadership: Is there alignment and support among board members and C-suite executives? Is there an executive sponsor for each potential deal?

• Investment: Is company leadership willing to accept a different ROI/investment level compared to standard levels? Should the corporate parent prioritize growth over profitability? When should leadership revisit the decision to continue investing?

• Culture: Has the deal team assessed the potential cultural impacts of an acquired business on the larger corporation?

• Incentives: Is the corporate parent willing to offer incentives that may be higher than is typical, if these incentives help retain the target company’s management team?

• Integration approach: Is the corporate parent willing to grant a degree of operational autonomy to the target company during its first year as part of the larger organization? Does the corporate parent need to set up an incubator or ventures division to manage the business during the transitional period?

Other factors that can help make the deal work:

• Making an informed valuation: Companies should consider multiple assessment methods, including scenario testing, economic analysis, and probability weighting and simulations.

• Due diligence: Because disruptive M&A differs from traditional M&A, due diligence should assess additional factors, including functional, legal, economic, and development and commercialization complexity.

• Negotiation tactics: Identifying and resolving differences between the buyer and the seller can be facilitated by using a “balanced scorecard” approach that scores the transaction across a set of key parameters and plots each organization’s positions.

Disruptive acquisitions turn the integration process on its head—because these deals aren’t just about acquiring products or technologies, they’re about acquiring ideas and talent. Companies should carefully plan their M&A integration strategies well in advance, considering the following factors:

• Integration priorities: The higher the degree of commonality between the acquirer and target—in terms of products and services, culture, revenue and number of people, market and brand positioning, and attitude to risk—the sooner full integration should begin. The opposite is also true. Therefore, companies need to determine how these elements should be integrated and when they should be brought into compliance with standard industry processes for a large corporation.

• Cultural considerations: Acquirers will need to decide which cultural strategy they’re going to undertake to support benefits delivery—from forging a new culture altogether to operating with a sub-culture.

• Tracking results: Implementing an effective synergy-tracking process will be key to both assessing if the returns have been realized and providing input on whether “course correction” is needed during years one and two.