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Does your deal-making embrace disruption?

Matthew Toole

31 May 2017

Power-generating windmill turbines. Photographer: Lisi Niesner

Tried and tested deal-making strategies are no longer sufficient in this age of disruption. How can organizations forge a new approach and embrace innovation?

The ability to innovate has become the cornerstone of corporate success.

At the heart of this approach are the corporate development and strategy professionals who find themselves having to adopt new skill-sets and fresh perspectives in addition to their deal-making abilities.

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Here, we look at four of the most interesting and exciting types of deals which could be classed as innovative, as well as the skills that corporate strategy and development professionals will need to be successful in this fast-changing environment.

A deal could be classed as innovative when an organization acquires another entity that:

  • is outside its core or traditional industry
  • is an early stage asset
  • has a different business model, or
  • is acquired in an alternative manner, such as through partnership or as a venture-capital investment

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1. Buy instead of build

Some of the biggest deals in recent years originate from an organization wanting to expand into a new area or space.

Instead of building the technology or infrastructure, organizations look to buy a company that already has the assets, expertise or is operating in this space.

This puts them in a more competitive position in the near-term because the assets acquired can be quickly integrated and used in their business.

In August 2016, multinational retailer Walmart acquired Jet.com, a fast growing and innovative e-commerce company, in order to accelerate Walmart.com’s position and compete more effectively with the likes of Amazon.

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2. Adjacent customer base

Some of the more innovative deals in recent years have come when the acquiror takes a creative approach by purchasing a company or product that is compatible with their existing customer base.

Under Armour, an American sportswear manufacturer, demonstrated this when it purchased the digital health and fitness apps, MapMyFitness, MyFitnessPal and Endomondo.

While the industries are different (apparel versus digital), the customer base is similar as all the companies are targeting those with an interest in fitness.

3. Technology buy

Airbnb revolutionized the hospitality industry by becoming one of the world’s biggest accommodation companies, despite not owning any lodgings.

However, in February 2017 it was reported Airbnb had finalized a deal to buy social payments start-up Tilt, a tech deal which doesn’t immediately fit the mold for Airbnb’s key offering or customers.

A few months earlier, however, Airbnb expanded its travel offering by launching a new ‘experience’ feature on its app and Tilt could provide the technology to facilitate payment for trip booking.

4. Asset/business swaps

Although rare, asset/business swaps represent a scenario where both sides create value by exchanging assets which are mutually beneficial to both parties.

Overall, both partners have their strengths enhanced and weaknesses divested. This was highlighted in 2014 when pharmaceutical companies Novartis and GlaxoSmithKline agreed to trade assets worth more than US$20 billion.

Further trends in the Pharma Industry

Joseph Jimenez, CEO of Novartis, coined the term “precision M&A”, which is the antithesis of mega-mergers where you acquire some good businesses along with others that are not great fits for your company.

Find out more about Mergers and Acquisitions

This approach was in contrast to the overall theme of 2014, when mega pharma deals dominated the headlines.

Filling the innovation gap in deal-making

The experience of corporate development professionals in traditional deal-making is invaluable, but no longer enough.

What’s needed today is a new perspective, coupled with creativity and a flexibility that seeks out and embraces disruption.

Corporates expect their development professionals to rise to this challenge.

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Furthermore, corporates would rather use their own employees to identify potential M&A targets, and in doing so, leave intermediaries out of the equation.

Currently, statistics indicate that only 38% of deals are brought to the table by employees (against 32% from intermediaries).

Even for experienced dealmakers, the percentage of employee-created deals is below 50%, suggesting organizations need additional content and capabilities to help find targets.

New skills and long-term strategies

Innovative transactions present unique risks and equally unique opportunities. Therefore, core due diligence skills alone are not enough.

They remain vital, but have become just a component of the new skill-sets that corporate development professionals need to thrive. These include planning skills and an ability to envisage how and where future opportunities will emerge.

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According to the same Deloitte survey, over half (57%) of corporate development professionals expect the volume of innovative deals that their company concludes to increase over the next two years.

In contrast, just 20% of the same group believe that their company’s corporate development teams are able to manage this expected increase.

What is clear is that these professionals need to rise to the challenge of re-defining their skills, develop closer ties with the different business units within their organizations and have access to the data and analytics to allow them to make informed decisions.

This will enable them to move well beyond simple deal-making and become instrumental in formulating long-term strategies.

 

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