3 Essential Elements to a Successful M&A Strategy, Pt. 2
A thorough strategic assessment is paramount to realize the promise of a new acquisition. Most corporations have well-established decision-making processes already in place; however, there are three additional key elements that need to be evaluated before a decision is made. We continue with the remaining two components: customer experience and competitive response.
2. Customer Experience
Over the years, as part of strategic assessment efforts and growth strategy projects, we have asked customers of a firm of interest to tell us one or two words (or short phrases) that best describe their relationship and interactions with the firm in question. On the positive side, we have heard words like “delightful,” “easy to do business with,” and “provocative.” On the other hand, we have heard bright red flags, such as “painful,” “a necessary evil,” and even “a future former supplier.”
Business relationship decisions are driven by customer experience. While quantifying the bottom-line impact of customer characterizations of their suppliers—positive or negative—remains a challenge, there is no doubt that the everyday experiences of customers shape their perspectives and impact purchase decision making. We understand that customer memories are long, that their perspectives are widely shared within their firm and often through the industry, and that a single notable experience is often the one that defines the way in which a customer organization thinks about a supplier for years and years. So when you hear those “red flag” characterizations, there is good reason for concern. They will be among the assets you acquire if you move forward with the firm whose customers provided those characterizations.
It is important to note that in today’s competitive environment, a low point in most customer experiences involves the discussion of prices. Many of us have heard the following in response to questions about customer experiences:
- “My customers had to go down market and they aren’t moving back up.”
- “That’s the aspect of our relationship that will eventually drive us apart.”
- “You just can’t imagine how painful it is to get a price quote from them.”
The above challenges are solidly based on reality, making pricing a daunting topic and one that must be understood before an acquisition is made. Firms that proactively manage pricing strategy with the right tools in place can produce significant top- and bottom-line results. A point gain in realized prices can yield a much larger proportional improvement in profits, and a point lost in realized prices can undermine the business case that was used to support the acquisition decision. Understanding whether pricing pressures are looming on the horizon must be a key learning emerging from a strategic assessment.
3. Competitive Responses
Here, pricing enters into this discussion in a different way. One of our clients developed an action plan to bring their acquired firm’s pricing “up to the levels our firm normally realizes.” Such thinking is not uncommon, but when the two firms share customers or operate in an environment of price transparency, it is possible that the rationalization of prices could go in the other direction. Without question, a common customer is going to ask for standardization at the lower price to which they have been accustomed, and to the extent that the acquisition ends up adding to the pricing pressures faced by the acquiring firm. The implications can be enormous.
Figuring out the potential for such pricing pressures is not easy in today’s world of global relationships and complex pricing formulas. Understanding how exchange rate adjustments and quantity discounts enter into the picture are two examples of such complexities. Especially when there are common customers served by the two firms, it is important to look at pricing disruption as a possibility.
Pricing is not the only example of competitive responses. One client firm completed an acquisition that served a competitor of one of its most significant strategic accounts—and on the day the acquisition was announced, that strategic customer called for a high-level meeting to voice their concerns. The agenda of the lengthy meeting included numerous topics that had not been anticipated by the acquiring firm, including a list of technologies that the acquired firm wanted assurances that they would not be provided to the competitor as a result of this acquisition, and a demand to understand what “walls” would be put into place to ensure that insights gained as a result of the relationship would not be shared with their competitor. Suffice it to say that the acquisition transformed a strong strategic relationship into one that was going to be treated in a more arms-length way by the customer.
We’ve learned that strategic customers often feel that the relationship entitles them to “most favored customer” treatment, even when such language never appears in any document. While expectations for “best price” are an example of this, expectations exist along other dimensions, such as getting early access to new technology and receiving priority shipment of products that are in scarce supply.
As part of the decision-making process, it is worth asking, “what does this acquisition candidate do that our key customers might expect in the future?” The answers to this question might go far beyond pricing to other factors relevant to common customers. Differences in business processes and practices can become issues when existing customers see something your newly expanded firm is doing that they think should be done for them.
To realize the promise of a new acquisition, it’s important to due a thorough strategic assessment. While you expect your firm’s expansion plans to take you into new markets and open a world of new opportunities, even the slightest misstep or oversight in your evaluation of target acquisitions could lead to more harm than good. Making game-changing, high-ROI acquisition decisions today requires a comprehensive approach, and your decisions need to be based on more than instinct. If your M&A strategy takes into account the potential for disruption, the customer experience, and competitive response—and your team asks the right questions throughout the process of assessing the strengths and weaknesses of acquisition targets—your company will be poised for healthy, well-informed, and calculated growth.