In Gordon Daugherty’s recent post, he encourages company founders to be deliberate about establishing management systems, specifically in the areas of meetings, communications, and decision-making. Based on a valuable lesson I learned from a small class Andy Grove taught on performance management, I respectfully contribute an additional topic to Gordon’s list.
My first software company employer, MRI, became the first software acquisition that Intel ever made. Intel’s annual revenue then was $850 million, less than 1.5% of 2014’s $58 billion. Andy Grove, Gordon Moore, and Robert Noyce traveled to Austin to meet us face to face and to share their plans for the future. (Gordon Moore’s prediction that refrigerators would eventually have embedded CPUs baffled me, but that’s another story.)
Intel CEO Andy Grove was deeply committed to teaching effective performance management to every manager in the company. His passion derived from his belief that building a strong management culture would support continued rapid growth of the company for decades. It’s hard to argue with that when you look at the company’s history.
Having effective 1-on-1 meetings was a critical component of the process Andy taught. He emphasized three aspects:
- Purpose – In the hectic day-to-day operations of a company, many issues must be dealt with immediately. Having regular 1-on-1 meetings creates time for “important” but not “urgent” discussions that would otherwise be overlooked. Between meetings, each participant compiles a list of important, non-urgent topics.
- Scope – No topics are off-limits. The only criterion for an issue is that it be important to the employee or the manager. Career planning, an idea not yet ready for a larger discussion, the scope of a project – any topic is allowed.
- Timing – Setting the right schedule is mutually determined. The relative maturity of the person to the position is the key factor. Increasing maturity allows for less frequent meetings. I may know a job extremely well and a weekly meeting with my manager would seem like micromanagement, but if I’m transferred to another position where I have little domain knowledge and experience, a weekly meeting schedule would be welcomed!
While some management systems may need to evolve as the company grows, making effective 1-on-1 meetings part of the company’s culture will pay dividends throughout the company’s life.
In the classic Steve Martin bit from early Saturday Night Live days, he’s a pitch man with a compelling hook: “How to make a MILLION DOLLARS and NEVER PAY TAXES!” After dramatically repeating the offer several times, he pauses to reveal the answer: “First, get a million dollars. Then…”
This post might be called “How to BUILD A VALUABLE COMPANY and SELL IT FOR A FORTUNE!” The first easy step? “Build a valuable company.” Assuming that you’re already doing that and your exit strategy centers on being acquired, four factors will impact success:
- Strategic importance of your product/technology/service
- Intensity of the competitive environment
- Existence and visibility of urgent, unsolved customer problems
- Presence of an insider relationship
Gauging the strategic importance of your offerings to a potential acquirer’s portfolio of capabilities is critical. Imagine all acquisitions resting along a value continuum. On the left end are low value (for the seller!) types of acquisitions like asset sales. Moving toward the right are transactions whose value is based strictly on financial parameters (e.g., discounted cash flow).
At the extreme other end of the continuum are companies whose value is so strategic to the acquirer that revenue and profitability are of little consequence. An example I’ve seen is a small software company with technology that uniquely solved an urgent problem for a multi-billion dollar enterprise. The valuation received was such a high multiple of the acquired company’s revenue that its financials were almost irrelevant to its value.
A common mistake in identifying potential acquirers is casting too narrow a net. Try listing 20 potential acquirers. Listing the first half dozen will be easy, but most of those are likely more financially-driven than strategic. Building out the list of 20 can lead to a discovery of previously unrealized strategic value in adjacent spaces.
A company in a highly competitive environment is motivated to move quickly to close gaps in its offerings. The trick is connecting during the time when the potential acquirer begins to realize it has to act. Wait too long to engage, and they will solve their competitive challenges through internal efforts, or by partnering with or acquiring another company. Getting on their radar at the right time is critical.
Urgent Customer Problems
An acquirer with a strategic competitive need is caught in a situation characterized by two attributes:
- A high-impact opportunity or threat exists.
- The company has a weak ability to respond.
Nothing will drive the acquirer forward faster than demands from customers having problems solvable by the incorporation of your company’s products, technology, or services. An effective way to validate value to the potential acquirer is to engage them in a proof of concept to solve a real problem.
The presence of an insider relationship is often the single most important success factor in getting and staying on the acquirer’s radar. Developing an internal champion who is already convinced that the companies should be working together for mutual competitive reasons optimizes the odds of success.
If you have an insider relationship with a target acquirer, use it; if you don’t, get one. Having already built a strong industry network will pay huge dividends at this point.
When to Prepare
Early in the life of a company, management has to focus on building a strong business. Deep analysis in preparation for an exit can be a distraction at this point.
Waiting too long to apply exit strategy thinking, however, is also a mistake. Once the business starts to prove itself, begin investing for the future by creating a valuation framework for your company. Build and maintain a list of 20 potential acquirers. Understand what clusters of acquirers need in order to grow. Fill gaps in your offerings to fill those needs and increase your value to potential acquirers.
Start building your exit strategy 12 to 24 months in advance of searching for an acquirer. By the time you decide to enlist an investment banker’s help, you’ll understand the universe of potential acquirers, you’ll have moved into a strong position that maximizes your valuation, and you’ll arm your investment banker with maximum ammunition and motivation.
Joel Trammell requested a guest post for his American CEO blog, and it’s called 2014 Issues for a 2016 Exit. You’ll find many other great thoughts for CEOs there, and since it’s a two-part article, subscribe there and/or here to make sure you get the second half next week.
Think your non-tech company won’t be impacted by this trend? Has your market been around awhile? Are things likely to continue pretty much as they have? Think again. A recent article in TechCrunch suggests that the market has reached a tipping point that could affect you. Many non-tech companies acknowledge that success increasingly depends upon how well they leverage technology, and they’re making bold moves to acquire software and other technology companies to strengthen their competitiveness. If you’re in high tech, you should check it out; if you’re in another industry, it’s imperative to learn more.
CEOs are increasingly aware that the technology-based operations of their company are critical to gaining market share and growing revenue. Large companies shop for technology that will make them more competitive. Business combinations that would have seemed baffling in the past are becoming commonplace, for example:
- a chemical and agricultural company bought a weather technology company;
- an auto company bought a music app company;
- an insurance company bought a health data analytics company.
As technology becomes increasingly accessible, astute organizations are leveraging this trend with several key business objectives:
- Erase the hard line between online and brick-and-mortar commerce;
- Deepen interactions with customers;
- Gather and incorporate more data intelligence on their business;
- Add critical technical talent.
If you lead a non-Fortune company, following their lead in making startup acquisitions may be imprudent or impossible. However, frequent conversations with astute CEOs suggests taking three straightforward steps:
- Get an outside audit of current software systems to learn how dependent upon technology your company is and whether it’s time to modernize in order to compete more effectively.
- Talk to thought leaders in your network about how the intersection of business objectives and spending on technology work in your market.
- Recognize that, as each operating division begins to understand how critical technology is to their business, information technology (IT) departments are decentralizing (believe it or not, there was a time when mature companies had a mail and logistics department with an actual mailroom.)
Computing has changed the way every type of business happens. Savvy CEOs understand the value of technology to their businesses and are exploiting it in every functional area.
An astute CEO can often augment organic growth with acquisitions, but a majority of acquisitions fail to deliver expected returns. CEO Carol Koffinke of Beacon Associates says that “60 to 80 percent of all mergers and acquisitions fail to meet their merger goals.” Why do they fail?
Much has been written about acquiring companies’ failure to realize the value they envisioned for their acquisitions and the why’s: a lack of proper due diligence, cultural mismatch, lack of integration planning, unforeseen market factors, etc. However, of all the possible reasons for failure, M&A experts put the lack of a clear vision at the top of the list.
Source: “Creating and Executing a Winning M&A Strategy,” Merrill Data Site and The M&A Advisor, October 2013
While a clear vision can accelerate execution of any growth strategy, successful M&A demands a level of clarity most companies fail to achieve. Why do companies launch into an acquisition without sufficient vision and planning? Here are the most common reasons we’ve encountered in working with top executives:
- Some CEOs don’t naturally think strategically. A CEO who’s risen through the operational ranks can end up with a “make stuff, sell stuff” philosophy and a view that strategy is merely a set of slides for board and investors, while in fact, a clear strategy drives revenue and profitability.
- A CEO can be overwhelmed by the daily pressure of running the business. Periodically answering the question “are you working on or in your business?” can prevent the urgency of daily concerns that distract from the CEO’s paramount responsibility – increasing shareholder value.
- Pressure to make quarterly goals can diffuse and erode the shared view of a company’s purpose. A process called business entropy (e.g., repeatedly accepting non-core business) can eventually dilute the strength of a company’s brand and slow its ability to generate new business.
How can a CEO be more intentional about growing the company through acquisition?
- Find a way to set aside time to think and discuss new directions. In this new social media world, it’s easy to develop a chronic short attention span. Focused thought is required to create breakout strategies.
- Take an honest look to make sure you’re not hanging onto more than you should. How to cross the second chasm, i.e. growing a company from small to big, is described in Doug Tatum’s insightful book, No Man’s Land. Pick up a copy and read it this weekend. (If you think you don’t have time, you need to read it.)
- Discuss growth challenges with objective trusted advisors. Use CEO peers at Vistage and experienced consultants as soundingboards to call out any “elephants in the room.” They will help you establish the clear vision needed to drive your acquisition initiatives.
The original 20/20 outlook process evolved while I was CMO at Infoglide a few years ago. In early April the company was acquired by FICO (Fair Isaac Corp.), one of the top potential acquirers identified during the process in 2009. The acquisition resulted from a partnership formed between the two companies as suggested by the analysis.
In early 2010, I founded 20/20 Outlook LLC. The original 20/20 Outlook process is now the second of four processes used to identify and create conditions that lead to growth and acquisition:
- CLARIFY: create bulletproof Strategic Positioning
- COMPREHEND: develop a Valuation Framework
- CONNECT: engage in Self-Fueling Partnerships
- COMPLETE: develop Mutual Accountability to move from strategy to execution
At our upcoming RISE Austin session on May 17, we will focus on how to develop self-fueling partnerships built upon a solid valuation framework. (RISE session locations can be fluid, so please make a note to double check this link a day or so in advance.)
Hope to meet you there!
UPDATE: The Self-Fueling Partnerships session for RISE Austin (4pm, 5/17) will take place on the second floor at the LBJ School of Public Affairs, 2300 Red River Street. You may want to arrive early to find parking.
How does a company get acquired? FICO’s acquisition of Infoglide provides an excellent example of applying deliberate steps to increase the odds and accelerate the process.
CEO Mike Shultz graciously allowed us to describe the backstory in a short case study. Read it to discover what you can do to attract potential acquirers.
Entering 2013, we have larger challenges than ever. Economic slowdowns in Europe and projected softening demand in Asia and elsewhere are forcing CEOs to pursue more challenging growth opportunities. This is not an option: we grow or we die.
For many firms, growth has historically come from new products or innovative extensions to existing products. The simple growth strategy where R&D generates a new widget, Marketing promotes it, and Sales introduces it to customers isn’t working that well any more. And even if revenue is growing, profits are often generated at the expense of ever deepening cuts in personnel, core capabilities, and reduced investment in capital and equipment. CEOs are worried that soon they will have to pay the proverbial piper.
M&A alone won’t do it either. While firms can and often should acquire or merge to become more competitive, most M&A data shows that the combined enterprise delivers little increased profitability. At best, results are additive, not multiplicative or geometric. So what’s next? Where can we find that elusive growth?
Leading companies are broadening their definition of growth beyond traditional product-based categories to include more novel growth strategies. For CEOs to take advantage of any of them, they must consider the real impacts on their businesses and determine the capabilities they will need to succeed.
First, creative CEOs need to generate a complete portfolio of growth initiatives that include: geographic expansion and M&A; product-based extensions and positioning; integration or bundling of products and services; marketing-driven initiatives like segmentation and value-pricing; localized delivery through outsourced capabilities; value-driven arrangements like performance guarantees; and IT-based strategies like remote services.
Second, CEOs need to determine how best to apply scarce resources to these initiatives, being especially careful to avoid the trap of over-investing in existing businesses – through both capital and key resource allocation – at the expense of novel and potentially much more profitable strategies. Communicating the necessity of and how best to implement novel strategies to their boards is a critical challenge. Key questions include: “Do I have the right leaders in the current businesses? Can my current team succeed in these new lines of business? Is the plan aggressive enough? Have we achieved the right balance of risk and projected return?”
Finally, only careful analysis will determine whether any of these breakout strategies are appropriate for your firm. Can you get buy-in from all stakeholder groups? Will employees get excited about the new opportunities? Will the board support the initiatives? Can you communicate the new direction effectively to analysts and investors?
In these especially demanding times, CEOs must gain a broader perspective and challenge their internal teams’ assumptions. Make sure that you incorporate external research and insights into your thinking before making the hard calls.
Washington Post, July 2, 2012: “Outlook for U.S. economy dims as manufacturing shrinks for the first time in nearly 3 years… ‘Our forecast that the U.S. will grow by around 2 percent this year is now looking a bit optimistic,’ said Paul Dales, an economist at Capital Economics.”
Being the CEO requires committing to a “no excuses” life. Others may offer plausible reasons for non-performance, but if your company plateaus, CEO excuses aren’t an option – you must take action:
- Softening economy? Find a way to take advantage of a changing business landscape.
- Lengthening sales cycles? Determine how to identify highly motivated prospects.
- Shrinking margins? Examine whether your company is leveraging its strengths.
Changing your business to address these and similar challenges incurs risk, but the risk of doing nothing is greater. How can you adopt an effective breakout strategy that will recharge you and your executive team?
Here’s a rational, three-step process guaranteed to provide direction: (1) reexamine your company’s true value and what sets it apart; (2) in light of market conditions and competition, determine an altered direction that will maximize value; and (3) identify new business relationships that will open doors to new business. In other words, you need to clarify, comprehend, and connect:
Clarify – Who are you as a company and what sets you apart? What truly separates companies like Apple, Southwest, Berkshire Hathaway, and the NE Patriots from the rest, year after year, is a sense of purpose. Clarifying the organization’s purpose and unique assets beyond a simple mission statement actually increases efficiency. It’s imperative to get this right.
Highly successful companies perform at a high level because they focus on a clearly identifiable market with a differentiated solution. Even successful companies eventually let pressure to increase revenue force acceptance of business outside their primary focus. Since profitability grows by exploiting core competencies, losing focus erodes margins. Having a crystal-clear shared vision of who your company targets and what customer problems it uniquely addresses enables employees to make decisions more rapidly (fewer meetings and emails needed) so more gets accomplished faster and margins increase.
Comprehend – Once you understand your company better, update your understanding of your immediate market. What change in direction will maximize value? Finding the right direction in a complex and competitive market accelerates growth. How do you define who’s in it and who isn’t? What is your relationship to other companies in your space?
One proven method is to pretend you’re selling your company and identify a number of companies that could acquire you and another set that you might acquire or partner with. By comprehending the needs of potential acquirers, acquisition targets, and partners, you will develop a value framework that identifies high value opportunities.
Connect – Which relationships will increase business the most? Whether your company is B2B or B2C, strong relationships with other companies can help it grow faster. That said, many CEOs have been burned by partnerships that failed due to poor planning, unrealistic expectations, and unmonitored execution.
The solution? Design self-fueling partnerships that continually reinforce each partner’s objectives. Partnering with potential acquirers and industry leaders will drive new revenue by providing access to new markets, extended geographies, enhanced product and service offerings, better branding, and staff augmentation.
By following this three-step process, breaking out of flat growth may be easier than you think.