Pipeline management in a disciplinary approach for making one or more choices among several alternatives. This approach is common in many areas such as VC funding, wealth management, PE firms, and mergers and acquisitions as well as many big decisions we make in our lives such searching for a university, job or even a house.
Here are some of attributes and characteristics of a pipeline:
- The number of stages in the pipeline
- The search criteria for allowing items into the pipeline
- The criteria or stage gate to move an item from one stage to the next
- Whether dropped items can enter back into the pipeline
- Fixed time or scope model in handling items in the pipeline
Some of the benefits of a multi-stage pipeline are:
- Tracking items as the number of items and interactions increases
- Items that are placed on a watch list can be managed properly for performance or events
- Relative comparison of targets in the pipeline
- Consistency in handling items in the pipeline
- Elasticity – Allowing more people to serve the pipeline
In this article we present the steps involved in sourcing targets in mergers and acquisitions based on specific strategy and search criteria. The importance of a robust pipeline management is paramount in M&A, and the way this is handled by buyers could significantly increase the likeliness of finding attractive targets and capitalizing on opportunities. Furthermore, proper execution of pipeline management can affect the cost and impact to the normal business operations, not to mention buyers’ reputation as an attractive or a hard to work with buyer.
Assuming a strategy is developed by an SME or a PE firm, complexity in M&A starts in searching for and evaluating targets. In large firms, about 80 targets are examined before a decision is made to proceed to the due diligence stage with one. Due to management commitment and time sensitivity of the interaction, evaluating the targets and timely interaction requires discipline and organization. In some cases, a target may need to be monitored for months for performance or certain events that could affect the buyers decision to make specific tactical moves.
Of all the tools used to manage the M&A process, CRMs are typically used to manage the front-end of the process. CRMs partially address the needs of the the M&A process in target search. Later, we will explore why a sales CRM does not address some of the unique and crucial requirements of M&A.
Search and Selection criteria
An acquisitive company starts by defining an M&A strategy. This requires an in-depth study of the resources and capabilities of the buyer. Under-utilized resources or capabilities can create synergies (See www.synergycalculator.com) that will only have meaning and can be materialized when the parent is combined with a complementary entity. IP and technology, geographic expansion, cross-selling, and upselling are a few of the M&A strategies used by corporations.
Once a strategy and investment thesis is in place, limiting the scope helps increase the likeliness of finding suitable targets. The search criteria determines what targets should enter your pipeline, while the selection criteria affects how targets are handled when they pass the search criteria. The former narrows the scope of the search, while the latter helps shorten a long list of candidates.
The following diagrams depict how a universe of targets in a specific industry is shortlisted based on the search criteria (Figure 1), and selection criteria (Figure 2 aka. Value drivers).
Figure 1 – Firmographic variables
Figure 2 – Shortlisting universe of M&A targets
CRMs and Pipeline Management
Can CRMs help manage an M&A pipeline? CRMs are necessary but not sufficient. CRMs provide a nice tool for managing contacts with the sellers. This is an important functionality in managing contacts with the target’s management team. However, managing this interaction in M&A goes way beyond this functionality. There are many aspects of M&A, such as strategy, governance, collaboration, financing constraints and feasibility that are very unique and are not provided in the general CRM tools. Furthermore, rating and ranking of M&A targets is very different than sales leads and prospects. This requires an intelligent framework that takes into consideration the strategic fitness, feasibility and the financial impact of the target.
Figure 3 – An M&A Pipeline
A stage gate model helps design the M&A process for one of the following screening schemes:
- Strict screening
- Moderate screening
- Loose screening
The assumption is that all targets that enter the pipeline meet the buyer’s search criteria. In strict screening, the selection criteria aggressively drops targets that are not up to par relative to other targets. On the contrary, moderate and loose screening let targets move to subsequent stages for further evaluation. Some of the factors that are considered in choosing the proper screening method include:
- Size of the market
- Availability of the sellers
- Opportunistic targets
- Market conditions
Cost of managing a pipeline
In M&A, it is very likely that the search and selection criteria changes while there are many targets in the pipeline. The re-evaluation of the targets in this case can be a very error prone and resource intensive task. A framework and proper M&A tools allow for changes in the search and selection criteria with little effort.
The cost of handling a target in the pipeline is accumulative and increases significantly as the target moves through the pipeline. This is mainly because buyers put significantly more internal and external effort to ensure target is strategically and financially fit and the acquisition is practical from many other aspect such as culture, financial capabilities of the buyer, and other factors. It is just as important to drop an undesirable target as early as possible as it is to not mistakenly drop targets that have high potential.
A benchmark for the cost of pipeline management can help companies define a process that is effective from a strategy and cost perspective. The M&A pipeline simulator (www.pipelineSimulator.com) helps understand the cost saving of filtering unsuitable targets earlier.
In this article we discussed the importance of a robust pipeline management process in an M&A strategy execution. Cost of managing a pipeline and services, and accuracy in target search and selection can make the difference between success and failure of the acquisition.
In the future articles, we will discuss how a proper stage gate model can help in maintaining a healthy M&A pipeline.