How to Tie Deal Origination to Strategy Development

With so many companies out there, how do you know who to approach as a potential M&A target? Having a solid origination process helps teams save time and money by enabling them to target the right entities. Helping us learn how to tie deal origination to strategy development is Scott Hile, Senior Director, Corporate Strategy & Development at Enviva.

“Origination is all about understanding what you’re trying to get to and then backing into having an adequate deal funnel” - Scott Hile

To be a strategic acquirer, it’s important to have your own proprietary source of deals. Going through auctions is often not the best way to find deals. Identifying target companies shouldn’t be hard, especially in your own industry. When looking to enter a new market, you can always use buy-side advisors. There are also tools available out there to help generate leads. The best place to start is to filter target lists that tie to your strategy. 

Funneling the List

While there is no one-size-fits-all approach, there are certain considerations to look at so that the target matches the overall strategy. According to Scott, sourcing involves moving targets through a funnel to force-rank them. Here’s what his funnel looks like:

Market attractiveness 

1. Is this a market that we’re trying to get into?
2. Is this a new sales vertical?
3. Is this a new geography?
4. What is the market size?
5. What are the market growth rates?
6. What is the profitability of the sector?

Target attractiveness

1. How does the target fit within that market? 
2. What is the revenue size?
3. What is the growth rate?
4. What is the profitability in the marketplace?
5. How does that fit with your strategic goals?

Cultural Fit

1. How does the target fit with your company?
2. How does the target fit with your strategy?
3. How does the target fit with your market position?
4. Are they aligned with your sustainability goals?
5. How do they align with your innovation goals?

Integration Risks

1. How difficult is it to integrate the company?
2. What are the positive synergies? 
3. Are they going to add value to us? Or are we going to add value to them?
4. What are the negative synergies?
5. Do you have the same customers?
6. What is the manufacturing or sales geography?
7. How many employees and offices do they have?
8. How many products do they have?

Deal Structure

1. Is this going to be a bolt-on, asset, or stock acquisition? 
2. What is the ownership structure? Is it single ownership? Is it a subsidiary? Does it have 150 holders who might not have the same view on selling the business?
3. Is acquisition the right path to achieve the strategic goal? Or is a joint venture enough?

Outreach

During outreach, figure out the best way to approach the target company. Gather all publicly available information regarding the company so you don’t go in blind. Identify if your company or anyone in your circle knows the target. Finding someone who can introduce you organically can make the first steps go smoother. 

Building a relationship and trust is the most important part of outreach. Establish yourself as a legitimate buyer in the market so companies will trust you during the early phase. The last thing you want is to have a reputation that you are not a serious buyer and are just gathering sensitive information for competitive reasons. 

This is why it is necessary to do research from the front end so that when you approach a target, you can commit to an acquisition if the company turned out to be everything that you hoped for.

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