How to Validate the Deal Thesis To Ensure M&A Success

In M&A, validating the deal thesis is a crucial step that can make or break the success of a transaction. Rushing into an M&A deal without proper validation can lead to costly mistakes. Acquirers may end up with a company that doesn’t integrate well or a deal that fails to deliver the expected value.

They risk wasting resources and energy on deals that don’t contribute to their broader goals. But what exactly does it mean to validate the deal thesis? In this article, Jann Lau, Senior Director, Corporate Development at PayPal, gives us his insights on how to validate the deal thesis and ensure M&A success. 

“Once you have the core value drivers, the reasons why you are doing the deal,  that’s where you should focus 90% of your diligence.” - Jann Lau

The Importance of a Clear Strategy

Before even thinking about acquisitions, it’s essential to have a clear strategy in place. The strategy answers key questions: Where do you want to play? How will you win? You need to understand your target market, your company’s capabilities, and the customers you serve.

M&A should be viewed as one of several strategic alternatives within the traditional "build, buy, or partner" framework. Having a well-defined strategy ensures that acquisitions are not opportunistic but aligned with long-term goals. Once you’ve outlined your strategy, you’re in a better position to pursue specific targets that fit your vision.

What is a Deal Thesis?

A deal thesis is essentially a hypothesis about how a particular acquisition will deliver value. It addresses questions like: Why are we acquiring this company? What value will it bring? This thesis should connect directly to your strategic goals and alternatives. M&A deals should not be done for the sake of doing deals but should solve real business problems, such as closing capability gaps or entering new markets.

Validating the Deal Thesis

Validating the deal thesis involves a thorough examination of whether the acquisition makes sense for your business. Here’s how to approach it:

1. Focus on Value Drivers
   Every deal has three to five key value drivers that make it worthwhile. These can be anything from technology and talent to customer base or regulatory licenses. The first step in validating the thesis is identifying these drivers and understanding how they align with your strategy. Your diligence efforts should focus 90% of your attention on these value drivers to ensure that the target aligns with your goals.
2. Targeted Diligence
   Focus your diligence on the value drivers of the deal. If people are a value driver, for instance, you must evaluate the retention potential and the fit of key employees. Similarly, if technology is a driver, you need to ensure compatibility with your systems and assess the integration effort.
3. Understand Alternatives
   Consider other alternatives such as building the capability internally or partnering with another company. Validating the deal thesis means weighing all the alternatives, not just jumping into an acquisition because it seems like a quick fix.

Crafting a Strong Deal Thesis

When crafting your deal thesis, focus on clarity and alignment. The thesis should:

• Be succinct and clearly articulate the reasons for pursuing the deal.
• Include both the benefits and the risks, outlining what could go wrong.
• Be rooted in data from the diligence process to back up your reasoning.

You should update the thesis as more information comes to light during diligence, ensuring it remains aligned with the evolving understanding of the target company.

Integration as a Deal Driver

It’s important to remember that value is created after the deal closes, not when it’s signed. A validated deal thesis should consider the integration phase carefully. Ask yourself: How will we capture the value we seek? If technology is the key driver, then the integration plan should outline how you will migrate systems, onboard customers, and make the new capabilities part of your operations.

Integration should never be an afterthought. It’s crucial to involve the right teams early on and ensure that everyone understands their role in executing the post-close plan.

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