Strategic Alternatives to M&A

Strategy to partnerships 

We're always thinking about how we can amplify our long-term strategy or help us grow our business. And we have two kinds of opportunities; inbounds, where we review pitches or outbound, where we proactively engage new prospects. 

The very first thing we do when we are going to evaluate a company is asking ourselves if a partnership or an acquisition of this company will help accelerate or address our strategic priorities. If the answer is yes, we engage further to discuss this in detail and potentially move into the next steps. 

On the other side, when we proactively engage, our approach tends to be very systematic. Everything starts with the enterprise focus as defined in our strategy. These are priorities that came from the strategy team, the board, and the long-term planning process.

If it's a target company that could potentially accelerate our strategy, we map the landscape of how we could potentially partner. My team then partners with the enterprise strategy team to consider building or partnering to achieve a specific corporate objective.

If we think about a partnership or an acquisition as the ultimate way to achieve that goal, engaging a potential partner is key. Even when the engagement is just to discuss an idea or multiple ideas about a possible path forward.

Partnerships to acquisitions

It's very common for the corporate development function and the SMA ventures function. It's not the ultimate goal for us, but it happens. 

Typically, these are technologies in our roadmap today, and we're actively working, co-developing, and collaborating with a specific startup. We're working day in and day out with a portfolio company and if it's doing exceptionally well, and if it seems to be the right moment for them and us, we consider an acquisition. 

Those decisions typically come from the business as they collaborate with the portfolio company daily. If everything is doing so well, corporate development will definitely hear about it.

And if an opportunity arises, we will assess if we should move and bring the startup in-house. We'll do a business case, do the proper diligence, and analyze if it makes sense to bring it in-house.

The business case will be strategically focused. Of course, the price also needs to be within the market needs to make sense. But it's not about the financial sense at all. It's about the rationale and the strategic fit of the teams.

Governance for partnerships

Our governance structure is rooted in best practices. I would call it bespoke to each one of our two objectives. Prisma ventures and our corporate development function have completely different visions, missions, and processes.

For Prisma, We have allocated 20 million to invest in early-stage startups, aligned to specific focus areas within the digital innovation roadmap. For approvals, our investment committee reviews and approves investment proposals from Prisma Ventures. 

They are also responsible for building the business case and showing the link to focus areas on the roadmap, and more importantly, the startup is the right team and fits to our brand and company. 

The investment committee combines the strategy team, the corp dev function, and the business leaders on digital innovation. 

On the corporate development side, the approval process depends on investment thresholds. At a specific amount, our executive team can review and approve investment decisions or acquisition decisions. At larger amounts, it requires engagement from the board of directors.

If we feel there is a pushback, we spend quite a bit of time understanding the pushback and resolving the issue. Again, it's about making a collaborative decision and making sure that everyone is on the journey.

Approaching target companies

No two targets are the same, and every company has different cultures and challenges. Your approach must be tailored to the opportunity. For example, we use a range of ways to reach out to a target company, whether it's phone calls, email, or personal networking.

So before we launch our product, we want to make sure we have the leverage and the expertise of others who are established leaders in the space. So my team will research and understand the landscape and select the few companies we want to engage in. There are many different components. 

1. The target is linked to the company's strategic priority. 
2. Research shows that the target company must be a strong player in their space. 
3. The initial approach must not focus on partnerships but rather an interest in learning more about the company and building relationships that will ultimately determine cultural fit. 
4. There must be a joint effort to shape the partnership over time to ensure it's a win-win for both sides.

But sometimes, we also use our relationships with investment bankers and venture capitalists because they either have this portfolio company or they know them. Or sometimes, we just email the founder directly and ask them for a conversation. 

First meeting

Every approach is unique, and it's tailored to a specific situation. The approach changes materially from company to company. It reflects on how we do business because we don't want something that's only good for us. It has to work for both sides, and no two deals are the same.

As we want to form mutually beneficial long-term relationships, we must take a holistic approach. Because you don't even know if we want an acquisition or an investment on day one.  

It's tough to take the same approach when you have a wide range of potential targets. Every company is unique culturally and financially and they're facing different challenges.

Approaching inexperienced startups

We have very standard processes, but we certainly guide them and help them along the journey. Part of our job is education, both externally and internally, and introducing our process to them. 

It's important first to determine the goal, the strategic rationale, and how both are thinking of solving that goal. As for the processes standpoint, it's something that we have even though we don't have a structured way of approaching every partnership.

After we know that we will do something, whether it's a partnership, acquisition, or investment, we have a specific process to follow, and it can be very efficient. But, whatever it is, it has to tie directly to the enterprise. It has to achieve the goal of aligning with the prospective partners' values and leveraging the cross-functional diligence process, which clearly outlines and educates, both externally and internally. 

Ultimately, you're solving so many goals, aspirations and objectives from the business teams and to the founders. Sometimes, the hardest thing is getting everyone on the same page, making sure that everybody understands that we have a common goal, and flexing on the issues as a corporation.

Assessing relationship

The main thing we want to review in a deal is the culture. Integrating and making the deal work could be challenging if it doesn't match. Sometimes you realize mismatches on the very first meeting. 

Sometimes we realize it when we sit around in a couple of conference calls, and it's obvious that we don't work the same way.

Sometimes, it takes a couple of reiterations. Sometimes, it takes all the way to work together and realize that it doesn't work because it's different. It doesn't mean that their approaches are better or worse. It just means it's different, and it might not be the right fit for our company.

The process to partnerships

The process of forming a partnership is similar to M&A, where there is an agreement or an LOI. You have some set of high-level terms and do confirmatory diligence. But in partnerships, you don't look at the target's financials, but at the details of how the partnership will work.

• Which stores are we going to be in?
• How are the employees going to interact with guests?
• How is the loyalty program going to be structured?
• Who is going to have access to all the programs?

It takes a lot of different components that you're vetting. You have to think about it as a pre-LOI or pre-high-level agreement. There will be processes in the background that need to move for that to happen. 

There's also the legal component, where you draft contracts that contain the governance of the partnership. Both sides must approve the terms set by the business teams.

Once you get to the signing of the deal or closing of the deal, you get to the key component, which is integration. In a way, even if it's a partnership, you're integrating two teams that are talking everyday to make this successful.

Diligence 

We don't necessarily have data rooms. But we set up processes and have cross-functional teams. We partner with the target company and bring in the team that is responsible for executing it. Since they come along with the journey early on, they are also part of the whole conversation.

Since they understand how we design the deal, they can also provide some insights. Typically, there are some senior team members because they have an idea of how other partnerships work, and what are the things we care about as a company. We need to make sure that the things we ultimately agree on can be delivered from both sides.

Integration planning

It happens just before closing. Toward the end, we'll talk about the details. We spend a lot of time thinking about how to take a detailed plan to something executable and actionable. 

Setting up the partnership for success

In every partnership, the metrics are different. Whether the metrics are the number of sales, number of engagements of some guests, it really depends on each partnership. There is always a set of KPIs to measure success. If both sides benefit from the partnership, they will hit and exceed the KPIs. 

Venture Capital vs. Partnerships

We have a venture capital arm that marries our digital innovation and our corporate development team. It's a bit different from partnerships because it looks to accelerate innovation by nurturing partnerships with startups. 

As a fund, were looking to partner with earlier-stage tech companies on a very specific set of verticals that we have defined that's tied to our digital innovation roadmap. 

Keeping partnerships alive

It's important to keep those relationships alive. Especially the relationships with key advisors, players, and investors in your space. It doesn't have to be done every day but make sure to touch base every six or four months, depending on who it is.

It's important to reiterate your approach. You want to be in a situation where there is an open dialogue, potentially make something happen with the startup, or it could be a three-party deal.

As for methods of following up with people, it's a combination of everything. We leverage software for that; we also have a lot of outlook reminders to have a conversation or get in touch.

Re-engagement is easy when there is a mutual interest. Typically there are similarities whether you share an industry or something that's driving your relationship.

The hardest times to connect are the very first couple of communications. Then, it becomes easier. 

Whether it's an individual or an organization, you'll know what they're focused on. And, if an opportunity fits them or us, connecting becomes natural.