How to Execute Product-Based Acquisitions

From Engineering the Product to M&A

Through my MBA and on-the-job training, I've developed a clear understanding of corporate math and the fundamentals of what makes a company run.

When conducting M&A, I always collaborate with an exceptional business analyst who has a solid background in traditional analysis and investment banking. Regarding the product side, anyone can learn this. It's about dedicating time to develop expertise. 

This aligns with the concept of 10,000 hours of practice for mastery. Playing to your strengths, particularly in the areas of product and marketing, has allowed me to attract the right targets and set them up for success.

A critical element of my approach is when I meet founders. I strive to engage with a new company every day, and primarily, my discussions with founders revolve around their product dream. This dream is often the reason they started the company. 

Even though some are not product people, most are. They have a vision, and I'm able to build a rapport with them over a shared understanding of their dream. We discuss the potential impact of the product, how it's uniquely superior to what's currently on the market, and how it would align with the acquiring company.

Multiple founders have expressed that this approach was crucial in sparking their interest in our discussions as opposed to other offers they received. This strategy has proven particularly beneficial in recent years within a fiercely competitive market.

Having spent significant time examining products and marketing from various perspectives, I've become competent in leading product and experience analysis. This enables me to identify the team's clear strengths and challenges based on customer insights and understand the current state of the market.

Finally, in product-based acquisitions, the sponsor is usually a General Manager or Chief Product Officer with a strong product focus. My ability to connect with them around the criteria that matter most accelerates the strategy. This understanding is grounded in the unique characteristics of each potential target, and I can evaluate those targets deeply from numerous perspectives, particularly focusing on the product and customer aspects.

Difference of Product-Based Acquisition

There are many excellent types of acquisitions, such as market consolidation and buying customer bases. For product-based acquisitions, beyond wanting to have great technology or experience, it's crucial to have these acquisitions rooted in your company strategy.

Ideally, the acquisition should fit within the definitions of what makes sense and have a direct line of sight to the company strategy. The criteria should then revolve around how the product can accelerate or enable this strategy. If there's a gap in your company strategy around the product, it's vital to consider what the product is going to do at the foundation, which should be your first criterion.

This product focus means that targets have to meet the product criteria first before any other criteria are evaluated. If you're doing a market consolidation play, for example, you may not care about the product. You could simply be merging a number of different companies to buy a share, or buying customer bases to put on your existing product.

To give some examples, I once worked on an important growth area that ended up being a new division. What mattered most was that the product matched our company strategy. We looked at several companies and eventually narrowed it down to three. All of them scored highly on the product, which allowed us to move on to the other criteria and eventually determine the winner.

Another example of a product-based acquisition is when we needed deep expertise. We needed a team that had proven expertise, which we evaluated based on their product's customer love. But we didn't just want the technology, we also wanted the team. Their products were proof that the team was capable, but we needed the team to build something that we thought was a much larger opportunity.

What's changed in product-based acquisition is the recognition that acquisitions can be made more successful and lighter weight. As software becomes more compressed in the stack, what was a great capability last year becomes table stakes this year. As a result, there's an acceptance of a more agile but methodically driven approach to product-based acquisitions.

For a long time, M&A was well developed on the financial analysis side, but it was a bit hit or miss from a product perspective. I remember a story I read about Pitney Bowes during their corporate transformation. They had a very template-driven, methodical, learning-based approach to acquisitions. 

When you apply this to product-based acquisitions, you go through several learning steps, get better each time, de-risk, and figure out what matters so you can focus on that and be super time and resource efficient with the rest. This methodical approach enables a higher tempo while ensuring the product fits with the company strategy.

Gauging Product Market Fit

I have strong experience and evidence-based opinions on this. When the market is hot, it doesn't often allow for the approach and specifics that I'll share to get exercised because companies, people, and cultures get pushed to move fast. I've found a couple of practices to be super effective which take time and resources.

Firstly, when I join companies, I want to go somewhere where there's a special focus on the customer, a special mission, something that's different. I look at companies not purely for their potential profitability, but also how focused they are on the customer. When we look at acquisition targets, we scrutinize what I call 'customer love metrics', the shorthand approach is net promoter score or things that customers love so much that they can't help sharing.

We conduct a net promoter survey for each acquisition, which provides insight into the customers in a way that the target company probably hasn't had the time or resources to discover. Companies that are on the shortlist are generally confident in their product and the experience they provide, and the customers love them. They're happy to show that off, so this process shouldn't be seen as a threat.

We develop a survey all about the product, the shopping, the purchasing and set up and first user experiences, and what the customer care experience is like. We're trying to extract as many things as we can that match our strategy, and point out where the company and its products are special and different.

Secondly, spend time talking to the customers. This practice is time-consuming and not often done, but the stories you accumulate enable you to build confidence and credibility. You'll find yourself reusing these stories when getting others on board with why this is a great product acquisition category to be in, or why a specific target is especially better for you.

Another point is proving scalability. At every company I've been at, there's always talk about doing acqui-hires. It's a lighter approach to acquire a small team that will integrate faster, with less heavy machinery to deal with during integration. However, if you want to get into a product category that a team is working on, you want scale to get proof that this is going to work for you.

And finally, reading reviews is crucial. G2 can be fascinating to read through. I spend a lot of time going through and seeing what their customers say and how it's changed over time. Avoid professional reviews, like top 10 lists, as they're often heavily influenced by pay-to-play. Stick to the reviews actually written by customers.

Direct Observation

In order to gain direct observation, we actually went to customers. At Intuit, we maintained relationships with customers who opted into research to help make the products better and provide feedback on new concepts, business models, and pricing approaches. 

The aim was to have a mix of quantitative and qualitative insights. The quantitative data doesn't provide the context, and the qualitative data doesn't give you the data set to have confidence.

A memorable experience was with a lady in the East Bay who was using our point of sale service, a desktop software at the time, and running a Yahoo store. Sending her a survey on her needs indicated that she wanted a connection between her online store and her in-person store. However, it was through visiting her and observing her interactions with customers that we gained deeper insights.

She would jump into service mode as soon as a customer walked in the door. When there were no customers, she was on a laptop, updating her Yahoo store. She had to separately manage her inventory and sales on the Yahoo store and our software. She had to redo all the product descriptions, which we could clearly see was causing her pain.

By observing her firsthand, we were able to identify the specific products we needed to acquire to alleviate her workload. We aimed to reduce it from two full-time jobs back to one. Our goal was to create a game changer in the market by solving a significant pain point for the customer. 

We didn't fully understand this pain until we witnessed it and were able to perceive it more deeply than how she described it to us. That was the 'aha' moment where we realized we could do something different than anyone else in the market.

Identifying the specific criteria around what we needed to acquire and how that would lead to better business outcomes, customers, and revenue, was an early part of our strategy. The work I've done around customer love metrics comes once you've got your shortlist.

As you start to identify potential acquisitions, it becomes crucial to do an analysis of the raw data they're providing on customer behavior, marketing metrics, and efficiency metrics for the company. This is done in parallel with scrutinizing their commercial products.

At this point, your customer's love metric analysis will determine if they really make it onto the shortlist. If they do, you may prioritize one over the other based on what you learn from this analysis.

At a minimum, it provides an amazing amount of validation on who you've picked for the shortlist, which is incredibly powerful internally. The analysis can also provide invaluable insight into integration priorities for the future roadmap.

Permission From the Company

It's important to involve the target company in the process, with the goal of building confidence and trust. Always start with the target, and if they're hesitant, it's necessary to understand why - it could be a sign of concerning metrics. Off the top of my head, I can't recall a situation where a company has refused to participate and we've proceeded with the deal, which I believe speaks for itself.

You should evaluate the target company first, but also find your own sources of information. This is much like hiring a key hire where you might talk to the one or two references they provide, but you also need to find your own. What you're looking for are aspects they might emphasize differently from what you discovered in your evaluation.

In addition to that, it's beneficial to identify one or two others that they didn't share. We strive to locate additional sources.

An interesting area where we've conducted extensive research earlier in the process, which aided us in identifying and gaining insight into targets without needing to directly engage them, is the open-source space. WordPress is a perfect example; sites built on this platform employ technologies from a multitude of other companies. As a host of WordPress websites, you can see these technologies, and they are your customers.

You can examine data such as volume by brand or type of product, understand usage rates, and even discuss use cases with customers. There's an abundance of data available from your own customer base, if large enough, that you can utilize early in the cycle to help focus your efforts later on.

Overlap Analysis During Product-Based Acquisitions

It's crucial to have a defined prototypical or ideal customer, understanding their attributes and how those tie back to your company strategy. Analyzing the customer base of your target and identifying who they're targeting can lead to an overlap analysis. This provides insights into the Total Addressable Market (TAM) for the near term, bolstering confidence in the most immediate components of your business case.

Often, I've been surprised to find a discrepancy between who the target company perceives as their customers and who the customer base analysis reveals their customers truly are. This can be an educational opportunity; perhaps, as the acquiring entity, you possess different, maybe more resources than the target in this area, allowing you to inform them more about their business.

Previously, we would use open market data for overlap analysis and, once we had a shortlist, we would have a certified third party analyze our customer bases to provide insights into shared customers, customer type distribution, and customer type attributes, without either of us viewing the other's customer base. This approach is still valid today.

Products such as Crossbeam and Reveal are cloud-based services that enable overlap analysis. They're incredibly useful, not just for M&A but for marketing purposes as well.

One instance comes to mind where the general market fit showed an 82% overlap. The specific customer profile, their use case, and what we had for actionable M&A, provided us with confidence that this 82% overlap validated our M&A trajectory for the business case.

For a target analysis or deal analysis, the overlap analysis and Total Addressable Market (TAM) analysis are crucial when you have a target. If you can find independent datasets, that's excellent, but often this is something you need to do in conjunction with the target. This is an aspect where you must invest the time and resources to demonstrate whether you share customers and TAM with your target.

This analysis not only builds confidence in your acquisition case but also informs your strategy to acquire customers going forward. It also serves as a critical part of preliminary diligence as well as validating due diligence for your shortlisted targets.

Key Elements for Deal Success

One of the first things I reflect on is the importance of not taking for granted what the bankers give you or what the company sends you. It's crucial from a product and marketing perspective to conduct your own analysis of raw data and form your own database conclusions independently from what the company and bankers provide.

For instance, we were once evaluating a relatively large acquisition target. This founder-led company had a lot of good attributes and a renowned banker assisting with their sell side. However, after our analysis, we found that we couldn't devise a model that would work. We struggled to find ways to keep customers engaged or grow the company profitably. Interestingly, their team couldn't either, based on the data we shared. Thus, performing first-hand analysis empowered us to realize that this particular target would not translate into a successful business.

Regarding the challenges of such analysis, it's fundamental to work effectively with the team. This involves going beyond meeting rooms, meeting in person, and collaboratively executing the plan. The people component is as crucial as you would expect in a product-based business.

This process, including understanding the target and their customers, understanding the product fit and their business approach, isn't just up-front, it's continuous. It goes all the way through from strategy and planning to identifying targets, evaluating them, and finally getting to who you're going to make a deal with.

I have found that its significance continues to the point where you decide to pursue a deal with the target. One point I want to emphasize is the role of integration. We touched on this during last week's discussion. The business analysis and integration process should include all engineers and the product team.

It's not just about analyzing the data provided by the company. In my experience, it's been successful to have a consistent team involved in everything, from initial planning, target identification, and formal diligence, to integration planning and execution. In a product-based acquisition, those involved should be the same people. I didn't stress this enough earlier, but it's crucial to maintain consistency and avoid segmenting these tasks into separate components or teams.

Agile M&A

Your book provides some great insights and it's a swift read. From both a product and a deal perspective, having a learning and feedback mechanism is crucial. Maintaining or improving a rapid cycle approach that is repeated regularly is important. This way, teams have the chance to provide feedback and data can indicate whether you're staying on course, allowing for swift corrections within defined periods.

Feedback is received, corrections are made and published, and it becomes part of a system, a process, a learning model, as opposed to some of the earlier M&A experiences I had when I shifted careers. Those were highly methodical with specific hard deadlines that were quite distant and very particular about people's roles. It seemed fixed, rather than allowing for swift trials and updates.

Integrating Engineering Teams

Engineers are crucial to whether an acquisition will succeed. Interestingly, I've found that it's often the engineers of the acquired entity who stick around the longest. They remain part of the acquiring entity for years. The care with which the mission and the plan are written down for the engineers of both the acquiring and the acquired entities is essential.

This meticulous planning, bringing the teams together, and promoting a culture of mutual respect and listening is key. It's an excellent question, absolutely central to whether the teams will collaborate effectively, be productive together, and solve problems together. If they're viewed as two separate entities, which happens frequently due to both being proud engineering organizations with strong beliefs, there could be issues.

The way these entities work together in engineering has to be highly collaborative, with planning, feedback, and significant attention to culture from the leaders to ensure a good fit.

One quick thing I wanted to share is the importance of clarity when it comes to product-based acquisitions. It's essential to understand whether the products you're acquiring are intended to be part of the parent company or whether they're intended to maintain a degree of autonomy.

Early in my career, the approach was a gradual, phased one. We thought we were being respectful to both parties, allowing them to get to know each other, work together, and merge over time. However, this often led to a sense of division, an 'us against them' mentality. Once that sets in, it's extremely difficult to resolve.

So, in response to your question, Chris, it's crucial to have these discussions during the deal cycle and reach firm agreements on how the teams, particularly the engineering teams, will collaborate. Engineers care about their career paths, development processes, methodologies, and work culture. Whether they have no-meeting Fridays or quarterly code jam sessions, these are all topics that should be addressed during the deal cycle and integration planning. If neglected, you're likely to lose the team you've just acquired.

Tips for Product Acquisition

The final point, which I'm quite adamant about, is the importance of being proactive. We previously discussed some mistakes I've seen in this area. I once had a chance to meet a well-known CBS golf commentator and PGA coach to discuss a business idea about video-based coaching. One thing I learned from him is the importance of focusing on the positives. He never dwells on the negatives, but instead emphasizes the positives, making them better. This clear approach resonates with my approach to M&A.

Whenever I've encountered reactive situations, like someone trying to sell something, I learn if necessary but otherwise respectfully decline. In my experience, proactive product M&As have been the most successful. This involves establishing company strategy, product strategy, and M&A strategy, setting the right criteria, identifying targets, screening them well, and setting them up for success. Anything that comes unsolicited is at best a learning opportunity. However, it's easy to get emotionally attached and to bend your strategy to accommodate them, which I've found doesn't work. So if I can offer a word of wisdom, it would be this: stay proactive.

Integrating Competing Products

I've been involved in several mergers and acquisitions, particularly in spaces with well-developed competitors, where growth is often driven by M&A. To be successful, you need a shared starting viewpoint. You must be agile, willing to learn, and active in both learning and decision-making based on what you've learned.

From the start, it's important to decide whether you're going to merge the customers and the products because your teams will need to analyze the work required to do this and incorporate it into the integration cycle. Even with well-structured data, adding a product vision into your operations will take time, especially if you're planning on being a branded house.

However, if you're not going to be a branded house, which can work very well, it's crucial to understand this from the beginning so you don't waste time trying to merge products or resolve conflicts.

The CEO at my last company had experience with numerous acquisitions in the travel industry. His strategy was to let the acquired teams continue competing in the marketplace, as this competitiveness was what made them attractive acquisitions in the first place. Instead of merging the front ends, they consolidated their data systems and shared resources where they could maximize margins, particularly in purchasing travel properties.

The key is to have a point of view. There is no right or wrong answer. If you end up with two competing CRM systems, your solution may be completely different from what other companies might choose. The important thing is not to delay the decision. Postponing such choices can lead to loss of business premises and team disengagement. Start somewhere and then stay actively engaged in refining your strategy as you execute.

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