How To Make Transformational M&A Successful

‍Text Version of the Interview

Basic Principles in Targeting Companies

We spend a significant time focused on the specific markets we're experts in. We're not trying to be experts across many markets or ranges where we're very specific about the types of companies we are looking to acquire within our business. 

What we've learned over time is that the longer we look at businesses and the better we get to know them, the better the quality of M&A we do.

So we tend to look at businesses for around two years, on average, before we invest in.

Nurturing Relationships with Targets

We have a couple of significant benefits. Firstly, we are one of the leading information analysts services for major brand companies in adopting digital commerce. Not all companies benefit from this. 

And what that means is we have a natural inflow of companies that want to try and influence our analysts on that side of our business. 

And we track specific markets; we do big exercises of market mapping them. So we do know who are the emerging forces within there.

We're also very active in talking to our customers about what companies or services they may have engaged with that are making a difference for them to run successfully in this space. And that's where we gather the most intelligence. 

How do you get that information?

Every quarter I meet our analysts. And then, as chief executive, the placement of capital on M&A is one of the fundamental things I wouldn't recommend you delegate.

So I have a small team that reports to me, and I work on each of the major transactions we look at. If there is a quarterly business review or a quarterly meeting with our customers, I will invite myself to it.

And that's where I'll have this direct dialogue around the businesses we will or won't deploy capital in. It ensures that when we're getting research, we hear it directly, and there's no disintermediation of the information.

And then thirdly, of course, when we engage with the companies, they know that we do know the facts because we turn up and actually can ask high-quality questions about their business. 

What are transformational deals?

For us, I think the most important transformational deals have been capability deals in our markets, rather than classic transformational deals, which are, from my experience, very rarely make transformations. 

We look for businesses that provide the capability that we as an organization can really leverage much harder than they can. A very high-quality capability in nature and doesn't necessarily mean they have to be a big business.

I'm a great believer that it's a combination of smaller deals that gets you there, rather than one killer deal. 

To give you a sense of that, In 2014, when we started down the path of really getting serious about building out capabilities for consumer brand companies, we wanted to get in early and get into markets where they've got high growth. 

We have acquired six businesses from around the world over five years. But to put that into context, we've been able to get them to become high organic long-term growth businesses. In five years, we have gone from zero revenue in that space to a business that by the end of 2022, should be around a quarter of a billion dollars a year. 

What Prompted This Approach?

In 2010 when they bought me in as chief executive, there were pretty low expectations for the group. They were in a very difficult space. They were a very horizontal focused company. They were a master of function but an expert at nothing. 

What I did was sell many of those businesses to recycle capital. And refocus it into a much more focused set of assets, where they were in high growth markets, where we built true expertise around that market.

From 350 brands, we are now down to only eight. And the company today is bigger than the company that was in 2011. 

How to Identify High Growth Markets?

For me, in 2013, a number of research notes were very negative on platforms like Amazon, and people didn't quite understand what a marketplace was and how it was going to work.

What got our interest was that we had spent quite a lot of time researching other marketplaces that were ahead of retail in the transition. No one understood the Amazon business model. And, of course, Google and Facebook were really hitting their stride at that point. 

Property classifieds, car classified companies, auto cars, those models in the US. We could see through those that if they were very successful and could leverage digital search, they would have massive network effects, much stronger network effects than Google and Facebook could drive.

And, of course, a complete lock-in because in the case of Amazon, people are buying everything through them, and as he expanded more categories, it became more critical as it improved its services. 

So we took a pretty big bet in 2014. We thought that in the long run, all the brands that we're charging to do digital-to-consumer websites really wouldn't win because they didn't have the network effect of our platform. 

Very few companies have brand loyalty, and that's why big-box retail has always been so successful. 

What we believed was the marketplaces would do that online. We backed that against the grain because, at the time, it was the biggest wobble period in Amazon's history. The share price was 20% down at the time, which gives you a sense that the markets didn't believe it.

And by building up capability because we had the thesis that it was going to be successful. We got significant assets very early on in the market, and we're able to build on it. And as the market's grown, we've grown with it. 

But as with all these things, if you want to be in the early stages, you can research it to your heart's content, but at some point, you've just gotta decide to move.

How Early Do You Invest?

We would be in classic VC terms. We've done pre-revenue, but we will definitely buy businesses with revenue only. We have to be sure that because we're a public company, they will get to profits relatively quickly.

About a third of our deals in the last seven years were pre-profit, and the other investors looking at them at the time would be series B, VC-style investors. 

It has risks, but that's why we tend to research them all. We have a real leg up compared to standard investors at that point. We have a number of assets all around the space. We're only looking for the assets in that area; they've got to complement what we're building in digital commerce.

You could argue what we're doing is using M&A as a direct replacement to capital investment ourselves. So rather than investing capital and building that platform or that code or that system, we're buying other assets and integrating them in. 

It's a different way of deploying capital, but through early staged M&A, where a lot of the platforms are already created or are well on their way to being created.

So yes, it is definitely riskier. The revenue streams and predictability of some of the businesses we buy are not as consistent as a public market would always want. But I think that's all about knowing when to go in and how to go in.

Do You Use Earnouts?

We do. When we do full M&A, we take a hundred percent of the company's ownership, but we're doing structured earnout programs management. Many of them, once they get comfortable with the concept and that they can see, we've got an excellent track record of supporting management through them like them because you've got the guaranteed rates and the way you're going to get paid out later down the road. You can, as management, just entirely focused on running the business and delivering results. 

So you can get your work, you can get your returns, you as a chief executive, you're going to entirely focus on your product, your customers, and your teams. You're not going to spend on average six months a year trying to raise the next round of growth capital. And it's a model that seems to resonate really well. It's like a third way of growing your business. 

How About Founders Who Wants to Do Fundraising?

It's not perfect for everyone. Many founders don't have to see the journey out to get to the value. And as long as they agree with us upfront in a very open way, that's fine.

So they can de-risk it a bit, but at the same time, they've also got to recognize they are becoming part of a corporation. That there are certain elements, we bring to that, that some can find frustrating.

But we're very up from about the downsides. We try to be very clear to them about what we are going to do for them and what we're not, what overheads we will bring, and what we're not. 

So they have a chance to assess it because we really want them to come in with their eyes open in that model for us. Even if that means we don't get to acquire that business. 

How to Determine What to Divest?

The most difficult decisions are choosing the markets you don't want to operate in anymore, especially when they're profitable companies. 

But for us as a company and particularly in the media, we're looking for businesses that can drive high growth. So it's about assessing their markets, really understanding whether the growth is going to be there.

And the culture that we have is being really honest with the organizations that are subject to disposal. Just because you're selling doesn't mean you won't invest in their businesses and that you're not going to want them to do well. You are actually going to find a new shareholder that will be a better shareholder for them in the long term.

If you get the balance of transparency and treat the people in the businesses like grownups, they won't have an issue. They're delighted that you're honest with them. 

As a result, there's a much higher degree of trust between the parent company and the brand that's being sold. So don't keep it a secret. 

There are times that the business has started to do better because we have inspired those businesses and given them the empowerment of freedom. 

How Often Do You Assess Businesses?

Every year, we do a parking lot exercise where every business goes into the parking lot. And then, we re-justify why it's core strategic and important to our customers, stakeholders of the organization, and ultimately our shareholders. 

It's like a reverse DD on convincing yourself, not that you're selling them, but why you want to reinvest in them and keep them, we find that to be an excellent exercise that keeps everyone in the company honest. 

• Is the company's capability still important to its customers? 
• Do these customers still truly value the quality of the product they're providing?
• What are the consistent NPS and value scores that customers are giving them? 
• Have we deployed the capital well? 
• Have they built and enhanced their products?
• Are they creating that network effect for their own business? 
• Are they running other people in the business satisfied at running the business? 
• Is it getting good results? 
• Is it a growth end market? 
• Is this truly still a good business? 

Most companies don't want to do that because it's a tough exercise. You have to really lean into the fact that maybe you didn't do as good a job as you thought you were going to do. 

Hardest Part of Divestiture?

The hardest part for me is picking the right investor to back that business. Everyone just assumes you sell a business based on price. And that isn't the reason for the decisions we've always made. Often, the price will not have enough difference to justify why one would get it over the other.

That's a hard thing to assess because it's really hard to admit that someone will do a better job than you might do for that company. 

Biggest Lessons Learned?

Data and information rarely lie. Too many people fall in love with the concept of the deal and don't keep themselves honest enough on the facts that they get presented through the process and get deal fever. 

It's really easy to be a human emotion. But the second you stop believing the data is the second you're about to make a bad decision.

And all of us see data where it doesn't quite match the story we want. And the problem is, we then start to build stories around why that doesn't matter anymore. And therefore, we still want to push ahead.

So the one thing that we always do as a company is if we pull out of a deal, and mainly if we pull out of a deal really late in the process, we actually celebrate that deal more than if we do one.

We go out and have a bigger celebration if we pull out than if we conclude. It's to make a culture in the company where everyone on the team is transparent, raising reservations, and not worrying about getting frowned at for not doing the deal. 

The second they get worried, they talk openly about it. I'd rather encourage my teams to celebrate walking away than celebrate buying a business that becomes a problem.

This is why we look at companies for two years before we move for a transaction. The longer you get to know the company, the better you can invest in them. 

Other Things to Transform Your Business?

You've got to have convictions once you've set your strategy; once you define the space that you will be an expert in and you're going to build around you, you don't be a butterfly. 

Stick to your knitting; stick to your discipline. Don't get bumped off the road because it's really easy if you're going to use M&A to get bumped off the road. 

M&A is a very dangerous sport. It can be done very safely, but you have to be prepared, have all the kit, you've got to be expert at it.

And the less you know it, the less you're good at it. The less disciplined you are, the more you sway, the more you don't challenge yourself on following the fundamentals.

The more you convince yourself that you want to do this deal, even though every warning signal is telling you it's not great. The more likely you are, you're going to fail, and the quicker you will lose your job. 

So I think it's just holding discipline and having a long-term view.