M&A Integration: Creating Value from High Priced “Tuck-in”​ Acquisitions

The Landscape Today

Transactions today are complex. Technology innovation and disruption are making the valuations of small companies appear big. Currently, small-sized targets are neither small on price nor complexity — value needs to deliver by integrating differently whereas given synergies do not exist conventionally. Tuck-in acquisition protects or enhances the economic logic in the buyer’s industry. As the purchase prices go high, investors demand quick ROI, creating pressure on the executives to deliver transaction value.

Challenges with Tuck-in Acquisition Valuation

The size of these companies typically creates underinvestment in areas like IT and other back-office functions, making revenue growth the primary value creation play. Most organizations have been through cost reduction, reengineering, restructuring, and other cost optimization projects, whether M&A. triggered them. These are known game plans with a solid experience base to build on. Revenue synergies are often more dependent on variables requiring new skills, new methods, new products or services, new channels, or even a new customer value proposition.

Delivering revenue synergies with “Tuck-ins” requires buy-in from the target company and rapid ability to rally your customers, brand, channels, and sales force backing the new value proposition. Integrating for value requires a different approach than conventional functional integration.

Integration Strategies for Tuck-Ins

Below are some of the examples of integrating tuck-in acquisition strategy:

1. Product-Centric — there are several ways of integrating products for value and they center on understanding the source and sustainability of products during the diligence. This creates a product road map for preserving key elements of value and enhances other areas, such as portfolio fit and profitability by Day One. Create opportunities for product bundling, rationalizing products or features quickly, and understand opportunities for new product development as a long-term play. Moreover, bundles and pricing can drive incremental value if executed well.
2. User Value Centric — this is the new lever in the era of the user, content, and data monetization, enabling a variety of business models from advertising, subscriptions, x-selling, and up-selling. Total users and active users present unique sources of value. Understanding the key attributes of user data, its value by segment and monetization potential should brief the integration plan.
3. Channel Centric — channels or routes to market are a key value driver — certain products are well-suited to specific channels. As a new product embeds in the portfolio, leveraging the buyer’s channel for scale, or reaching new customer segments is critical. A key aspect of delivering value is to make sure that customer segments, brands, products, and pricing align quickly to support the channel early in the transaction cycle and clear barriers such as channel conflicts, efficiencies, and carry factors.
4. Talent Centric — tuck-in’s come with two clear value plays i.e., Product (or Technology) and Talent (Acqui-Hires, the new funky industry name for it), the success of one without the other is questionable. However, the major difference is that Talent Centric transactions are originated from Product teams (usually not Corporate Development). Talent can be reassigned to work in various parts of the business despite the target’s product. Retaining these individuals is key, and cultural diligence early on helps identify risks with talent including implications on talent strategy, retention planning, career paths, and risks of alienating existing talent. Acceleration opportunities for products, go to market, and impact on recruiting budgets need to be measured rigorously to capture and report the value to shareholders.

Concluding Thoughts

As the velocity of disruption increases and the war for talent intensifies, the volume and value of tuck-in acquisition will continue to rise with investors demanding more transparency and quicker returns. This will get acquiring organizations to rethink their integration playbooks and synergy-centric thinking. Tuck-ins are part of solutions to a company’s journey to a new business model; hence, the pieces of the puzzle that are yet to be completed must be taken into consideration appropriately.