Andrew Greta's Business Development Blog

Once corporate strategy identifies a new industry or market with attractive fundamentals for the business, M&A jocks often mount up the I-Banker safari wagon, lock & load the elephant gun, and roll off into the Serengeti in a cloud of dust to bag the next big acquisition. While M&A is often the cornerstone of a good business development function, outright acquisitions aren’t always the best path into new markets.

Building (through a new product development process or Greenfield business startup) should always be considered as an option even if discarded or reserved as a fallback position to any eventual 3^rd party negotiation – even if it doesn’t result in a commemorative Lucite paperweight for the trophy case. In addition, skillful partnership creation is becoming increasingly more important in our rapidly globalizing economy as certain jurisdictions place limitations on foreign ownership and investment. Narrow-minded deal junkies with only a hammer in their corporate development toolkits run the risk of seeing every opportunity as a nail instead of taking a more nuanced approach to targeting value.

Listed below is a menu of entry options along with typical pros and cons to consider before blasting off on the next game hunt.

A well-rounded business development function has skills in each area and can fit the right tool to the job. And while BD bread-and-butter is executing acquisitions and JVs, we’ll consider each entry path in greater detail on future posts.

Labels: Strategy, Target ID

posted by Andrew Greta  # 3:13 PM 0 Comments Links to this post

According to Reuters, merger activity in the United States dropped 29 percent in the second quarter as financial deals driven by leveraged private equity shops dried up from lack of lender liquidity. Meanwhile, strategic investors are seeing opportunities to snap up cheap assets, bidding for stalwart consumer staples like Anheuser-Busch Cos Inc (BUD) and Wm. Wrigley Jr Co (WWY).

But what’s this distinction between financial and strategic acquisitions? Aren’t all deals just deals and shouldn’t they all be driven by financial returns at the end of the day? After all, we don’t want to be like the misguided company president I once heard describe an acquisition that, “isn’t expected to make any money… it’s strategic”. Yes. Good deals create real economic value for the participants, but the distinction is often how that value is realized.

In the most general terms, financial investors tend to be hands-off money. They invest in opportunities at an arms-length and expect to reap their gains in a future sale, or recapitalization of their holding. Any Joe on the street who buys stock online through his internet broker is the epitome of a financial investor, as are Wall Street firms and other investment funds.

Financial Deals

Strategic investors, on the other hand, are more like the Monster Garage mechanics of the financial world. Their interest is in buying up businesses, properties, assets, and technologies they can integrate and use to build something better. Typically these are operating companies pursuing corporate and business development activities on their own behalf.

Strategic Deals

This is clearly a gross simplification and deals can involve complex hybrid approaches (e.g. it’s not uncommon for a private equity LBO shop to take an active role in a company’s operational turnaround after an acquisition) but it provides a general framework to understanding where deals touted in the press fit in terms of rationale.

We’ll cover each of these deal types in greater depth on future posts.

Labels: Business Development Basics, Strategy

posted by Andrew Greta  # 11:04 AM 0 Comments Links to this post

“The theory is simple,” he used to relate during deal review meetings as a precursor to any new or “visionary” business proposal. “Regardless of how unique you think your business is, certain core fundamentals remain. If you can’t map out your high-level business model showing inputs, outputs, customers, suppliers, value creation, and strategic barriers on a cocktail napkin for your airplane seatmate at 30,000 feet, you haven’t thought through your pitch.”

“The secret,” he said as he walked us through the process, “is to start with the customer and follow the money. Don’t get hung up on the minutia. Capture the core of your business model that explains the most material 80% of what you do and save the peripheral nitpicking for later follow up.”

1. Customers: A concise summary of who pays you and for what. Capture the main customer group (or groups if they’re big enough to be material). Are they paying directly for discrete goods and services, or is it a subscription-based flat-fee model? What are they getting from you in return? Try to boil this down to a per-unit measure which can roughly equate to average revenue-per-customer.
2. Suppliers: What are the inputs needed to create your product or service? Common big block categories include compensation and benefits for employees (which can be the vast majority of cost for a service business or other high-tech company), assets (like machinery, vehicles, facilities, or computer servers), and raw materials (especially in manufacturing organizations). Are these fixed costs (does your rent bill come due every month regardless of whether you sell a single item) or variable (incurred only when you produce a product or service)?
3. Value Add: What role in the business process is your company playing to add real economic value? Common answers can be assembling raw materials into finished goods (manufacturing), getting physical stuff efficiently through a supply chain (distribution), providing skills and information to help customers make or save money (services).
4. Margin: Once the customer pays you (revenue) and you pay your suppliers (costs), what’s left over is your operating margin. Focus on your core business for the moment and figure this on a cash-basis ignoring additional outflows like interest, taxes, and dividends.
5. Strategic Barriers: Finally, it’s time to explain what keeps you competitive in the marketplace and allows you to reap the margins you enjoy? Is it an advantage in scale that allows you to produce at the lowest cost? Is it high quality and better service? Or is it some sort of barrier to entry like exclusive access to scarce resources or ownership of a key patent. Answering these questions carefully will help you identify the sustainability of your business while pinpointing key threats.

After looking at his seatmate’s business model, my former CEO quickly realized that the would-be entrepreneur was competing on price alone in a commoditized industry. He had negative margins funded by investors (as a customer subsidy) with no barriers to entry. He predicted that once the VC money burned up, prices would increase by necessity and customers would switch to other substitutes. A few month’s later he was proven right – which shows the power of cutting through pulpy marketing spin and buzz to hit hard bone of business fundamentals when evaluating any new opportunity.

I believe all businesses can be modeled at a high level with this approach. But if there are readers who think they’ve got a really unique stumper that’s so out-of-the-box that it can’t possibly conform, let me know here and we’ll see if we can model it out in future posts.

Labels: Pitches, Strategy

posted by Andrew Greta  # 12:04 PM 1 Comments Links to this post