Navigating mergers and acquisitions in a time of change

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There were 105 M&A transactions in 2016.

There was no shortage of retail mergers and acquisitions (M&A) in the first half of 2017, as companies look for ways to offset the threat of online-driven competitors such as Amazon.

According to Pitchbook, there were 105 M&A transactions in 2016, totaling $17 billion, the highest in the last five years. The trend does not seem to be slowing, as the retail environment continues to shift due to technology-driven changes in consumer behavior.

“Retailers are facing what I call their ‘Blockbuster-Netflix’ moment, where established incumbents still have the opportunity to leverage their market capitalizations to acquire growing competitors and solidify leadership positions,” Tige Savage, co-founder of Revolution and co-leader of Revolution Ventures, told FierceRetail. 

While in the case of Blockbuster, the retailer realized too late that it could no longer ignore Netflix and then was priced out of the market, other retailers still have a chance.

FierceRetail sat down with Savage to garner more tips on staying relevant in a changing retail environment.

FierceRetail (FR): For companies looking to acquire other retailers, what are they looking for in a sale?

Tige Savage (TS): Most of these companies are looking for technology-enabled businesses that close the gap between their existing business model and their online, modern competitors. Many of the newer e-commerce companies have subscription or strong repeat-purchase models that create the type of brand loyalty retailers seek—we saw this with the acquisition. Additionally, these new brands have been able to capture a younger generation of consumers. Many are cloud-based and have artificial intelligence or other innovative features built into the platform.

RF: For retailers looking to sell themselves, what are they looking for in a parent company?  

TS: There’s a stark dichotomy in retail now. The vacuum in the market has created significant demand for young, tech-savvy e-commerce companies with impressive leadership. The multiples and dollar amounts for some of these acquisitions have been very impressive, reflecting the value that new companies can generate when matched with the assets of an acquirer. Likewise, new opportunities open up for young e-tailers once they have access to global markets, greater capitalization and sophisticated supply chains, to name just a few. 

FR: What are some steps that a retailer can take to make itself look more desirable before a sale? 

TS: Sound business principles never go out of style. The most attractive M&A candidates will have built a brand that consumers adore, leveraged technology in a way that fundamentally shifts the consumer and/or profitability dynamic, assembled a team that incumbents would have a hard time hiring directly, and often will have exploited a consumer niche that incumbents have ignored or take for granted.

FR: What are the biggest hurdles to get over once two entities merge? 

TS: M&A is a learning process on both sides and no two mergers are the same. Open communication of expectations (on both sides) and agreement on process, goals, and the business objectives that need to be collectively satisfied are a good starting point. There’s also a lot of emotion and questions surrounding these transactions, so satisfying the employee base with transparency is critical.

FR: What can the new parent company do in the first year to make the transition smoother for all employees involved?

TS: Established parent companies can take the requisite time to explain the culture, challenges they’re hoping to solve and any ‘gotchas’ up front, so that young, scrappy entrepreneurs are mentally prepared to adjust to a new organization. It’s never business as usual after a merger or acquisition. There’s plenty of give and take on both sides. 

FR: What do retailers need to keep in mind in way of the customers when there is a merger or acquisition? 

TS: During a time of transition, customer service needs to be the highest priority so that nothing falls by the wayside. The best acquisitions have strong industrial logic that includes benefits to consumers.

FR: What else can you tell us about creating a successful acquisition?

TS: I’ve outlined these five rules of digital M&A that often apply to a successful retail acquisition strategy:

  1. The best acquirers are extremely clear about how digital M&A will enable their strategies.
  2. A consistent and repeatable acquisition strategy pays off in the long term, rather than large one-off purchases.
  3. Acquirers who think that digital assets are too expensive are short sighted. Strategic acquisitions that signal that a digital acquisition is not a one-off, but is part of a strategy can be well rewarded over time, even if the acquisition feels expensive in the short term.
  4. Deals that expand a company’s scope by adding new customers, products, markets or channels typically perform better than scale deals, which grow a company’s scale by adding similar products or customers.
  5. Post-acquisition integration should be implemented smartly to avoid losing the culture and advantages of the startup inside the acquirer.