Tag Archives: deal thesis

The Acquisition Value Leaky Pipe

We have seen in the two previous posts the 3 to the 3rd transformation-based acquisition integration method and a framework for decomposing an investment thesis into eight parts.

But where along the acquisition process are the potential risks to preserving acquisition value? 3 to the 3rd combines the transformation method, the deal thesis framework, and the “leaky pipe” concept which we had previously applied to supply chains.

Along the steps of the acquisition process, value can “leak” anywhere and anytime. We represent the acquisition value leaky pipe below.

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Risks begin with corporate strategy pre-transaction (usually a growth strategy) and continue through integration.

When you undertake acquisitions, be cognizant of these potential risks to deal value. These risks can form the basis for acquisition integration and a means for mitigation and scenario planning.

Acquisition Investment Thesis Decomposition

Buy Sell

Many reasons exist for a firm to execute a strategic acquisition. Investment theses vary from deal to deal but a general framework such as the one shown below effectively sets expectations for buyers, sellers, financial backers, and stakeholders chartered to integrate an acquired company.

3 to the 3rd works with strategic acquirers to clearly define the specifics of a deal and leverages the following eight component framework throughout an acquisition’s lifecycle.

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A deal thesis decomposes to eight elements:

  1. Growth with new markets and new products or services
  2. Marketshare gains in existing theaters or product categories
  3. Innovation usually enabled by disruptive technologies
  4. Portfolio of offerings expansion into adjacent or step-out spaces
  5. Combined valuation of the integrated firm
  6. Talent acquisition to add capabilities
  7. Culture shifts to evolve or transformation legacy organizational behaviors
  8. Process, new business models, and new infrastructure capabilities

Different Industries Weigh Thesis Components Differently

Each deal will have different relative weights for each thesis component. Through hands-on experience and research, we have found a generalizable pattern based on industry sector.

Modeled below are deals in technology, consumer products, and financial services. The orange components receive heavier weighting in each industry example shown.

Technology firms include acquisitive companies such as Cisco, Google, and Yahoo.

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Consumer product companies include PepsiCo, InBev, and Heinz.

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Financial services companies include Capital One, TD Ameritrade, and Charles Schwab.

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Not surprising, common across the industries is an emphasis on growth and the valuation of the combination.

What we find in acquisition integration is the value of clearly articulating the strategic intent of the deal and using the decomposition framework to align deal makers, executives for buyers and sellers. and post-acquisition integration stakeholders.

Things to Consider

When you undertake your strategic acquisition which investment thesis components do you emphasize most? Does the seller agree? How will you communicate your investment thesis and gain alignment from all stakeholders pre- and post-transaction?