Funnel fundamentals: building a strong M&A pipeline

June 2023  |  COVER STORY | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2023 Issue

As a rule of thumb, it would be unwise for any entity, whatever its composition or field of operation, to put all its eggs in one basket when engaged in enterprise. On the contrary, conventional wisdom states that efforts and resources should be spread across a wide range of options.

Likewise, in an M&A context, it is preferable for those with an eye on acquisitions to have a comprehensive roster of targets at hand – a pipeline of M&A opportunities that can be compared and contrasted, as well as replenished, on an ongoing basis.

As defined by Dealroom, an M&A pipeline, also known as an M&A funnel, refers to the flow of events that occur during a transaction and how stakeholders work them. The pipeline steps begin with acquisition strategy and deal sourcing, proceed to acquisition planning, negotiating and due diligence, and move all the way to transaction and integration.

Furthermore, according to M&A Science, in order for the M&A process to stay organised and intentional, each milestone of the pipeline should have set entry criteria, so it is clear when it is time to move to the next step. Perhaps most importantly, an M&A pipeline should be a collaborative and efficient process, not merely steps to work through, in order to close deals that live up to their potential value.

Of course, it stands to reason that some companies will do a better job than others at building an effective M&A pipeline, thus the challenge is for those with an appetite for acquisitions, but less merger know-how, to have the capacity to construct a funnel and execute it accordingly.

According to Midaxo’s 2022 ‘Guide to Building a Winning M&A Pipeline’ report, the most successful acquirers take a proactive, systematic and repeatable approach to screening targets and originating deals: core M&A best practices. They actively manage a pipeline of suitable acquisition targets rather than making knee-jerk reactions to deals, successfully screening potential acquisition targets in line with their company’s overall strategy.

Supporting this contention is the Institute for Mergers, Acquisitions and Alliances (IMAA), which observes that a strong pipeline means having defined a clear M&A strategy of what transactions acquirers may want to pursue. The IMAA notes that it is equally important to know which targets to reject right away to save time and resources. Ideally, acquirers want to be able to make choices and have options when pursuing acquisitions. They should be selective in pursuing the best deals and transactions.

For Merlin Piscitelli, chief revenue officer, EMEA at Datasite, a healthy pipeline is vital, particularly for serial acquirers. “A well-thought-out acquisition strategy and pipeline will make certain growth-minded companies can ensure the right deal gets done at the right time and the right price,” he says. “With deal times getting longer as buyers adopt a more cautious posture, a strong pipeline creates opportunities to achieve better returns, and provides more certainty and efficiency when multiple deals are in progress.”

When quiet on the acquisition front

During quieter periods in the M&A market, typically when economies are contracting and uncertainty abounds, having recourse to a solid pipeline of prospective targets can do much to improve the chances of getting a deal done.

“Savvy dealmakers with robust pipelines will steer away from taking opportunistic stabs, including buying a business simply because it is available or looks cheap, and will instead focus on targets that fulfil their long-term vision, and make their move when they have the market advantage,” explains Mr Piscitelli. “For M&A to be successful, it is not enough to just make the deal; dealmakers must make the deal work as well.

“With changing market forces and trends, a robust deal pipeline provides a structured process that allows dealmakers to act quickly, confidently and securely,” he continues. “Without an efficient end-to-end process, it is extremely difficult to complete deals on time and capture the optimum deal value. That is where the need for a strong and efficient M&A pipeline arises.”

However, others are less open to the virtues of an M&A pipeline during quiet spells in the M&A market. “It is less a matter of the pipeline than continuing to pursue deals during quieter periods,” contends Christopher Kummer, president of the IMMA. “It particularly gives you the advantage over companies that do not pursue deals during those times.”

Fundamental steps

With perhaps the most fundamental component of successful M&A being the ability to identify a suitable acquisition target, it is essential that acquirers adopt a systematic and repeatable approach to M&A, to increase the efficacy of a campaign and yield positive results.

According to the Midaxo report, there are five key steps, as outlined below, that buyers need to incorporate into their acquisition strategies to help them build an effective M&A pipeline.

First, identify key criteria. Once a company has defined its overall (and supporting M&A) strategy it can start identifying the right market sectors to focus on. Taking a market-driven approach helps select targets in markets that arrestable, growing, attractive to consumers and most likely to deliver the expected deal return on investment or desired revenue growth.

Second, structure pipeline strategies. Defining a stage-gate process is a critical step in building efficiency around the pre-deal process. Once a company has defined a long-list, it should visualise the M&A process in three main categories: pre-deal, execution and post-deal. Then it can define how and if the stages should be expanded.

Third, consider the motives. A company should be mindful of three motives – proactive, reactive and opportunistic – on which targets are moved through each stage of the M&A pipeline. Proactive acquisitions are most likely to be successful in terms of being closed and providing a strategic fit. Reactive acquisitions occur when the acquirer responds to an approach from a seller. Opportunistic acquisitions are the least likely to succeed and have the lowest probability of closure.

Fourth, visualise reporting. It can be challenging for companies to manage multiple data sources, metrics and historical deal data. The best solution is a collaborative software tool designed for M&A. This ensures key metrics and outputs are easily accessible, including target scoring, a weekly dashboard and individual target cards.

Lastly, consider a digitalised approach. Throughout the M&A pipeline process, a vast amount of information is shared among the deal team. It is essential this information is securely stored and managed to prevent deal compromise. A cloud-based solution gives all team members, advisers and third-parties secure access and collaboration capabilities from any location and ensures the latest data is used.

“Acquirers that adopt a systematic and repeatable approach to their M&A process can benefit from lessons learned on past deals, and therefore can improve their deal-making capabilities on an on-going basis,” states Midaxo. “While no deal is the same and it is impossible to predict all deal eventualities across the deal lifecycle, it is advisable to build a core strategy around pre-deal screening and processes, to safeguard against unwanted surprises and loss of value.”

Ultimately, access to a universal M&A pipeline enables companies to make decisions on the best way to pursue a target. When shared with everyone on the buy-side, this helps support a collaborative approach to pipeline building and management.

Supplemental activities

While there is no ‘one size fits all’ playbook for every M&A transaction, there are a number of supplemental activities, as outlined by Mr Piscitelli, that can assist acquirers in developing a dedicated acquisition pipeline.

First, build strong relationships. Around 55 percent of deals usually come from direct channels, such as contacts dealmakers already have. That is why strong relationships and a solid reputation as an acquirer and dealmaker is key.

“Nurturing these channels by setting reminders to check in and position expertise, catch up or perhaps even offering congratulations for an event in their lives is essential to create a foundation from which to build strong acquisition pipelines,” adds Mr Piscitelli. “Contacts can be shared and linked, which could potentially result in another deal.”

Second, use M&A pipeline management software. Time is of the essence in M&A, especially when dealmakers are executing multiple deals a year and have to move quickly on each opportunity. M&A pipeline management software provides numerous benefits by allowing teams to communicate, collaborate, keep track of where deals are in their lifecycle, what deals are coming up, and to address any areas of concern.

“Such software empowers serial acquirers to better manage their pipelines while offering flexibility if market or company dynamics change,” attests Mr Piscitelli. “Many M&A teams use spreadsheets to manage their pipelines, but this tool can slow down workflows and expose more risk through data duplication and potential security breaches.”

Finally, take a long-term view. Consider deals that are adding to the pipeline, rather than jumping on deals which will not make a positive impact, or being sucked into ‘deal fever’.

According to Mr Kummer, it is also useful for a company to ensure its appetite for acquisition is well known. “If you are acquisitive, you want everyone in your company, in your particular industry and sector to know that you pursue growth by M&A, including a network of advisers,” he points out. “Some people hold the belief that adopting a strategy of growth through acquisitions should remain confidential. However, I think the opposite is true.

“Growing by M&A should not be a secret, it is the other way around,” he continues. “Everyone should know about it, so that you see all potential targets on the market, ideally even before they are on the market. Winning at growth through M&A is, at the end of the day, about better execution – from deal making to integration.”

Sourcing off-market deals

Beyond on-market acquisitions, buyers can also generate acquisition leads through off-market channels. This involves identifying opportunities by building an extensive, far-reaching network of contacts that can help to source a wide array of potential deals.

“All deals have a human element,” says Mr Piscitelli. “Forging connections, building rapport and balancing the needs of both parties will position dealmakers for success. Developing relationships, channels and sources can be as simple as just going through a contacts list and catching up with past leads.

“Once this contacts database is set, keep feeding it with additional contacts, including personal details and conversation specifics,” he continues. “As these relationships are developed, it can be a good idea to share them with colleagues, as this may open further connection opportunities and leverage the team’s expertise to align with target values.”

Disciplined but opportunistic

In an M&A market that is subject to global economic and geopolitical shifts which result in peaks and troughs of activity, it is important for acquirers, serial or otherwise, to be disciplined but opportunistic when executing their strategies. This posture makes them suited to building a strong M&A pipeline and to avoid chasing suboptimal targets.

“It is important for acquirers to be disciplined and opportunistic, but also confident in their dealmaking, especially in a volatile market,” asserts Mr Piscitelli. “Acquirers need to make sure they have managed the early stages of M&A from the development of an acquisition strategy to target identification and early-stage assessment and performed robust due diligence.

“M&A is a means to an end,” he continues. “It is important for acquirers to look ahead and have a clear, well-mapped rationale for why they are buying the target. This includes checking for synergies and growth. Managing an acquisition pipeline is about balancing speed and confidentiality with a need for information, analysis and strategic thinking.”

For Mr Kummer, a pipeline of potential transactions is a must-have for any company serious about growth. “For a serious strategic acquirer, the building of a strong M&A pipeline makes absolute sense and is something that senior management needs to constantly spend time on,” he concludes. “At the end of the day, deals are not only about numbers and spreadsheets, but about people and relationships as well.”

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Fraser Tennant