Three Secrets for Retail M&A Success

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Three Secrets for Retail M&A Success

06/15/2017
Consumer M&A deal volume is up 27 percent so far for this year, with experts rating the likelihood of retail M&A above prospects for all industries at large. It's no surprise, therefore, that nearly 40 percent of middle-market firms are interested in M&A, with many actively seeking suitors, according to the National Center for the Middle Market.

For retailers interested in M&A, there's sharp focus on how to become a strong acquisition target. But what about the other side of the equation? With industry consolidation a leading trend these days, how can organizations become an "acquirer of choice," to secure the attention of smaller firms seeking buyers? 
Building an "acquirer of choice" culture can serve as a competitive edge that fuels inorganic growth goals, speeds and smooths post-merger integration activities and energizes new and existing employees to look toward future opportunities, post-acquisition. But fostering this culture is not a simple task and will warrant taking three key actions.

Value strengths, while acknowledging struggles
Being an acquirer of choice can help strategics secure those bolt-on or add-in acquisitions, but doing so requires cutting through the clutter in the middle-market M&A space.

The best way to stand out from the pack is to recognize and voice an understanding of the uniqueness of the target company, including the full suite of strengths the organization could bring to the merged entity. Especially for large retailers looking to make several smaller acquisitions as part of a broader plan to scale the business, it's critical to acknowledge the unique differentiators of each target company, beyond the "obvious" strengths.

A great example of this is Walmart's acquisition of internet retailer Jet.com. While Jet was clearly a leader in the e-commerce space, Walmart's understanding of Jet's competitive advantage extended beyond this core strength. Walmart recognized that Jet's operating model and culture are part of its interlocking strategy and preserved these strengths throughout the merger — making the deal a success.

The lesson here? Overlooking everything but the one or two obvious strengths of the company you're looking to acquire can be dangerous. Had Walmart recognized nothing but Jet.com's e-commerce expertise, the retailer may have overlooked, or even eroded, other important strengths, such as Jet's culture — and turned Jet away from its bid.

On the flip side, it's just as critical to demonstrate a deep understanding of the target company's struggles. What pain points are challenging the organization, and how might the deal serve as a solution to those obstacles? Will increased scale from the deal, alone, be enough to overcome those obstacles, or is the target company struggling with additional roadblocks that need attention, following the acquisition?

Both pieces of the puzzle — strengths and struggles — should factor into a broader vision to seize the opportunity that lies ahead.

The "secret ingredient" that's often forgotten
Cultural fit is critical to being an "acquirer of choice," but often put on the backburner, behind melding financial and operational processes. Identifying and clearly highlighting the cultural synergies between the two organizations — or, where differences exist, thoughtfully considering how to navigate these cultural differences — is a must for every suitor. This is especially true in retail, where the "human touch" is so critical to maintaining customer loyalty in an industry being overtaken by online behemoths such as Amazon.

Especially for bigger retailers looking to make several acquisitions throughout the year, the power of understanding and valuing the target company's culture, paired with an intention to integrate that culture into the broader organization, should not be underestimated. This process starts with asking questions including, "What does this brand stand for?" and "What makes its customers and employees unique?" as well as "What's the driving force motivating this retailer's people — from employees on the ground to the board room?" These insights can feed into and enrich the mission of the broader organization.

Full transparency when it comes to cultural similarities, and especially differences, is table stakes to building a trusting relationship from the very beginning. Where culture clash might exist, leaders should develop a mitigation plan to ease concerns from the target company about being swallowed and digested by the deal.

When Hershey acquired Brookside Foods in 2011 — a British Columbia-based confectionary company specializing in chocolate-covered fruit juice pieces — the chocolate giant was careful to integrate Brookside effectively into the broader organization, while preserving the independence of the brand. From maintaining the company's branding to keeping products and packaging consistent, Hershey showed respect for the values that make Brookside unique and, in turn, preserved the company's identity during the merger.

Delay integration, delay success
The single biggest pitfall that derails successful M&A transactions is a lack of vision for the opportunities, beyond "synergies," following the integration process. Waiting until the deal is done to start talking about integration is a surefire way to be viewed as an unattractive acquirer — and fail to exploit the full set of opportunities to build a better combined business. Having conversations early on and bringing as many voices into the dialogue, even perspectives from employees on the ground, is critical to being an acquirer of choice.

Melding two companies into one is tricky and requires a careful balance between independence and integration — guided by a clear value proposition that's communicated to all parties involved, from floor workers to the corporate office.

External communication of the value proposition is just as important as internal. When Walmart acquired ModCloth, the deal was met with outrage from customers who were loyal to ModCloth's community-based website, indie fashions and stance on issues, such as inclusivity and self-care. Despite a statement from ModCloth's co-founder following the acquisition about how the deal would allow the company to expand its message and reach more people, customers turned away from the brand. Some even attempted to purchase ModCloth's clothing directly from the independent designers.

The takeaway here? Perhaps not considered in this acquisition was that the brand represented something very different than Walmart: the independence of the brand itself was a selling point for ModCloth's customers. In fact, many ModCloth customers saw the brand as more than just another clothing retailer. The unique comments section on the website — which included options to specify size, height and other details, in addition to providing clothing reviews — is an example of the unique value that ModCloth provided to customers, which is not always recognized by an acquirer. 

Recognizing this value at the outset, through early, inclusive conversations, could have led Walmart to focus more on manufacturing and supply chain synergies in the deal, while externally communicating strong commitment to the brand's values and independence.

Three questions to success
As they battle for acquisitions to compete in the shifting retail landscape, retail leaders must ask themselves tough questions in order to become an acquirer of choice. Internally, they must know, "What is this brand looking for in an acquirer, and do I fit that mold?" Externally, these leaders must understand, "What value can this acquisition truly add to my organization, based on its competitive strengths, including culture?" And, throughout the process, retail leaders must ask, "How can we together tap into all the opportunities presented to improve both businesses through this merger, so that one-plus-one equals greater than two?"

Asking these questions today will arm leaders with the vision and tools to be the strategic acquirer of tomorrow.


Gaurav Gupta is a principal at Kotter International, the leadership and strategy acceleration firm founded by renowned Harvard Business School professor Dr. John Kotter. He can be reached at [email protected].