When acquisition is on the agenda, companies should consider looking outside their own industry – while still keeping culture and risk front of mind.
A world-renowned fine art auction house and a Buy Now, Pay Later fintech may not be the most obvious bedfellows. However, Christie’s acquisition of a non-controlling equity stake in Art Money is just one example of how cross-industry mergers and acquisitions (M&A) can help to build corporate value.
Australian art entrepreneur Paul Becker is Art Money’s founder and CEO. He believes Christie’s was prompted to make the investment by the need to stay relevant.
“They are this 250-year-old company and all this exciting tech was happening,” he told Australian arts platform ArtsHub. “They could either watch it go by or be part of it.”
Along with interest-free instalments for customers, Art Money took regulatory technology to the table. This will help Christie’s to navigate increasingly complex compliance around issues such as money laundering and know-your-client regulations. In 2020, Christie’s achieved annual global sales of US$8.4b. Becker expects access to a US$1b share.
“Acquiring digital know-how is one of the most common scenarios for cross-industry M&A,” says Holly Stiles GAICD, national head of corporate finance at Grant Thornton. “We’ve seen many examples of bigger businesses acquiring a small technology company because it’s quicker than building the technology themselves.”
Two years ago, Woolworths increased its stake in data analytics company Quantium from 47 to 75 per cent. Woolworths CEO Brad Banducci told the Australian Financial Review that the way the company gathers, interprets and protects data is becoming increasingly important. “Through this transaction, we aspire to bring together Quantium’s advanced analytics capability and Woolworths Group’s retail capabilities to unlock value across our entire retail ecosystem,” he said.
A range of opportunities
Cross-industry M&A can be part of a risk management strategy. “Investing in deeper cyber capabilities could strengthen your online security,” says Rob Silverwood, head of M&A at PwC. “Risks associated with energy transition and the broader context of ESG are also important concerns. Directors need to understand how evolving regulation and community expectations might disrupt their business and consider whether acquiring specific expertise could help them develop a more resilient future.”
It could help to solve the problem of how to continue to drive growth, particularly where a company has reached saturation point in its own industry. Online recruitment pioneer SEEK expanded by acquiring expertise in vocational training and education. Now, they not only help people find jobs, they prepare them to join the workforce.
Outsourcing specialist Probe CX is another company that looked outside its own industry to expand its customer offering. Since acquiring Innovior, a specialist consulting, automation and AI analytics company, it has been providing digital transformation consulting services.
There can also be geographical benefits. The UK-based RSK is a global group of 175 businesses drawn from multiple industries, all committed to developing environmentally and socially sustainable solutions to challenging problems. By acquiring Australian advisory and project delivery services firm SJA, RSK has gained greater access to large construction and infrastructure projects across Australia and opportunities to expand in the Asia-Pacific region.
“You could even gain a pool of talent,” says Stiles. “Picking up a team of 100 or so people who are established, experienced and all work well together could be a very attractive proposition.”
2022 Deal Activity
Transactions valued at over $50m — down from 62 in 2021, but consistent with 42 deals in 2020 and 41 in 2019
Three binding transactions exceeded $5b — $9.5b for OZ Minerals by BHP; the $8.9b for Crown Resorts by Blackstone Inc; $6.8b for CIMIC Group by HOCHTIEF AG
There were six more deals in this range, led by Brookfield consortium’s $3.4b for Uniti Group
Of total M+A activity by the energy/ resources and professional services sectors
Source: Gilbert + Tobin Takeovers Schemes Review 2023
Managing the risk
A 2011 article published in the Harvard Business Review pegged the overall failure rate for M&As as between 70 and 90 per cent. Since then, this has been widely quoted. A decade later, Aoris Investment Management examined 1,000 of the largest M&A deals over the past 50 years and put the failure rate at 60 per cent. Aoris also identified the two most likely causes as the size of the deals and how far the acquirer strays from their core business.
“While many of the risks associated with cross-industry deals are common to all M&A activity, some require more attention,” says Delian Entchev, senior equity analyst at Aoris. “For example, it can take more time for the acquirer to develop a deep understanding of customer needs, regulations and other differences when they’re looking outside their own industry. We saw that when Rio Tinto’s failure to recognise the differences between mining iron ore and operating in the aluminium industry led to the failure of its Alcan takeover.”
Cultural differences between industries can also thwart integration. “A key contributor to the failure of AOL’s infamous acquisition of Time Warner was the cultural clash between AOL’s 3,000 new economy pioneers and Time Warner’s 80,000 old media mavericks,” says Entchev. “Our research found that bringing two cultures together can be a challenge, even when they’re in the same industry, but it can be done.”
The board must be equipped to oversee cultural due diligence. That includes being very clear about the role culture plays in any M&A activity and the risks associated with making it low priority. “For example, a high turnover of employees is a big red flag,” says Sasha Lawrence, partner in deals strategy and operations at PwC. “Attrition is rarely captured on a balance sheet, so a business can have very high ongoing costs that aren’t immediately visible.”
Focus on culture
From there, culture needs to stay high on the agenda. “It takes time to understand the culture inherent in both organisations well enough to identify their differences and similarities,” says Lawrence. “The similarities will form the foundation of integration, and the sooner you uncover any fundamental differences in operating rhythms or ways of working, the more likely you are to resolve them.”
Lawrence gives the example of two companies he worked with that had very different demographics and cultures. One was a digital native using technology to deliver their strategy, the other more traditional and institutional. “They had very different ways of servicing their customers, so it was very important for them to keep focusing on why they wanted to bring the businesses together in the first place — what they believed they could gain from each other and where their cultures overlapped.”
One common trap is for the dominant company to assume the other will simply adapt to their culture. “A large and established organisation might be attracted by a nimble, agile and creative tech startup that isn’t shackled by red tape,” says Lawrence. “If they then squash everything that supported the startup’s success, they’re shooting themselves in the foot by losing touch with how they thought they would benefit from the deal in the first place. We see the best chance of success when both entities keep an open mind and are prepared to learn from each other. They can then work together to co-create a sound culture for the future.”
Another trap is to focus too intently on retaining senior executives and those in business-critical roles. “There are people at layers two, three or four of an organisation who play a significant role in shaping and maintaining the culture,” says Lawrence. “They could also provide strong support for the integration process. You need to make sure they’re on your radar and do your best to keep them on your side.”
A convincing story
There are many examples of a cross-industry acquisition bringing real value to a business. However, shareholders are sure to pounce on the risks. “You must be able to communicate your rationale to all of your stakeholders, including the potential for enhanced shareholder returns,” says Silverwood. “That can take more work and thought when you’re hoping to acquire a company outside your experience and industry knowledge.”
Stiles adds that it’s the board’s role to make sure all of the strategic thinking is in place before embarking on an acquisition strategy. “Management should be able to articulate the acquisition criteria, understand the funding options and set their valuation expectations well before they start looking at particular targets and considering how they might fit into their own organisational structure,” she says. “M&A activity is notoriously distracting, so directors should also make sure that the management team won’t be pulled away from the core business by lack of resources.”
In their book, The Ecosystem Economy: How to Lead in the New Age of Sectors Without Borders, Venkat Atluri and Miklós Dietz predict that one-third of global GDP will soon come from ecosystems — networks of organisations across different sectors. Dietz has described this shift as the single largest economic transformation in the history of the planet. “For 10,000 years, everything — the whole economy — was organised across traditional industry lines, and now it’s breaking up. It’s getting reorganised across customer needs,” he told McKinsey Global Publishing’s Charles Barthold.
A little hyperbolic, perhaps, but still worthy of directors’ consideration.
“Next time growth through acquisition is on the agenda, the board might want to challenge management to look beyond their own industry,” says Stiles. “Directors should consider whether they might find opportunities to achieve more for their customers, shareholders and other stakeholders if they looked further afield.”
This article first appeared under the headline ‘Takeover Targets’ in the June 2023 issue of Company Director magazine.
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