Bain & Company: The case for buying a new growth engine

While it can be tempting to start a new business from scratch, our new study supports the case for purchase. We’ve looked at hundreds of Engine 2 companies over the past 25 years, and of the 58 most successful, 40 have used mergers and acquisitions (M&A) as a significant part of their scaling plans. This is an important insight at a time when lower valuations and less competition for deals are making the market a buyer’s market.

Building a team organically can take years longer than purchasing, which can put the company at a disadvantage in a fast-moving competitive environment and allow others to gain a strategic advantage. Without in-house expertise for the new business, multiple mistakes could set a company back on the scaling path. M&A comes at a cost, of course, but higher rewards are required to poach critical talent one-by-one. Building a business also often comes with costs associated with false starts, reorganizations and management intervention.

The key to successfully buying and scaling an Engine 2 starts with understanding that the target company’s unique assets and the acquirer’s scaling journey will be different. However, most generally fall into one of three common archetypes – and each requires tailored priorities and areas of focus. We will look at these archetypes one by one.

Roll up companies with similar cores

In these cases, an acquirer typically has some experience in the desired Engine 2 business and is attempting to scale rapidly through multiple acquisitions of existing businesses. To be successful, the buyer must be extra diligent and validate the strength of the company and how well the asset matches the new engine. It’s also important to emphasize the integration of the new asset into the larger engine with minimal IT dis-synergies and losses of customers and key talent.

Atlas Copco was keen to go beyond its core of compressors with a new Motor 2 using vacuum technology. From experience in similar industries, the company knew the market was poised for growth and that there would be great value in becoming the market leader at scale. In order to grow quickly, the company acquired the Edwards Group and subsequent success reinforced its belief. Atlas Copco added vertical and geographic coverage to the engine through acquisitions of Leybold, CSK, Brooks Automation’s semiconductor cryogenics business and more than 10 service and sales facilities over the past three years.

Success was the result of a combination of the right strategic plan and excellent execution, including thorough due diligence and efficient integration, to scale the new engine and establish a leadership position in a growing market.

Buy skills to create a new core

In these situations, the M&A target is strategically attractive for capabilities or assets that augment a new growth engine the company has in mind. The target may have critical talent, data, infrastructure, or expertise that the acquirer lacks that can be applied to existing or future new growth engines. The most seasoned practitioners are applying the lessons of these acquisitions to multiple engines and lines of business, creating new value in unpredictable ways. Successful execution of this strategy will require excellent talent retention, cultural integration and a patient board that is willing to wait out a potential multi-year journey of twists and turns.

Consider the path Disney took when it envisioned the potential for content streaming as a new growth engine. Its direct-to-consumer ambitions were significantly accelerated with its 2017 acquisition of BAMTech, a technology services and video streaming company previously founded by Major League Baseball. The BAMTech acquisition gave Disney several key elements to what would eventually become Disney+, including robust back-end technology, insights into customer needs, and key talent to tie the value proposition to the new technology.

Buy the new core already in scale

In these deals, a company makes a single, large acquisition of an Engine 2 business that it intends to aggressively grow. China’s TCL successfully carried out this application when it bought Zhonghuan Semiconductor to add a large-scale Engine 2 of solar materials and modules with runway to become even larger under the leadership of the leading consumer electronics company.

With this strategy, the acquirer must be confident that they can rely on their existing resources and skills to grow the new business in a way that makes the high acquisition cost worthwhile. This is usually achieved by adding value that was not possible if the goal was alone. For example, the acquirer may have sales relationships, R&D resources, unique assets, access to data or users, or operational excellence that can be leveraged to take the goal to new heights. While this approach is typically the quickest way to scale a new engine 2, it can also be the most expensive and result in the highest acquisition premiums. In addition, it requires the highest level of integration difficulty due to the complexity of large-scale transactions and changes.

Dell’s 2016 purchase of EMC set the standard for large-scale Engine 2 acquisitions and is still considered one of the most successful in history. Dell knew the market was moving toward networked storage and servers, but it struggled to gain traction with its organically evolved storage products. EMC was a leader not only in storage and virtualization (with VMWare), but also with enterprise customers, which Dell wanted to push harder. Among many potential integration priorities, Dell began cross-selling and quickly moved to allow its sales team to bring storage solutions from EMC and VMware solutions into Dell accounts (and vice versa), eliminating both Dell’s traditional core and acquired ones companies were given a turbo drive. Dell achieved synergy targets in half the expected time, accelerating the company’s ability to achieve its Engine 2 ambitions in a fast-moving and highly competitive environment.

Companies that are most successful in acquiring a new growth engine test specific value propositions with potential customers to confirm the magnitude of the potential benefit. They are also building an operating model and management system that enables the right crossover points to deliver new value from Engine 2 while retaining the unique elements that made the asset valuable in the first place.

4 basic steps to successful implementation

These buy versus build archetypes are all viable approaches to accelerating a new engine of growth. What separates the success stories from the followers is the execution. Many companies have learned that the priorities and decisions that work for the core business don’t always lead to the creation and scaling of a new business. Regardless of which archetype a company chooses, we see four basic steps that no acquirer should overlook.

• Start with a laser-focused due diligence that tests the asset’s fit with the elements most critical to your scaling.
• Design a clear integration thesis and execute the integration with the goal of preserving the unique assets and capabilities that made the goal desirable.
• Design the integration plan to focus on the key decisions that will unlock customer value for the new engine, not just the quickest route to day one.
• Go beyond mere financial incentives for the critical talent you identified during onboarding.

As more companies choose to purchase to accelerate Engine 2 growth, more success stories are emerging—and the details that contribute to that success are coming into sharper focus. Winners will be those who take these lessons to heart as they take bold steps in the downturn. They benefit from lower premiums and less competition for deals to accelerate their new engine of growth, overtaking competitors more effectively and at a lower overall cost.

Alexandra Ramanathan and Vincent Vandierendonck are partners at Bain & Company. Mikaela Boyd is a Partner and Head of the Americas Strategy Practice at Bain & Company. Scott Nancarrow is the practice director for mergers and acquisitions at Bain & Company. Bain & Company is a partner of wealth‘s Breakthrough series.

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