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

As they face macroeconomic uncertainty in their industries, most business leaders acknowledge that it’s more important than ever to develop and drive an engine of growth. replacement for the future. We refer to these new businesses within existing companies that use the scale benefits of the core business to grow faster than an independent startup could be “Engine 2”. And recessions are times when companies take bold steps to help them emerge stronger than their competitors.

While it can be tempting to build a new business from scratch, our new research strongly supports the purchase case. We’ve looked at hundreds of Engine 2 businesses over the past 25 years, and of the 58 most successful, 40 of them are mergers and acquisitions (M&As) used as an important part of the expansion plan. their scale. It’s an important finding at a time when lower pricing and less competition for deals make it a buyer’s market.

Building a team naturally can take years longer than an acquisition, which can leave the company behind in a fast-moving competitive environment that allows others to win. strategic advantage. Without the in-house expertise for the new business, a company can make some mistakes in its scaling journey. M&A certainly comes with costs, but higher premiums are required to attract individual key talent. Building a business also often comes with costs associated with false starts, reorganization, and executive intervention.

The key to successful Engine 2 buying and scaling begins with understanding that the unique assets of the buyer’s scaling goals and journey will be different. Most, however, will generally fall into one of three common archetypes—and each requires matching priorities and areas of focus. We’ll look at each prototype one by one.

Deploy businesses with a similar core

In these cases, the acquirer usually has some experience in the desired Engine 2 business and is looking to build scale rapidly through multiple acquisitions of existing players. To be successful, the buyer needs to have particularly strong due diligence, asserting the strength of the business and the suitability of the property with the new motive. It’s also important to emphasize integrating new assets into larger tools with minimal IT coordination and minimal loss of customers and key talent.

Atlas Copco is interested in going beyond the compressor core with the new Engine 2 in vacuum engineering. From experience in similar industries, it knows that the market is ready for growth and that there is great value in leading to scale. To build quickly, the company acquired Edwards Group, and the subsequent success strengthened their faith. Atlas Copco has added engine verticals and geographic reach with the acquisition of Leybold, CSK, Brooks Automation’s cryogenic semiconductor business, and more than 10 service and distribution assets over the past three years.

Success is the result of a combination of sound strategic planning and excellent execution, including extensive due diligence and effective integration to scale new engines and build positions. leader in a growing market.

The ability to buy to create a new core

In these situations, an M&A target is strategically attractive to capabilities or assets that expand the new growth engine the company has in mind. Targets may have critical talent, data, infrastructure, or knowledge that the acquirer lacks, and can apply to existing or future new growth engines. The most skilled practitioners apply the lessons from these acquisitions across multiple engines and business units, creating new value in unpredictable ways. Successful execution of this strategy requires excellent talent retention, cultural immersion, and a patient board ready to await a likely multi-year journey with twists and turns. turn.

Consider the route taken by Disney as it envisions streaming content’s potential as a new growth engine. Its direct-to-consumer ambitions were accelerated dramatically with the acquisition of BAMTech, a video streaming and technology services company formerly founded by Major League Baseball in 2017. The purchase BAMTech’s return to BAMTech gave Disney some of the key elements to ultimately becoming Disney+, including powerful back-end technology, a deep understanding of customer needs, and the talent needed to put together a price proposition. treatment with new technology.

Buy new cores already at scale

In these transactions, a company makes a single major acquisition of an Engine 2 business in which it plans to thrive. China’s TCL has taken this action successfully when it acquired Zhonghuan Semiconductor to add a large-scale Engine 2 of solar materials and modules with runways for further growth under the direction of China’s TCL. leader of the consumer electronics industry.

When using this strategy, buyers must feel confident that they can rely on their existing resources and capabilities to grow the new business in ways that make the high acquisition costs worthwhile. . That is often achieved by adding value that is not possible when the goal is alone. For example, a buyer may have sales relationships, R&D resources, unique assets, access to data or users, or operational excellence that can be used to take a goal to the next level. new high. While this approach is often the fastest way to expand a new Tool 2, it can also be the most expensive, incurring the largest acquisition fees. In addition, it requires the highest level of integration difficulty due to the complexity of transactions and large scale changes.

Dell’s purchase of EMC in 2016 set the standard for large-scale Engine 2 acquisitions, and it remains one of the most successful in history. Dell knows that the market is moving towards connected storage and servers, but it has struggled to gain traction with its organically developed hosting products. EMC is the market leader not only in storage and virtualization (with VMWare) but also with enterprise customers, which Dell wants so it can make more of a push. Among many potential integration priorities, Dell started with cross-selling and quickly moved to help its sales team bring EMC and VMware storage solutions to Dell accounts (and vice versa). back), leverages both Dell’s traditional core business and the acquired businesses. Dell achieved its synergy goals in half the expected time, accelerating the company’s ability to realize its Engine 2 ambitions in a fast-moving and highly competitive environment.

The companies that are most successful when purchasing a new growth engine at scale will test specific value creation arguments with potential customers to confirm the magnitude of the potential benefit. They also built an operating model and management system that allows the right overlaps to bring new value to Engine 2 while preserving the unique elements that made the property’s value right. from the beginning.

4 basic steps to successful implementation

These buy versus build prototypes are all viable approaches to driving new growth engines. What separates success stories from failure stories is execution. Many companies have learned that priorities and choices aligned with their core business do not always translate into establishing and scaling a new business. Regardless of which prototype a company chooses, we see four basic steps that no acquirer should skip.

  • Start with laser-focused due diligence to check how well your content matches the factors that matter most to your scaling.
  • Draft a clear integration thesis and implement the integration with the aim of maintaining the unique assets and capabilities that make the goal desirable.
  • Design an integrated plan to focus on key decisions that unlock customer value for the new tool, not just the fastest path to day one.
  • Go beyond mere financial incentives to the key talents you identified during the onboarding process.

As more and more companies choose to buy to speed Engine 2’s development, more success stories emerge—and the details that contributed to that success are coming into focus. The winning companies will be the ones that keep these lessons in mind as they make bold moves during a downturn. They will take advantage of lower premiums and less competition for transactions to accelerate their new growth engine, outpacing competitors more efficiently and at less total cost.

Alexandra Ramanathan and Vincent Vandierendonck are partners of Bain & Company. Mikaela Boyd is a partner and head of strategic practice for the Americas at Bain & Company. Scott Nancarrow is the practice director of mergers and acquisitions at Bain & Company. Bain & Company is a partner of AssetBreakthrough series of.

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