Thread by @ryan_caldbeck

1/ Capabilities. That’s the word of the day.

One thing that industry “experts” often miss when evaluating historical M&A or trying to predict M&A, is that the best acquirers often aren’t looking at the financials of the target first- they look at the capabilities of the target.

2/ Let’s talk about what that means, why it is important and why entrepreneurs, investors and strategic acquirers should care.

3/ First- what it means. Capabilities allow the target or acquirer to do something unique that matters. Talk to a new demographic, or same demo in a new way (brand capability), deliver unique value in the product (product cap.), distribute the prod in a new way (distro cap.) etc

4/ The capability being acquired allows them to make progress on a job that needs to be done. @DollarShaveClub wasn’t acquired for $1b because the metrics made ANY sense. They didn’t- the multiple was insane. @Unilever isn’t dumb either.

5/ Unilever was making a bet that they were acquiring d2c capabilities that might be able to be leveraged across a portfolio 100x-1000x as large.
fortune.com/2016/07/19/uni…

6/ Similarly @Walmart ’s acquisition of @Jet wasn’t backed up by the historical #s Jet was putting up. Saying that they only wanted to work with Marc is careless and overly simplistic (though that acqui-hire was part of the story).

7/ They were buying capabilities- the ability to be an online retailer. Walmart.com’s own employees would say Walmart.com was a bit of a mess and getting crushed. Walmart was making a big bet on acquiring capabilities.
fool.com/investing/2017…

8/ The concept of capabilities is related to @claychristensen Jobs to Be Done framework. The acquirer is “hiring” the capabilities- not necessarily buying the immediate P&L, which often wont make sense in the near term relative to the purchase price.
christenseninstitute.org/jobs-to-be-don…

9/ The best acquirers think like this. They identify capabilities they want and hone in on those- not necessarily only focusing on the underlying financials.

10/ Or you can focus on the same P&L that every other acquirer has access to in that shopped deal- in which case you’re all running the same DCFs and it will be just whoever wants to pay more.
The smart strategic acquirer cares about capabilities.

11/ Sometimes focusing on capabilities doesn’t work out. @Google buying @nest (not great outcome so far but good bet). But sometimes it does (Android, Double Click).

12/ But it is far better for the acquirer to focus on the capabilities than staring at the same #s everyone else has access to and trying to rationalize a bigger price. That path will lead to underpaying for the right asset and overpaying for the wrong one.

13/ What does this mean? For entrepreneurs it means an understanding of how (the best) acquirers think.

Let's be really clear- I don’t like building a business just by thinking about being acquired- those companies tend to be soulless. Soullessness leads to disaster.

14/ But it is important to focus on what capabilities you’re creating and why that solves real needs in the world. What job - that needs to be done - are you actually doing?

15/ If it is just a knockoff of @tide laundry detergent– it may generate some revenue, but why should that similar product exist? What problem are they solving that Tide isnt’? If it’s organic and my 18 month old can drink it without getting hurt? That is solving a problem

16/ Now try to get a handle on how big the problem is- why is it valuable, to whom, when, etc.

17/ Similarly for the investor, when you’re looking at the co. think about what capabilities they are creating that matter. Consumer PE investors often focus a ton on the financials- they should. Those matter in a big way.

18/ But sometimes those same investors miss the forest for the trees and forget to think through what capabilities the target investment is crating.

Why should the brand/product/distribution strategy/company exist in the world and what problem are they solving?

19/ Finding the company that has strong metrics, and is solving real problems by creating unique (and defensible) capabilities- is the holy unicorn.

20/ As strategic acquirers- in any industry- think about their problems, they must focus on capabilities. Waiting for the target co. to have metrics commensurate with their (requested) purchase price will result in dramatically more competition for the asset (thus bidding up).

21/ Think of the old school data co. that is acquiring new school data. The NewCo may have proved unique & valuable capabilities with their data, but their nascent sales/mkt team cant yet demonstrate the metrics that would impress Old School Data Co.

22/ The visionary strategic sees the potential, the dying-Titanic sinking strategic wants to wait until the #s have been proven…..to them and every other buyer.

23/ Macro- make sure you’re building something that creates real, unique value for the world. If you do that, the smart investors/customers/acquirers will see it.

Perhaps it is my Mr. Obvious point of the day, but I am amazed at how few consider it.