Successfully Executing M&A as a Growth Strategy

Medtech M&A seems to be making up for lost time this year.

Predictably muted by the COVID-19 pandemic in 2020, mergers and acquisitions have increased significantly over the first four months. While we and many other industry observers expected M&A transactions to bounce back strongly this year, none of us could have predicted the flurry of deals that have already occurred—nearly 100 transactions through April, according to the research team at MedWorld Advisors. Barring a considerable slowdown in the second half of 2021, the industry could register a record number of deals.

In May, we interviewed three M&A professionals from several top global medtech strategics, participating in a MassMEDIC-hosted panel discussion with Charlie Attlan of Boston Scientific, Eric Knudsen of Zoll Corporation, and Tom Gales of Draeger Medical.

We’ll elaborate on their comments in future columns but we’d first like to share some of the relevant issues/concerns these experts can address regarding M&A strategy and successful inorganic growth execution. These issues may be familiar to many C-Suite executives who may be reviewing their companies’ M&A growth strategies. And those leaders thinking of selling can use the insight we offer to determine the best approach to buyers.

While there are numerous questions the C-Suite team may want to ask itself in analyzing its M&A game plan, following are the Top 10 to consider:

1. Elevator Pitch: As a buyer, companies must determine why they are a good match for the acquisition target. It’s important that message be clear and straightforward in order to attract interest from a potential seller. While valuation is important, many owners (sellers) are equally as interested in their future legacies—for them, their team, their products, and their company.

2. M&A Drivers: Companies must also deduce and understand the highest value drivers for inorganic activity. This could be innovation, market share, new market/adjacent market entry, or simply an opportunistic activity.

3. Inorganic Growth Strategy: In thinking about growth strategy, C-Suite executives must determine whether the M&A activity at their organizations are more of a tactical execution or a driver of strategy. It is important that companies understand the key objectives of both organic and inorganic growth plans. M&A activity should be analyzed to better understand deal origination. Deciphering whether deals more often result as part of a strategic execution and outreach or a business (or M&A advisor) solicitation can help companies determine whether their acquisition behavior is more opportunistic or more purposeful.

4. Communication: When considering an acquisition, companies also must decide when (and whether or not) to involve internal business unit(s) leader(s).There also should be clear processes for keeping the C-level team updated and preparing the Board of Directors for possible upcoming deal activity.

5. Confidentiality: It’s important that companies maintain a “close to the vest” approach while considering all of the aforementioned issues. Anyone experienced in M&A understands that one of the best ways to kill a potential deal is to talk about it. Lack of confidentiality on either side can lead to a lack of trust, and trust is critical to establishing a relationship that will help foster a constructive negotiation and eventually lead to a successful transaction.

6. Strategic Engagement Options: There are typically four ways medtech companies can conduct a deal as it considers its inorganic growth strategy. These include a full-scale acquisition, strategic R&D partnership, distribution or licensing, and investment. Companies must focus on the appropriate scenarios or metrics to help them decide the most appropriate pathway for an inorganic growth opportunity. It doesn’t always have to be a pure acquisition. In fact, many “sellers” are not quite ready to sell, so one of these alternative structures may provide a competitive advantage when thinking about executing an external growth strategy.

7. Valuation: When speaking to buyers and sellers, we’re often asked about valuation. As companies consider their acquisition goals, it’s important they understand the factors driving value creation for potential transactions. Sellers will be flattered by the positive attention and potential “synergies,” but eventually valuation will drive a good portion of their deal behavior. Medtech organizations must consider an effective valuation approach before tactically deploying it.

8. Deal Structures: To be successful in gaining agreement with a potential seller, it’s important to consider various possible deal structures for the right deals. Many times there is a valuation gap between the buyer and seller. This valuation gap is often driven because the seller has created a future market opportunity for which it wants to be compensated. Concurrently, the buyer (while excited about the future market opportunity) often is unwilling to pay for that opportunity, because the buyer will mostly be funding future growth activities. This can sometimes lead to an impasse on deal value unless the parties involved can be creative in their deal structure. There are many options to achieve a win-win scenario in these situations. To help bridge this valuation gap, companies can broker a structured deal, though milestone payments (sometimes called “earn-outs”) are one of the most litigated M&A issues. Simply stated, milestone opportunities ensure there is a true possibility for the milestone to be achieved within the timeframe allowed. It’s a deal enhancer and a value-creating tool to make transactions a win-win scenario. But when not negotiated well, it can trigger a Hatfield-McCoy-rivaling dispute.

9. Integration: Unfortunately, integration is a seldom discussed topic yet it is one of the key drivers of the total deal value proposition for both parties. Companies must carefully consider who will be driving the integration process once the acquisition closes. Often, the same people skilled at business development and fostering the deal are not best suited to drive the integration of an important acquisition. Successful integration requires companies think about the most critical value creators from the combined entity and choose the right team to achieve those value drivers. The team tasked with integrating a purchased firm must have the appropriate skills and respect to ensure that everyone feels valued in the post-transaction combined company.

10. Culture: A successful M&A transaction and integration discussion leads to the critical nature of understanding company culture. Culture can be driven by differing locations (regions of a country, or countries themselves), company size, or core values and behaviors. While there are often two good cultures trying to combine, it’s clear that no deal will be ultimately successful without understanding the value of integrating both companies’ cultures. This needs to be fully evaluated and understood while looking at an acquisition. Once the transaction is completed, use this information to manage the integration with purpose. The most successful integrations help drive communication on all sides to bring the combined forces together as one team serving a united objective, while feeling valued as part of the same overall culture.

These are only a few of the issues commonly raised when considering M&A. There are plenty of others that certainly will be of value as deal activity likely accelerates in 2021. Buckle up—it could be memorable ride. 

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Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at [email protected] or at www.medworldadvisors.com.

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at [email protected].