Introduction

In the world of investments, there are roughly two distinct types of buyers: strategic buyers and financial investors. While both seek profitable opportunities, their decision-making processes are dramatically different. Understanding these differences reveals why strategic buyers face significantly more complex challenges when pursuing investment opportunities and M&A.

The Financial Investor's Advantage: Crossing The Hurdle

Pressure for Fast Capital Deployment

As a fund manager, your primary objective is clear: raise and deploy capital as quickly as possible. The logic is straightforward - faster deployment typically leads to faster return of capital, which in turn helps you raise your next fund faster and grow your assets under management (AUM). This is the AUM flywheel.

The "Good Enough" Investment Philosophy

When financial investors evaluate investment opportunities, they follow a relatively streamlined approach:

• Hurdle Rate Assessment: Does this opportunity meet or exceed our required rate of return?
• Risk Evaluation: Is the risk level acceptable for the potential returns?
• Decision: If both criteria are met, proceed with the investment

This hurdle rate approach applies to most fund types, with the notable exception of very early-stage funds where outcomes are often binary, making hurdle rate analysis less relevant.

The key insight: Financial investors aren't looking to participate only in the absolute best opportunities. Good enough is good enough i.e., any investment opportunity that can meet the return & risk criteria can make the cut. Investment committees and general partners (and in turn, limited partners) are out there scouting for "good enough" deals that meet these criteria rather than participate in only the best. At its extreme, this drives the flavour-of-the-season investment model, with the expectation being a rising tide (of business momentum & capital) will lift all boats, so choose whatever you can board.

The Strategic Buyer's Challenge: Multiple Hurdles and Higher Standards

The Complex Multi-Hurdle Process

Strategic buyers face a fundamentally different and more complex evaluation process. Firstly, strategic buyers are in the business of running their own business, which means that unlike financial investors, strategic buyers are not in the business of deploying capital externally. For strategic buyers, deploying capital into growing their business is their first and default choice. M&A is a break from the usual - a move beyond the comfort zone, in many cases. Therefore, every potential M&A opportunity must navigate multiple challenging hurdles:

1. Organic vs. Inorganic Growth Decision

• Should we stick to growing the existing business, that we know and understand well or acquire something that we don't know as well?
• If we have to think beyond our existing business, what kind of M&A do we do? Do we consolidate, do we add a horizontal, do we aim for vertical integration or something entirely different?
• Should we optimize for risk i.e. acquire something low risk and play safe or acquire potentially disruptive but also with high chance of failure?

2. The Buy vs. Build Analysis

• Should we just build this capability in-house instead?
• What's the opportunity cost of building internally vs. acquiring now?

3. And the Ultimate Challenge in M&A: "Is This the Best Option For Us?"

Even if an M&A opportunity successfully passes all previous hurdles, this question can be quite the deal killer. And to convincingly answer this, the deal team has to know their universe of suitable candidates for M&A, understand the relative strengths and weaknesses of individual combinations and then rank these combinations based on strategic goals of their organization. For a deal team, in the frenzy and rigours of deal making, doing all of this work to answer the best option question can become an expensive detour that imposes punitive costs and time loss, to the extent that it can cause deals to be lost and deter M&A for good. Doing this market scouting and deal ranking as an exercise in itself, delinked from live deal processes, can seem to be the antidote, but so can the question arise - to what end?

The Way Forward

So, what is the solution to all this? The answer is to not treat deal execution and the quest for the best possible M&A candidates as separate items. The right way is to see M&A for what it is capable of - to be an extension of your strategy and then to define what kind of M&A is best suited to your strategy and stage. Next, scout the market for the best deal candidates and then pursue M&A within your best deal candidates. This is M&A done right.

And to help you get started with doing M&A the right way, turn to The India Portfolio. The India Portfolio uses custom algorithms and AI to evaluate '000s of deal combinations, sector by sector, to bring to light the best M&A combinations. Choose from these combinations to progress your strategy and begin your deal execution with the deal rationale and answer to the best option question, already in place.