Corporate Development Spotlight

Spotlight Q&A:

Jonathan – Thanks for joining us for this issue of Corporate Development Spotlight! Can you provide a quick flyover of the West Monroe corporate development team and approach to M&A?

We are a small team by design, which consists of myself, a senior manager to lead active deals and drive sourcing, an analyst, and an integration lead. We are responsible for driving inorganic growth (both acquisitions and partnerships) for West Monroe and lead the full deal life cycle from sourcing through integration. We spend a lot of time with our individual practices to identify firms that fit our strategy. As a firm, we want to grow topline revenue about 20% annually, with 5-10% growth coming from acquired revenue. We target closing 2-4 deals per year to achieve our growth goals. We’ll look at over 200 opportunities each year, but given our unique model, we are pretty selective as most firms don’t fit.

West Monroe is a great platform for companies to continue to grow post-acquisition as we’ve built an infrastructure for our new colleagues to leverage and do what they do best, which is serve clients. We have several investment criteria that a target must pass through, which probably aren’t materially different than other firms out there: strategy, market, financial, and culture. From a strategic standpoint, West Monroe is focused on helping clients modernize their businesses by leverage digital capabilities. We look for acquisition targets that have deep domain expertise within our core industries as we believe clients want an advisor that can tell them what is happening in their industry and how technology is going to help them stand out relative to competitors and not just sell them a tool.

From a market perspective, we invest in areas that have natural tailwinds and there is potential to grow market share with our clients. From a financial perspective, we want firms that are growing (we don’t buy lifestyle businesses) and building long-term relationships with clients but understand how to do it profitably. From a culture perspective, we are focused on firms that value their people and are investing in the development and growth of everyone. We added in diversity, equity, and inclusion into our screening process a couple years ago as we firmly believe focusing on DEI benefits all parties from individual people to our clients to our communities.

What advice or best practices can you share regarding the professionalization of a Corporate Development team (including, systems, diligence, origination, etc)?

You have to be consistent in your approach to be successful at Corporate Development work. This goes for pretty much all your stakeholders, both internal and external. If you are reinventing the wheel (or even parts of the wheel) each deal, you’ll lose time, the seller, the transaction, or will eventually lose the focus of your internal partners. Our team has growth from one to three in the last 18 months with plans to double the team in 2022 (just took an investment from MSD Partners to further growth), so we are really focusing on ensuring consistency across the team in how we do things. This past year we have revisited playbooks and process maps covering a variety of areas to formalize how we operate. This was done with an eye to the future as we grow and onboard new team members. Growth has also brought different kinds of acquisitions and new perspectives from our stakeholder groups, so we are revisiting how we diligence acquisition targets. Given most of our acquisition targets are on the smaller side, a small leadership team tends to bear the brunt of our diligence effort, so we need to streamline the process and minimize impact on our targets’ businesses.

Managing multiple constituents in M&A is often challenging. How does your team coordinate with other business units, functions etc. within the organization?

Part of West Monroe’s strategy is to bring deep industry expertise and our horizontal capabilities to help our clients with challenges they are facing. When we look at acquisition targets, we are trying to find targets that bring multi-disciplinary capabilities, as well. This can create multiple stakeholder groups (with slightly different opinions) to manage during a diligence effort. To help, we try to partner with our practices before targets are identified so that we are up to speed with their strategies and they are aware of how the M&A process works before we have a live deal.

Any other best practices for Corporate M&A?

Another area I think is very important is to spend time with your leadership team to ensure you’re on the same page with them and they are on the same page with each other. We do not have a very hierarchical leadership structure, which requires concerted effort to make sure we are communicating appropriately across the firm and addressing any major issues that our stakeholders may have with an acquisition before it comes up in a diligence readout or some other forum. In addition, we have a significant number of practices that operate somewhat independent of each other, so that can feel like managing Corp Dev for multiple businesses, so we need to be in tune with our leadership team so that we don’t spend significant effort working on a deal that is interesting for a practice leader, but not for the firm.

Predictions for the next 12 months in corporate M&A, including any triggers you think will initiate change:

I feel like we’ve been talking about the hot market slowing for years and years at this point. Ultimately, I think it continues for the foreseeable future given access to capital for strategics and dry powder for private equity, but I do feel like prices will reach a point where the growth can’t support it and things will slow somewhat in the next 12-24 months.

It will take a while for the capital to run out, so it must be something else that triggers change. I do think a pullback in the equity markets could result in buyers re-evaluating the multiples they are paying. In addition, I think we’ll see some slowing of growth as all the economic factors continue to create challenges for different industries. We play in the technology consulting market and there has been phenomenal growth there as clients want to become more digital faster (this was happening before Covid, but Covid really crystallized the need to move faster for some industries). Growth is great, but we can’t assume it will last at these levels and I worry we may have pulled forward some of the growth from future years. When we look at acquisition targets, we are constantly testing growth assumptions to see how that impacts our return metrics to ensure our business case is sound.

Most memorable M&A story (can be most successful, funny, best learning experience etc):

For some reason, there have been a few deals that didn’t close that had some extenuating circumstances that are memorable to me. One of these goes back a few years at my prior firm when we were evaluating an insurance broker that specialized in the construction sector in Brazil. The company was based in Rio and our small pursuit team was staying in a hotel on Copacabana Beach. The beach was beautiful, the hotel…not so much. After finishing the usual long day of meetings, we went to dinner. We had a bit of walk to get back to our high-rise beachfront hotel and then found out both elevators were out of service. Nothing like hiking up 12 flights of stairs after a 14-hour workday after doing the overnight flight from Chicago to Rio. Ultimately, the deal didn’t go through, and a few months later Operation Car Wash was announced, which created significant noise in the political environment as well as the construction industry, so we hit the pause button on activity there and the deal never happened. I’m sure the elevator thing was just a coincidence, but sometimes weird things happen that make you wonder if a deal is just destined to fail.

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