Why 70%-90% of the M&A fail? Analyzing GrubMarket’s aggressive acquisition spree
One company that caught my eyes with its frequent appearance on the press releases since last year is GrubMarket. It’s easy to see why, from PrivCo’s database tracking all M&As, GrubMarket has indeed gone on a bit of an acquisition spree. Founded in 2014, GrubMarket was born out of the Y Combinator as an online marketplace for farmers and consumers, aiming to deliver the freshest local food at a fraction of the cost while providing a DTC channel for farmers.
I did a little bit of spreadsheet work and got the below table:
Data disclaimer:
- The revenue numbers are provided by PrivCo
- The valuation is assumed to be 5x revenue which is based on the 10x revenue valuation GrubMarket has less some Venture money unicorn dust cool factor
- PrivCo does not cover companies with $1 million or less annual revenue. Hence, though revenue numbers are missing, I have made a ballpark guess for the estimated valuation.
This table raised a few red flags for me and led me to question the purpose and the acquisitions and management’s logic.
1, The total valuation of all its acquisitions is $160 million dollars, almost double the total funding of GrubMarket.
In total, GrubMarket has only raised $89 million dollars, less its own cash runway over 5 years. How has GrubMarket financed the purchases? The obvious answer is debt. Taking leveraged buyout to finance quick successions of targets is worrying from a capital discipline perspective.
2, All of GrubMarket’s targets are in the same business as GrubMarket itself
What was it trying to achieve? I think it can be assumed that GrubMarket was looking for fast growth in customers and producers it has on the platform and acq-growth became an appealing option to the management.
The Californian targets are mostly wholesale distributors. And each has slightly different business models and focuses, however, one thing they have in common is that they all own more relationship with producers and consumers than GrubMarket at the time of acquisition. Which begs the questions, were acquisitions the best strategy? Partnerships could offer much more savings from GrubMarket’s perspective and offer a much more flexible scale and integration.
The reason it was not pursued perhaps was because GrubMarket has more to gain in this partnership than the wholesalers. And rather than growing its own wholesale relationships and network, GrubMarket decided to find acquisition targets. In GrubMarket’s press releases, it said that the SaaS platform GrubMarket has would empower distributors and create synergy. I remain skeptical of this statement. Having a SaaS platform is a wonderful thing, but it certainly should not have a multi-million dollar price tag. The NYC based wholesale distributors Baldor built its own DTC platform in 1 week after the shelter-in-place order took effect.
The “take” rather than “give” way of thinking about acquisitions is something Rotman School of Management professor Roger L. Martin described as the number 1 reason why M&As fail. The reason being, in pursuing such a target, buyers are likely paying too much for the target likely to price in all its future values in the acquisition price. Having already paid the target’s potential, the acquirer has little upside to gain.
The more recent targets are marketplace platforms in other geographies, which to me is an even bigger worry. Instead of growing outside of California organically, GrubMarket decided to acquire marketplaces in Michigan, Minnesota, and Massachusetts. Each of the 4 companies’ business model hinges on local relationships. Acquiring operations hundreds of miles away would unlikely to result in any operating efficiency. Given the scattered geographical locations and the fact that the 4 companies were not direct competitors in each of the cities, it is also hard to see any strengthened market/pricing power as a result.
Which again begs the question- why did GrubMarket chose acquisitions over organic growth? It would be pure speculation, but perhaps GrubMarket’s management bucked at the pressure to grow from the VCs. The demand for growth might have forced GrubMarket’s hands.
3, A lack of integrations
As of the time of the writing, all of GrubMarket’s targets still operate as individual businesses. Not surprising results given the quick succession of acquisitions. This perhaps directly explains the meager growth for GrubMarket despite having acquired half of its valuation worth of companies in just 2 years.
Finally, it is good to keep in mind the purpose of M&As. Often CEOs think of M&A as a boost of its current performance. And I think perhaps that’s the trap. As exemplified in the GrubMarket example, the buyers usually face little upside after paying the full potential of the targets at closing. The framework to think about M&As is perhaps one that focused on the long term business transformation- to redirect and reinvent a business.
Speak soon,
