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A bold new approach to mergers and acquisitions

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While 2018 looks to be on pace to continue the recent fervid spate of traditional mergers and acquisitions — measured in terms of number of deals, size of deals, or both — it may be best remembered as the year that a bold new approach to M&As that we call “neumarkets” revolutionized retailing and a broad portfolio of other industries.

Greg Portell

Neumarkets represent a totally different approach to M&As, which were once designed to create innovative consumer solutions. But before we look at neumarkets, let’s take a brief look at what’s behind the boost in M&As that we’ve witnessed to date.

Traditional M&As

In reality, there may be as many reasons for M&As as there are M&As. Some are, frankly, irrational, the products of egos or visions that exceed existing market realities. But, broadly speaking, most M&As are driven as responses to existing competitive conditions and fall into standard categories, including, but clearly not limited to:

• C3, or consolidation in collapsing categories, as we have seen in the office products ­category.

• The marriage of physical and digital, as we saw in Amazon.com’s acquisition of Whole Foods and PetSmart’s acquisition of Chewy.com.

• Horizontal integrations, such as Disney’s proposed acquisition of 21st Century Fox.

• Vertical integrations like AT&T’s failed attempt in 2011 to acquire T-Mobile USA.

• Capability acquisitions, such as Walmart’s acquisitions of Spatialand, a virtual reality firm, and Parcel, a high-tech, last-mile solutions provider.

• “The best defense is a good offense,” the apparent strategy behind Walmart’s acquisition of Jet.com, Shoebuy, Moosejaw, Modcloth and Bonobos, which expands its digital presence, appeals to a new and expanded customer pace, and at the same time helps to protect it against digital pure plays.

The origin of neumarkets

The origin of neumarkets can be traced back to CVS Health’s $69 billion bid to acquire Aetna last December, which would lessen CVS’ dependence on “retail”; open the door to the transformation of its 10,000 chain drug stores into community health care sites; and threaten to eliminate the need for pharmacy benefits planners, because CVS would be in position to manage its own benefits.

What are neumarkets?

So, what exactly do we mean by neumarkets, and how do they differ from traditional M&As?

At their core, neumarkets are sustainable consumer-facing commercial entities created through the merger and/or acquisition process. The neumarket parent companies can operate either in adjacent markets with complementary offering or service spaces, or in what had been disparate commercial spaces, coming together to create brand-new consumer-facing markets.

Either way, neumarkets represent a fundamental redefinition of existing markets. The critical element they share is their ability to reshape or reimagine what consumers have come to expect from either company, or perhaps from any companies. If an M&A results in what is basically just an expanded version of business as usual for both companies, it isn’t a neumarket.

If, in the end, the CVS/Aetna deal ends up as just another vertical integration scheme, built on the shoulders of the retailer’s $26.5 billion acquisition of Caremark Rx in 2007, it won’t represent a true neumarket. But if the acquisition results in the development of a new, unified health care solution that lowers costs through the disintermediation of pharmacy benefit managers and creates broadly expanded versions of the walk-in clinics CVS currently operates in some Target stores — say a networked consortium of neighborhood-based general practitioners operating out of a variety of retail formats serving Aetna customers and offering discounted pharmaceutical costs — that would be a ­neumarket.

A peek inside the future neumarket tent

Neumarket thinking reinvents how we look at what M&As can — or should — accomplish, thereby expanding the logical target list. So, what are some potential examples of neumarkets?

Let’s imagine that a Web-based general retailer with a deep cache of consumer data buys a brick-and-mortar food retailer creating URWHATUEAT, a digital personalized food shopping consulting service that preplans meals, arranges for sourcing food, coordinates information to and from your physician or personal trainer, and adds in health and wellness-inspired nonfood and general merchandise items, and then arranges for everything to be delivered or staged for pickup — all centrally serviced, billed and fulfilled. That would be a ­neumarket.

Or there’s Inpetsment, the merger of a pet supply category killer and CryptoKitties, one of the first global games to be built on the back of blockchain technology. CryptoKitties are, “crypto-collectible” digital pets that can be bought, sold and, in some cases, bred. AxiomZen, the game’s inventor, initially put 100 “founder kitties,” on the market and plans on releasing a new “Gen O” CryptoKitty every 15 minutes until November 2018. The digital pets sell for the average of the last five previous transactions on the blockchain, plus 50%. Players are allowed to breed two of their own, “genetically unique” CryptoKitties, which can be bought or sold by their “breeders,” who pay the company a fee on every transaction. By leveraging a scarcity model AxiomZen has created a market where, in less than a month, individual “kitties” were selling for well over $100,000 apiece.

Why would a retailer consider this kind of an M&A? Executed correctly, it could become a market offering that pet lovers and financial speculators could find equally attractive, especially if it benefited animals by donating 1% of every CryptoKitty transaction to humane societies and animal shelters, benefiting real animals.

Imagine Google buying a department store and creating a neumarket that creates a personal lifestyle management service that blends the retailer’s buying and sourcing skills, merchandising flair and physical locations with Google’s access to the Internet of Things, hardware devices, software expertise, customer relationship management (CRM) analytic capabilities and database. The new offering could act as a combination of a digital AI assistant, personal shopper, interior designer and security agent.

Or think about a large agricultural company acquiring a supermarket or restaurant chain. Such an M&A could result in a neumarket that lets consumers select their food based on where it was sourced, when it was harvested, how it was grown from seed and even who grew it. Approved products could be shipped to the shopper’s home on a subscription basis, prepared in a restaurant near them and delivered, or purchased in raw form at a supermarket.

Chain drug stores could acquire a publishing company, for example, and form a neumarket around proprietary health and wellness titles, discussed by in-store “book clubs” that attract new customers and reinforce the role of the store in the community. Or they could acquire what’s left of the travel agent business and design customized vacations based on a customer’s unique health profile — say survival trips for fitness fanatics and spa vacations providing complete state-of-the-art medical services for those who love to travel but are afraid of being too far away from such services.

The possibilities are, quite literally, endless.

Neumarket formation

How should retailers think about neumarkets?

Obviously this is a brand-new idea, and so case studies, benchmarks and “best practice” models aren’t available. But that shouldn’t limit our thinking. Here are a list of questions that could help us evaluate the potential of a neumarket M&A:

• Does the proposed target company operate in an adjacent and complementary market space?

• Are you really buying new ­capabilities?

• Does the M&A hold the potential to address an unmet consumer need?

• Does the M&A allow you to compete in a new market?

• Can your people, culture and organization meet the challenge of radical innovation?

• Can you craft a plausible story for analysts and potential investors?

The real reason for retailers to consider a neumarket approach to M&As is that we face radical change on all fronts — demographic, cultural, technological and, of course, competitive changes that can’t be addressed by playing the same game in the same way. It’s past time to get creative.

Greg Portell is lead partner in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. He can be reached at Greg.Portell@atkearney.com.


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