Though SPS Commerce has grown successfully by focusing on its core over the past couple years, Vice President John Strenger said at the Minneapolis Smart Business Dealmakers Conference that recently they've been making a concerted effort to look at other spaces and adjacencies they could get into. He says building themselves to move into a new space or a different product line can be a challenge, so they're leveraging M&A to chase the opportunity.
"We're not going to kid ourselves that we can build and get in there," Strenger says. "So, we've been actively looking at bigger acquisitions in adjacencies, because we think it's the right way to enter those."
He says they treat their M&A function like a sales pipeline, using weekly and bi-weekly meetings with the team focused on M&A to discuss who is in LOI, who they're going to bid on, and what they think of each opportunity.
"We've tried to just keep that as active as possible," he says. "And then the weekly meetings, it's just, it's dynamic, so you're constantly trying to keep up with where do you want to focus because these take resources and time — not just to do the diligence, but obviously, close it, integrate it and all that, so trying to manage capacity as well."
As they look at new spaces, he says in select cases they're bringing in advisers to help with the due diligence — commercial, financial, etc. They have a law firm they work with on transactions and will work with bankers, depending on the size, bringing them in sometimes pre-LOI. With tuck-ins, however, he says they use fewer advisers.
"It's a competitor; we know them," he says. "We're not going to have to do a lot of commercial or any commercial due diligence. We don't even need to talk to customers, for the most part, we know what they do in the market. We can get that deal done. We have a playbook for that deal. So, it's a very different animal."
To validate the deal thesis in a new space, he says, takes a more concentrated effort. That's when they tend to lean on advisers because they're going to need to go in front of the board and tell them they're about to spend a lot of money in a space they're not in, so the risk profile is much higher, and they'll likely get a lot more scrutiny from investors. But with a tuck-in, he says they're highly confident in their thesis. And because these are smaller, the risk profile is lower.
He says they're done a ton of work on their whole value chain, researching what their customers do day-to-day with their products and what other products they're interacting with, and pain points they had.
"Because we don't want to just buy something because it's in the supply chain so we should just have that as well," Strenger says. "We're really trying to figure out — and we actually had our product marketing team put a pitch together that we show how would SPS sell this product? And does it make sense? Would it, as a customer, resonate with me? Like, ' Oh, that makes a ton of sense. I see why you're bringing me that.' Or would you go, 'Why are you trying to sell me that, I work with you with this over here? So, we really are trying to be thoughtful, which is great, but it also makes it tough because there's a lot of deals we see it's like, that doesn't fit, it doesn't work."
Operating under an initiative to go out and find adjacent deals has been interesting, he says, because it's challenged the company to look outside its core, which has put it in some ways outside its comfort zone.
"There's some uncomfortable conversations," he says. "It's like, 'Well, that business model doesn't do what we do.' Well, yeah, it's a new space. It's an adjacency. We got to figure out how to make this work. So, what keeps me up at night is making sure when we do that deal, it's going to make an impact. Long-term, I hope we look back and we say, 'That was a great move. I'm glad we went into that space, and it really helped continue our success.' Because we've been on a successful run for 20-some years. It's been amazing. I don't want to be the guy that bought the company that screwed that up. So, that keeps me up at night."
