Achieving Business Growth Through Strategic M&A

0:28People are asking for more M &A Science. team breakout. He saw this as an opportunity to shift their strategy and transform the business. In this interview, we talked about how they used M &A to accelerate their transformation. We discussed how they started their M &A journey, what M &A strategy framework they used, the evolution of their strategy, and how he works with his corporate development team. This episode is sponsored by Firm Room. Searching for a data room that offers simplicity without any compromise? Elevate your data room experience with Firm Room, the world's most intuitive virtual data room.

1:06From scalable storage to unlimited users, industry-leading security features, and flat rate pricing, Firm Room keeps it simple. No hidden fees, no per-page billing, no surprises. Ready to revolutionize your virtual data room experience? Try Firm Room free for 14 days, no strings attached, no credit card required. When you're ready, you can power up and sign up for unlimited users and 10 gigs of storage at a flat rate of$495 a month. Check out Firm Room, a tool built by dealmakers for dealmakers. Learn more at firmroom.com. Again, that's firmroom.com. I'm Kisan Patel, and you're listening to M &A Science.

1:55where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:15Hello M &A scientists. Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about products and services to support world-class M &A teams, or want to get involved with a community of forward-thinking M &A practitioners, visit mascience.com. You can get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Dr. Yoav Zaif, CEO at Stratasys.

2:56Stratasys is a global leader in additive technology solutions, otherwise known as 3D printing, for industries including aerospace, automotive, consumer products, design, education, and healthcare. Today we're going to talk about how to use M &A to drive positive business outcomes from strategy through integration. Does that sound like a good topic? Fantastic topic. Yoab, thanks for joining me for this conversation and taking a break from doing deals and having board meetings. My pleasure. Thank you for visiting us in our Minnesota facility and for arriving in person. I'm stoked about doing this interview in person.

3:32And I am absolutely fired up. Your colleague gave me a nice tour of the facility. I got to check out all these massive commercial printers and your capabilities. I got my diligence done for this interview. Great. I'm here to answer any question and to share some lessons from six acquisitions and six investments over the last three years. Can we kick off with a bit about your background? My name is Joab Zhaif. I'm the CEO of Stratasys. I joined the company three years and three months ago, directly from McKinsey, where I was a partner in the McKinsey New York office. Prior to McKinsey, I was an executive, mainly on commercial sides, sales, marketing, product, but also R &D in two large companies.

4:14One of them was Netafim, which is the largest irrigation company in the world, what we call precise irrigation. So everything is computerized, satellites. You fertilize and irrigate the crop or the field in a precise way. So it's called precision agriculture. And six years before, I was the R &D manager and product manager of the largest generic company in crop protection. I was also a professor in the university, two universities in Israel. I was a faculty member in one of them in economics. My profession initially is international economics. I have a PhD in international economics, but I was also teaching MBA students in Tel Aviv University, a course called International Business.

5:00And it's all about how you take a business and make it global. Part of it, by the way, is M &A. as one of the tools to make a company or a great idea a global one, to scale it. And you're in the Army too. Yes. You take me to kindergarten. It all comes together, your M &A approach. I was also an officer in the Israeli Army for four years, a single officer in infantry, also in the reserve army for many years until the age of 46. And also in the middle between the Army and my PhD, I was also a real estate developer. So practically, I was building houses. So many different perspectives, but also a lot in common.

5:42How you take an idea and make out of it something that really works. Doesn't matter if you build a house or you make a part 30 years later through 3D printing. You don't watch a lot of TV, do you? Not really. Your M &A backgrounds, when did that come in play? What does the actual M &A experience look like? I have a lot of M &A, both from my McKinsey career. because I was both, I was an engagement manager and an associate principal at McKinsey. Then I left for almost 13 years. Then I came back as a partner and I had significant M &A experience, mainly on the PMI front. So post-marriage integration front, like the theory, but also the practice working with really large corporates that acquire the business.

6:25And McKinsey came either through a clean team or as an integration team. And we led the integration. And I had the privilege of leading a few of those projects. So when I came to be an executive, I had already the theory and some of the practice as a project manager of how to do M &A in the right way. And you had some operational experience from your prior roles. Yes. Some of the practical from what you did before as a professor, then your consulting background, which it sounds like you did both strategy and integration. That's true. I'm combining theory and practice. And when you came to Stratsys, what prompted you to start acquiring businesses?

7:04I started my current role in the first week of the breakout of COVID. It's a perfect time. A great time to join a new role. Perfect storm. But because of this crisis, also an opportunity to transform it into an opportunity. And we took the first two and a half months. The first two weeks was I literally managed the company from a quarantine, from a small room. we said, okay, we are not selling because people stopped printing immediately because we are leaving from the consumables. People stopped printing and we leveraged this time and the capacity that people had to run, I don't want to use adjective, but it was an amazing process of reframing our strategy.

7:47What we have done is that we ran a diagnostic, which was one of the work stream. Then we build a strategy. then we construct a new operating model that will support the strategy and we resize the company in order to make sure that we are shifting resources into new things that we need like M &A. We did all that in two and a half months internally with our internal resources, with people that are within the company for years and know the industry inside out. Part of it was, A, we need to acquire companies. And I'll pause here and I will explain why. Everything starts with the why. Stratasys is one of the two pioneers of this industry.

8:33And it's a 30 years old company that in 2012 merged with, it's a merger of two companies, Stratasys, the American company. We are sitting in Minnesota here now and Object, which was an Israeli company. And this merger created the new Stratasys, which was the undisputable leader in the industry. But unfortunately, from the peak of 2013, 2014, which was the hype of the 3D printing, we started decline for six years till 2020. And this decline was not really explained. And that's what we have done in our strategic process. We found out that we were declining because we were not competing in the growing markets with the growing technology.

9:14So we were addressing only one third of the overall opportunity in our market because we are focusing on two technologies where the other three technologies that are very common in polymers, we are not playing there. And then you ask yourself, okay, how do I, and this is number one question in strategy, where do I compete? And we found out that we need to compete on polymer 3D printing, focusing on manufacturing. But practically, we don't have the tools to compete there. We don't have the tools because we are missing three technologies. And what happened in those five years prior to 2020 is that other companies with other technologies were growing where we were declining.

10:02It was clear that we need to be there. And in order to be there, the fastest way to address those markets, the fast growing market, was to acquire technologies. And that's what we have done. You saw this landscape and these other emerging technologies coming about, which eventually is creating new markets. That's where you had to change your strategy to be able to play in those new markets. Yeah. And the nice thing is that Stratasys is a great company. When we run the diagnostic, and this is how you identify the problem. What do you solve here for? We found out that when we are analyzing the deals that we closed and the deals that we lost in those declining years, it appears that we have a fantastic conversion rate.

10:47Almost every deal, it's unbelievable, but almost 95 % of the deals that we are bidding on, we are winning. And at the same time, we are declining. And competition were growing, but they were not growing because they were winning on our bids. they were winning because they were playing in markets that we will not exist there. So that was the obvious insight. We have to be in and cover the overall addressable market, not only two technologies. And the nice thing in additive manufacturing is that there is no silver bullet. It's not the car industry. You can go from here and, you know, we are in Eden Prairie.

11:24You can go to the Minneapolis, the MSP airport with any car, with a GM, with a Toyota, with a Mercedes and with the Audi. Each one of them will take you there. And 3D printing is not the case. If you want to print a mic or you want to print cell phone or you want to print a part for a car, you need a different technology. And if you don't have the right technology, you are not, practically, you are not competing. That's the why. All right. And that's where that shaped the strategy for you to build your case on executing M &A. Yeah, we had a strategy. And then we said, okay, In order to execute the strategy, we need to do a set of things.

12:02And we have a very, we build a very detailed plan, how to execute the strategy step by step. And the strategy had three phases. One of those work streams was about business development activities. And we built a framework and presented it to the board more than two years ago. So just a few months after the strategy, we presented to our board a framework of business development and M &A. And we said, there is a strategy, one tool to execute the strategy, a major one, is business development and M &A activities. Here it is. We are going to bring to the board for approval many different opportunities, but we promised one thing.

12:43Everything will be within the framework. That's what we have done. And that's why we also initiated the search for targets. Because once you have a strategy and a framework, everything is much easier. You're not opportunistic. You have a plan. And you want to fill holes or to accelerate some of the initiatives or the projects in your plan. Yeah, I like that. Tell me more about this framework. What does it entail? It's a very cool framework. It's about what do you do in M &A and why do you do it? So the way we build it, it's a three-by-three table that was derived from the strategy. I will not go into all the nine boxes, only three of them, because it would be too complex.

13:26But in general, we said, okay, what do we need to do here in order to fulfill our strategy? And our strategy is polymer manufacturing. We lead the industry into real manufacturing with 3D printing in polymers. That's a strategy. Very simple one. Polymer manufacturing. In order to be there, you need core technologies, which are the machines. you need material and software that support the machine because it's a trade-off between material, software, and printers in order to get to the best part. And you need a full workflow. What is a full workflow? I'll give you an example because we are addressing different applications.

14:08A full workflow, for example, we are printing one application, anatomic modeling, and surgical guides for surgeons. Before you go into the operations room with the complex surgery, you print the anatomic model. For example, separation of Siamic twins in Israel. We made many different prints of the anatomic model of the head where the Siamic twins were connected and with some surgical guides. And the surgeons are practicing prior to the operation. But in order to be there, there is a full workflow. You need to scan the organ. You need to translate it into a 3D printing file, a file that you can print.

14:55You need to interact with, it's called segmentation. You need to interact with the surgeon, with the doctor. You need to send it to printing. To send it to the surgeon, he will decide on surgical guides where he can drill or cut. and then is practicing on it and go into the operations. It's a whole workflow. So you need to make sure that there is the software, the ability to interact, the ability to transform the file, the ability that someone will print it, to send it back, to have quality control. This is the workflow. Do you have an example of specifically that workflow context to M &A? Park it for a minute, okay?

15:35Sure. Get back to the framework. The framework, we are now Stratasys we have a strategy to go for polymer manufacturing and really to transform this industry from a prototyping industry into a manufacturing industry and we focus on polymers we said okay what do we need we need four technologies which is a combination of something we can do internally because we had two technologies plus technologies that we will acquire that's the first layer the second layer is about add-on technologies material and software. So I need something that will strengthen my position. For example, if I am printing with a specific jetting technology, I need some visual recognition.

16:21I don't want to produce it or to develop it internally, but I can invest in a company that have some capabilities and I can adopt the add-on feature into my core technology. First layer is core technology. Second layer is investment in add-on features, software, and material. And then the third layer is partnership. I don't need to acquire, I don't need to invest, but I need to partner with someone that will help me to build the full workflow. Those are the three layers. The way to look at it is that if I want to achieve my strategy, I need a combination across those three layers. That's the only way to have fully use case across different applications without losing focus and without putting too much resources into it.

17:17So that was the framework. Two and a half years ago, we put the framework and we started to populate it with targets. And the rest is history. You turned your strategy into a framework, which made it easier for your leadership to follow along. Exactly. Every deal or opportunity had to fit it within the framework. Yeah. I still don't understand the workflow. Do you have an acquisition that fit into the workflow part? We have a strategy to go to Polymer Manufacturing. In order to be there, you need five technologies because then you are agnostic when you are in front of a customer. You need five technologies.

17:48As I said, no silver bullet. That's one. You need hardware. That's the technologies. That's the hardware. But you need also software, material, and unique added value features, which is not core technology. It's something that you add to the technology so you can deliver the best parts and the best prints. Okay, that's the second layer. And the third one is building a full workflow. What is a full workflow? If I need to build a part for an helicopter or an airplane, I need to make sure that I have a whole thread from pre-processing to post-processing and everything is traceable and I can capture the data.

18:28So that's what I need. Now, how do I fulfill it? We said, okay, for technologies, full acquisition. For material and software and add-on technologies, like the visual recognition, quality control, investment, with option to acquire in the future. And the third layer is only partnership with some type of investment in order to have an end-to-end workflow. I understand it. Okay. Thank you. Let's go layer by layer from the framework. First of all, we identified that we're lacking three important technologies in polymers. One is called DLP, direct light processing. The second one, stereolithography.

19:13And the third one, which is the most suitable for mass production, is high-speed sintering in powder bed. So the three technologies, and we'll not get into the details because it's M &A discussion. But we were missing three technologies. And then we said, okay, let's identify good targets and go for it. And that's what we have done. We acquired three companies that were in early stage, developed very unique IP protected technologies for those three areas, which in practice almost triple our addressable market as a company. What we have done is that we acquired them. All of them were at early stage.

19:54We made out of them a real product. and we put this product into our channels because we have the infrastructure. So you are buying technology, but we have the infrastructure and the coverage globally to make this a success. That's an example of the acquisition. In terms of the strategy evolving or changing, how does that come about? Is that built in to do some periodic check-ins, iterations? The fact that we have developed a strategy three years ago doesn't mean that we stop. It's still evolving. We developed a strategy, but we also developed a process how to assess the relevance of the strategy and the need to adjust it year over year.

20:37So we put in place a five years plan that we are adjusting every September, just one month before we start the annual operating budget. It's crucial for the success, both of the strategy, but also the M &A strategy, because things are changing. And I would say that many three things. One, there are market changes. Macro changes, but many industry changes. I'll give you an example. Some technology can catch up faster than the other. And they said, okay, I need to shift resources from one technology that I have to the other because here there is more excitement and more traction from the market side.

21:15So you want to make sure that you are shifting resources into something that is more promising and will generate more return. That's market change. The second one is about assessing your progress and based on your lessons from the year, adjusting your strategy. And the third one, I would say, it's customer and partner feedback. Those are, for me, the most important three things that really push the change in the strategy. The market is changing, and maybe you are running after a goal that is not any more relevant. It happens a lot, especially in industries like us, where to develop the machine can take years for a solution.

21:56Every year you need to check yourself. We do it twice a year. If the market didn't move to another place, that's number one. The second one is we are doing something and you need to have two feedback loops. One is internally. We had a target, we achieved it, we didn't achieve it. We have done better or not. And then to say, why? What have we learned? what can we do better or what should we adapt that worked well in one place and didn't work in another place. And the third one is about the second feedback loop is from customers and partners. You are doing something. They are the one using it. It could be that you are completely theoretical.

22:34And then your customers are coming back to you and say, hey, we need something else. And that's what we have done. We took those three as part of the five years plan and we changed. A great example of our change is that we shifted our strategy from being focusing on technology. Because at the beginning, what we were missing is technology. We shifted after a year, the focus into use cases because we added technology because we progressed. As I said, we already progressed. So what? You stick with the same strategy? The same North Star. We want to be in product, in manufacturing with polymer. The star, the North Star has not changed.

23:11However, the first step was to have new printers. Then second step was, hey, our customer told us you have great printers, but we need a full workflow that will be tailored to our application, our use case. So now we shift the mindset and now we are focusing not on having only the best machines, but having the right solution. So this is the involvement of the strategy toward the same North Star. Yeah, I like this example. And it sounds like it's a pretty proactive approach annually. but just as much effort as you did to build the original strategy, you're benchmarking it, gathering the feedback, internal, external, and also looking at the market, how it's changed.

23:53Very proactive. They're not sleeping alone. How do you work with your corporate development team? Corporate development is pivotal. When I joined, we put together a very strong team of corporate development with very clear goals and we divide and conquer. Some of them were focusing on searching for the core technologies, some on the material, software, and add-on technologies, and some of them on partnership. We divided it practically to two, three groups. Each one, it's a very small one, by the way. The whole team is, I would say, six, seven people. But we divided them. Each one had a very clear goal.

24:36Some of them were on the full acquisition. Some of them were on the venturing. Those are the investments, the second layer. And some of them were on partnership. And I personally is involved in it every beginning of the week. We have one hour corporate development up. But we don't start anything if it's not part of the strategy, the framework. And we always prioritize. That's why we have this meeting. It's a weekly meeting. We prioritize because there are so many opportunities. You have to prioritize because otherwise you lose sight and you don't close deals. Because if you run after everything, no way you will be successful.

25:14So all the time we are prioritizing. We are prioritizing both in terms of the opportunities, but also if we agreed on an opportunity, we also prioritize in terms of what are the issues we need to address. Because every acquisition or investment or partnership has some issues and the ability to identify the make or break or the ones that move the needle is critical in M &A. Not boiling the ocean because it's very easy to send a list of due diligence and boil the ocean to miss the most important thing. It sounds like prioritization applies throughout the life cycle of doing the deal from prioritizing the opportunities as you execute the deal, prioritizing the issues that bubble up.

26:01Yes. Now let's say I'm on your corporate development team. Give me some advice and what's the best way that I should be presenting deals to you to make sure I'm hitting on those particular things to make sure it's going to fit into the framework. Obviously, I think of the key things, right? Here's my case on why the financials make sense and things like that. But give me more beyond that. What are those real key things that you expect to learn about as the corporate development team pitches you opportunities? Teach me how to pitch to you. Historically, and I did many MNAs even before I joined Stratos, I was always looking at three things.

26:35but it evolved since I joined Stratasys. The first thing was, is there a real need? Because you are acquiring something and you want to make money out of it. You want to make sure people really use it. So you have to ask yourself, is there a real need in investment and in acquisition? So this solution, there is someone on the other side that you deliver to him value that no one else currently can deliver. And he really appreciates this value. That's must. Then you ask yourself, especially in our business, Is there a technology or something that is unique? And last but not least is who are the people?

27:11Because people is everything. Everything. That was my preconception when I joined Stratasys. I always check those three. But when you're leading a company, I think that I a bit adjusted the framework. The first thing that I'm asking, and also I would like that my business development team will ask, is that part of the strategy? is this acquisition or investment of partnership will accelerate and will make us more successful on the strategy. Number one, otherwise you lose sight. The second one, remember, manufacturing. This is the strategy. I don't do anything that don't take me to manufacturing.