- July 14, 2019
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
- In the current economic activity where capital is cheap, cash reserves in companies are high and demand from shareholders to invest the excess capital in inorganic expansions, almost every company from startups to large companies are involved in M&A.Yet many companies fail to achieve the desired value that they had envisaged during the deal rationale and generate required shareholder returns.
- A recent McKinsey report had stated that companies that does M&A regularly have a higher success rate than the companies that have an adhoc approach towards M&A.In addition, the report states that the companies that are involved in doing small deals regularly have demonstrated a higher Total Shareholder Returns than compared to their peers who had an organic growth strategy or selective acquisitions approach.Companies that do an average acquisitions of around 2 deals per year on average for a period of 10 years with none of these acquisitions having a deal value of more than 30% revenues of the acquirer had shown a improvement of 30% in their market capitalization.
- It is also very apparent that companies resorting to a big bang M&A approach where deals are done randomly and deal size are more than 30% of the acquirer revenues fail to demonstrate success with many of these deals causing value erosion.
Secret sauce of a Programmatic M&A approach
So what is the secret behind having a programmatic approach?
- The famous adage that Practice makes it perfect is applicable here.To get success in M&A, there has to be a systematic approach to it with an organization infrastructure along with the availability of the right resources who can add value at every phase in M&A life cycle.
- Companies with programmatic M&A have an established process for each phase of M&A right from Strategy and Sourcing to Due Diligence and Integration planning.
Strategy and Sourcing
- There has to be a strong alignment of the corporate strategy in building the deal pipeline.Companies with programmatic M&A approach follow a proactive approach in building a deal pipeline by arriving at a list of targets that they want to acquire rather than looking at Bankers to share the targets that are available in the markets.
- Most of the targets that the acquirers want to look at, may not be even available for sale, hence the acquirer needs to be proactive to reach out to the desired targets to build a relationship and evaluate if the target can be a good strategic fit to the acquirer.
- For instance, if the acquirer wants to expand its presence in Europe, then it needs to be sure of the capital that it is ready to pay for the deals along with doing a detailed analysis of the current market trends and customer segments in Europe.In addition, the target also needs to look at the regulatory aspect to assess if the deal may face issues in getting appropriate approvals.Looking at Europe, the acquirer might have come to a decision of looking at Nordics as a favourable region overall in terms of market attractiveness, regulatory standpoint, availability of skilled talent and customer segments.The acquirer also needs to understand its competitive advantage and how it can add value to the target as a parent company.Basis this analysis, the acquirer can shortlist a few targets that satisfies all the necessary criteria.
- The process of Target evaluation has to be an iterative process between the business leads and M&A team.This would indicate that the acquirer follows a streamlined process to arrive at Targets against having an adhoc approach.This iterative approach increase the probability of success in completing the deal and limits deals that are not relevant, to be eliminated at the Target evaluation stage itself rather than spending money on Due Diligence.
Due Diligence and Integration
- The acquirers following a programmatic M&A approach generally plan for Due Diligence and integration much earlier than closing.They would decide which process needs to be redesigned and integrated to realize synergies.They also decide the organization structure of the combined entity, governance structure/decision making and the target operating model of the combined entity.The acquirer would identify the target IT systems that shall be retained post acquisition.
- The acquirers having a programmatic M&A approach generally identify the cost and revenue synergies opportunities very early in the transactions and assign owners who will be accountable for realizing those synergies.The acquirers would have resources available with necessary skills and capabilities to execute these synergies.
- The acquirer would also be assessing the cultural fitment and risks between the parent and target company very earlier in the process.The acquirer would look at the working environment, hiring strategy and retention process of target company.If there is a huge difference in culture/way of Working between the acquirer and target, then the acquirer would choose not to integrate those process in order to prevent any disruption that will destroy value.
Benefits of having a programmatic M&A approach
- Having a programmatic M&A approach where the acquirer would execute 1-3 deals on an average annually provides a lot of benefits.The acquirer shall have an external facing approach and identify the key market trends in his industry that are gaining demand.The acquirer can then rebalance its portfolio based on the findings to reallocate capital and resources to those businesses which are in demand and starving those business which are underperforming.Then it can allocate capital for acquisitions for those businesses that the acquirer has decided to focus/strengthen.
- The acquirer can do additional capital investments on those businesses which have a market demand.More capital investments either through R&D expenses or hiring Salesforce to increase sales would increase revenues.Firms whose Capital expenses/Sales are high, generally show a higher growth than their peers.
- Having an end to end M&A operating model spanning from Strategy and Sourcing to Due Diligence and Integration planning would have a higher success rate than having an adhoc approach towards M&A.
- Successful acquirers are investing in their M&A capabilities as rigorously as they invest in their Sales and delivery functions.This ensures a streamlined M&A approach with high probability of closing the deal and with a higher success rate in realizing the synergies.
- Technology companies use a CRM like tool to build their M&A pipeline.This shall track the target companies that the acquirer wants to acquire along with various stages of the acquisition that a deal currently is in.This is accessible to the top leadership who can track the status of each M&A deal in their organization.
- A programmatic M&A approach helps build the M&A capability within the organization with the right organizational structure and right skills in order to improve the odds of success.This is very important in the current business environment due to the rapid changes in the current business model that are no relevant to growth objectives.
[…] Programmatic M & A approach when a firm makes about two or more small or midsize deals in a year, acquiring significant total market capitalization, is more successful. When a company executes a significant acquisition where the original deal size is more than 30% of the acquirer’s market capitalization, most of its portfolio story is by this large bet. Such deals are often risky and have high chances of failure. […]