The secret to a Mergers and acquisitions (M&A) Turnaround Strategy?

Mergers and Acquisitions (M&A) turnaround strategy

Mergers and acquisitions (M&A) turnaround strategy involves acquirers to turnaround the target company performance to add value.
Turning around a company is in itself very challenging.Similarly executing an acquisition is also very challenging. When we combine these two, the odds to success are low.Acquirers that have achieved turning around their acquisitions have achieved higher Total shareholders returns along with high market share and growth.
We will list out critical success factors that are important to successfully turnaround the declining target company post acquisition.

Rise in mergers and acquisitons (M&A) Turnaround strategy

  1. Companies that struggle to achieve organic growth resort to acquisitions as an inorganic growth strategy to expand market share, gain access to new markets, customers and new products/services.As the global economic growth rate is starting to decline, followed by political issues like US China Trade war and changing customer preferences, acquisitions is an important growth strategy for legacy companies to stay relevant.
  2. Disruptions in market due to Digital followed by changing business and operating models along with changing customer needs have resulted in companies losing their market share to new age companies.Legacy companies whose shareholder returns are deteriorating needs to restructure their businesses to regain their lost market share to competitors. These companies require a successful turnaround strategy.
  3. With the global economy slowdown and volatility in stock markets, the proportion of acquisitions that involve turnarounds will increase.
  4. An acquisition needs a turnaround when the acquired company display a decline in their revenues before the closing of the deal.

Selecting the Right target company for Turnaround

  • Acquirers that acquire companies which require a turnaround need to be sure that they are the right partner and can add value to target company post acquisition. Hence selecting a right target company would be extremely important.
  • It is preferred that these target companies operate in the same sector as the acquirer so that both companies have the same operating and business models.
  • When both target and acquirer have the same Environmental, Social and Governance policies, then it is highly likely that their culture and way of Working would be similar.
  • In the acquisition that involves turning around the target company, the acquirer should ensure that the target company growth has not nosedived. In this case the time and effort required by the acquirer to turnaround the target company would be very high.

Success factors for mergers and acquisitions (M&A) turnaround strategy

Focus on increasing R&D Investments

  • The R&D investments needed is different for each sectors.Sectors like Technology and Healthcare require high R&D investments where as sectors like Construction would require less investments.
  • Companies that spend more on R&D than their industry average display a superior financial performance.This is because the products of these companies have higher differentiation than its competitors.
  • Hence acquirers that invest by increasing the R&D capabilities of the target company have higher chances of adding value.These investments increase the innovation capability of the enterprise.

Have a Short and Long term vision

  • When a buyer acquires the company that needs turnaround, a majority of the initiatives post closing of the deal is focused on restoring the target company back to growth.
  • While these short term initiatives are important, acquirer should not lose the long term vision of the deal.Hence acquirers should take advantage of any opportunity that requires additional investment to grow revenues and expand market share.

Have a well defined purpose

  • Acquirers should not focus only on the financial parameters of the deal or other metrics like gaining market share.
  • While these are important, it is important for acquirer to build a long term purpose of what the deal is set to achieve.This would serve as motivation for employees who would engage and align their goals towards this well defined purpose.

Set ambitious synergy targets

  • Acquirers should set ambitious synergy targets in order to add value post acquisition. This is more important when the acquirer overpays for the transaction.In that case, synergies needs to be achieved to justify the transaction.
  • A synergy target of ~15-20% of the revenues of the acquired company would be ideal.Anything less would mean that the acquirer integration team has not put efforts while anything more would have diminishing returns.

Willingness to act quickly

  • Acquirers that integrate their acquisition faster have a higher probability to succeed.Delay in integrating the target company would result in lost revenues.
  • Acquirers need to restructure the combined entity post acquisition to reduce cost and gain revenues.Companies which have a high restructuring costs in their financials in the immediate quarter after acquisition perform better in adding value.
  • There are two benefits to a speedy integration.It frees up the excess costs that can be used for high value initiatives.The momentum with speedy integration would continue to extend to year 1 and 2.Hence successful companies achieve 25% of their revenues and margins objectives in the 1st year of the closing of the deal.

Conclusion

  1. Individually corporate transformations and acquisitions are challenging.Mergers and acquisitions (M&A) turnaround strategy combines both of these risks.
  2. The odds to success for Turnaround M&A is low, but companies which have achieved success have beat the market share and were successful in displacing their competitors.
  3. By focusing on initiatives that have the largest impact on the final outcome of the deal, acquirers can design deals and integration programs that capture more value.


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