How can successful M&A Integration extract maximum value?

M&A integration create maximum value

M&A integration determines the success of the M&A transaction. The integration strategy needs to be aligned with the strategic intent of the deal.
For legacy companies, the big challenge is to achieve growth as most of the companies lag behind the global GDP growth. Hence companies look at M&A and other inorganic strategies for growth.Inorganic growth has become much more challenging recently as valuations have soared.Large deals transaction with value greater than $1 billion have proved especially difficult.
Buyer acquire target companies to expand their portfolio, building scale and diversifying the portfolio, acquire fast growing companies in the buyer’s core competencies to accelerate growth or to place a bet on finding growth in categories adjacent to the core.
Recent studies reveal that transactions where buyers look to acquire fast growing companies in their core competencies produced the highest Total returns to shareholders where as when the buyers look to acquire companies in the categories adjacent to the core, the total returns to shareholders is the weakest.This clearly indicates that acquirers need to look at target companies where they have a clear understanding of their business and operating models.
Traditionally, Most of the companies do M&A to expand their portfolio.Acquisitions done for moving to adjacent business or fast growing companies are rare.Recently more acquisitions are done for buying adjacent and fast growing companies because they are few quality targets available and the valuations have soared. So acquirers are looking to widen their M&A reach.

Portfolio Expansion in M&A integration

  • Portfolio expansion is a traditional M&A scale play focused on acquiring a brand portfolio from a direct company.In this deal type, the acquirer understands the target company’s business and operating model.Hence the formula to extract value is largely known.These deal types are generally attractive for market leaders that are profitable but are seeing slower growth recently. Such acquisitions produce a direct and material impact on the performance of the acquirer.
  • Portfolio expansion deals are mostly done for cost synergies.The synergies are through cost savings achieved in operations and General and Administrative functions through the use of scale and broader portfolio, higher negotiating power with suppliers.In this digital age, cost synergies and scale aren’t enough.Acquirers look for target companies that provide access to marquee customers in fast growing segments.If this can be achieved then this acquisition strategy will provide both growth and margins.

Acquire fast growing companies

  • In this digital age, traditional barriers to entry no longer exists. If the company has a compelling value proposition and provide services that attract millennials, then these companies can achieve above high rate of market growth.
  • Acquirers prefer to acquire brands with strong prospects that can make financial sense rather that look at inhouse innovation for success.The challenge to success in such deal types lies in the legacy company leveraging the target company’s growth platform without destroying its unique value proposition and appeal or scaring away its critical talent.The key to success lies in protecting the secret sauce of the target company.

Betting on Adjacencies

  • Acquirers who are forced to drive growth and have substantial cash reserves but not able to find target companies in their core segment look at targets from adjacent categories.The ideal target should be similar enough to protect the risk involved but different enough to provide access to new customers or product categories to bring high diversification and growth.This deal type makes sense of acquirers who want to diversify into a new category that offers high growth potential and have the resources to make the acquisition.
  • The adjacencies deal types have a lot of issues.Limited business overlap would mean that the scope for cost synergies is minimal and the lack of understanding about the target business would hinder high growth.As these transactions don’t have a straightforward deal thesis, these deals often fail to realize any value.
  • As the acquirer and target companies are focusing on different customer segments, the possibility of capturing revenue and growth synergies is limited.The fundamentals of successful integration is critical by setting up the Integration Management team staffed with talent and to go after value early.The integration team needs to protect the topline by not complicating the Day1 and being sensitive to the cultural aspirations of the target companies is critical to be successful in integration.

M&A Integration strategy for different deal types

When the deal type is Portfolio expansion, then following are the critical success factors for Integration.

Portfolio Expansion

  • The integration mantra is always to protect the base revenues of the target company and minimize disruption. Inspite of this, many acquirers experience topline erosion due to the rapid consolidation of sales forces to achieve an early and material synergies through headcount reductions.
  • Due to the overlapping customer base, acquirers typically look to prune their sales headcount as acquirers look to consolidate their key account management teams.This consolidation of Salesforce can be disruptive because the sales team maintain a deep relationship with their customers and there is a chance of losing the best customers as well as the best sales people due to this decision to consolidate.
  • Acquirers should prioritize stability and continuity of customer relationships. They can strengthen the customer experience by communicating early on the merger and then retain both sales forces to keep them working in an organized manner.Once the ground situation is normalized, then acquirer can look at headcount reductions.

Cost Synergies and Invest on target capabilities

  • In portfolio expansion deal type, realizing synergies from scale is the most critical as Operational synergies account for two thirds of synergies in portfolio expansion plays and determine their financial success.Companies can achieve operational efficiencies faster by following two approaches.
  • Companies need to do a cost benefit analysis of developing temporary bridges that allows rapid execution of Operational synergies. Hence delaying operational synergies till the integration of legacy systems is completed is risky and might never materialize.
  • Acquirers can use integration as an opportunity to evaluate its procurement process and identify opportunities to broaden procurement’s scope, depth and sourcing tactics.
  • When the synergies are realized, acquirers can either return back the cost savings to shareholders or use this savings to invest in target company’s capabilities, redesign their operating model to enhance agility or align better with market needs.Companies that return excess cost savings back to shareholders experience a decline in growth, hence it is wiser for acquirers to invest their savings in sources of growth.

Review the acquirer and target company’s portfolio

  • Acquirers need to identify roles for each portfolio, customer segments to target and ways to target them in order to gain clarity.
  • Some portfolios can be aggressively grown while some portfolio needs to be discarded due to high costs and limited potential.A cautious approach needs to be followed as these decisions would require careful customer management.

Identify growth areas in Target

  • There are lot of processes where target would perform better than acquirer. Hence the key to successful integration would be to choose the best approaches objectively.
  • The benefits to this approach would include improved processes/systems, high talent retention and faster cultural integration.

Acquire fast growing companies

When the deal type is to acquire fast growing companies, then the critical success factors for integration are:

Add more value in M&A integration

  • The acquirer must understand its value proposition to the target which is to invest significant funds, add capabilities and provide access to its sales force.Acquirers need to be very careful about the strategy to drive growth and know where to give support and where to have the target business operate independently.
  • The acquirer needs to provide the target company considerable freedom to pursue growth and innovation while providing backoffice infrastructure, marketing and sales support for the target.

Protect the target brand during M&A integration

  • The acquisition rationale is mainly due to the target brand and its loyal customers.For small companies, their brand is often linked to founders identity, so the role of the founder and how that role ends are critical issues to address.If there is a perceived threat to the brand continuity, then there is every chance of customers and employees to quit.
  • The acquirer can leverage the target brand to sell wide range of its products/services. Integrating the target brand with the acquirer portfolio very quickly risks destroying its appeal.Active brand communications and slow approach to expand the portfolio is key to avoid this risk.

Retain target firm’s innovation during M&A integration

  • The acquirer needs to understand the target company’s innovation process and who drives the innovation.The acquirer needs to protect the target company’s sources of innovation and also need to leverage the target company’s innovation sources in its portfolio.
  • Startups are risk takers and take a fail fast iterative approach to innovation. For legacy companies, risk taking is not their DNA.Hence acquirers must devise ways to protect target innovation DNA without sacrificing it’s own quality and safety standards.

Employee Integration

  • The deal rationale for acquiring fast growing companies is growth.It is very easy to realize synergies in HR, Finance, Legal and IT but integrating the core businesses is harder.Employees in critical areas like Design, Sales and Marketing are crucial to preserving the value of the deal.
  • The founder is the most critical factor in this deal type.Employees who are loyal to founder do not want to work in a big corporation.Hence getting the right people to stay in the organization post acquisition is difficult. The appeal for retaining employees needs to lie in using their skills across the larger organization and look to achieve growth far beyond the reach of the startup.

Betting on Adjacencies

When the deal type is to grow by acquiring companies in the adjacent categories, the critical success factors for the integration are:

Seek clarity on the value drivers during M&A integration

  • In this deal type, the traditional synergies will not be successful and hence buyers need to think creatively about value creation.
  • The biggest challenges in acquiring adjacent companies lies in identifying how to realize meaningful synergies by combining businesses with different value chains.As these targets need to remain independent post acquisition, the synergies in procurement, administrative and in supply chain are limited.Hence the deal need to generate substantial value through revenue synergies.

Don the hat of Private Equity Buyer in M&A integration

  • As the target company is in a different sector, the synergy potential is limited.Hence the deal has to make financial sense in other ways.
  • The acquirer needs to strategically evaluate the target company’s growth profile.The acquirer will get into such a deal type only when the target company is operating in a sector which is attractive, profitable and has a higher growth potential than the acquirer sector.It would be good if the target company is a leader in its segment and is far bigger than its nearest competitor. The acquirer also needs to look at investments in capabilities to further improve the target company’s growth rate.
  • As the synergies are limited, the target should generate stand alone cash flow after making transformational changes.The buyer needs to follow the Private equity buyer’s approach to cost budgeting, lean processes and functional transformational improvements to generate growth.

Show Patience

  • In case of Adjacencies, the value capture generally takes a longer time than a portfolio expansion deal type.In addition, the target company also require significant additional investments.
  • Since the value proposition in this deal type is often fuzzy and evolving, the deal makers should not evaluate these deals against traditional synergies timeline of 18-24 months.These deals take a longer time to generate value.

Key questions to be asked before M&A integration

Companies contemplating M&A integration should evaluate their ability to execute successful transactions by asking following questions.

  1. If M&A is a key driver to realizing growth aspirations, then which M&A would drive the most value and deliver growth?
  2. Does the buyer have integration execution capabilities required to undertake the selected M&A play?
  3. Does the buyer have resources, talent and leadership to carry out the integration?
  4. Is the acquirer organizationally ready to absorb the target company?