Why You Should Spend More Time Thinking About Programmatic M&A

Inadequate diligence is the root cause of M&A transaction’s failure

Programmatic M&A

A slowdown in the economy could be an excellent time to step up the Mergers and Acquisitions (M&A) activity. Companies will proceed to do mergers and acquisitions (M&A) to develop their product or service offerings and to obtain new intellectual property or technology capabilities. Most M&A deals fail. McKinsey’s research has found that acquirers have a higher success rate when they close many small transactions regularly. This method creates more value than those closing occasional large deals. McKinsey describes this approach as programmatic M&A

Companies following a programmatic M&A approach carry out acquisitions over the years and have become masters of the art of identifying, negotiating, and integrating acquisitions. Most programmatic M&A activity falls into two categories: roll-ups and growth. Roll-up programs tend to be safer and lead to slower, contained growth because they involve the systematic acquisition of smaller businesses competing with acquirer in their area of core competency.  

Growth-focused M&A activity entails going beyond the areas of essential expertise and is risky but can also lead to far more substantial rewards if the acquirer gets it right. With growth-focused M&A, buyers are looking for strategic adjacencies to their core competency areas so they can move their business into new, complementary areas.

What programmatic M&A do differently

The four steps of M&A transactions are: 

  1. Strategic sourcing, 
  2. Deal execution, 
  3. Integration, and the 
  4. M&A operating model.

In all these four stages, programmatic acquirers exhibit the more pervasive application of specific practices that are unique and set them apart from their peers. They focus on building an end to end M&A operating model with clear performance measures, incentives, and governance processes.

In the M&A strategy and sourcing stage, successful acquirers align their M&A strategy with corporate strategy. They reallocate M&A capital regularly to the business units that align most with their overall strategy. They also have the clarity on which assets to buy and sell to realize their company’s M&A aspirations. This clarity allows them to grow their portfolios more proactively.

During due diligence and deal execution, programmatic acquirers follow an established process. These processes enable them to make go/no-go decisions at each stage of the deal. They dedicate more time aligning people, getting buy-in from leadership, and developing measurements for the new company’s vision during the integration process. Getting buy-in from senior management is vital to building trust. Acquirers manage it by using time effectively, cascading key messages throughout their organizations. 

Any CFO who’s overseeing programmatic acquisitions will want to have an integration team working in accord with the other groups involved in scouting out and undertaking the due diligence on deals. The integration is critical because of how well the buyer absorbs the company into its operations determines whether the transaction ends up growing their company in a way that increases its profitability.

The toughest part of integration isn’t the systems but the people, especially when it comes to technology companies, because its the key people who make or break the companies’ success. 

Finally, when it comes to M&A operating model, acquirers develop ongoing internal structures and processes for M&A by establishing clear ownership for each phase of M&A. They codify knowledge gained from past M&A pursuits and develop playbooks in each stage of the deal process. This experience helps them to follow best practices for future deals.

How can companies improve the Programmatic M&A success rate

Companies following a programmatic M&A program can enhance their odds of strategic success. When employed successfully, this can lead to value creation. A programmatic approach won’t work if companies don’t treat M&A as a permanent capability.

Companies need to have a centralized and dynamic process for evaluating prospective deals. They should always be scanning the environment relevant to their area of focus, identifying the companies that could make good acquisitions, and have a strategy for when to make their move. The acquirer should identify the target company well enough, understand its untapped value, and how they can access that value in a way other companies can’t. That’s why deals that make little sense on the outside — like a recent $4 billion acquisition by PayPal of a company that makes only a fraction of that in revenue a year and appears unlikely to make a profit soon ​ might make much sense.

Companies should establish a central M&A team that has a mandate from the CEO to work directly with the strategy and corporate finance functions. The central M&A team should co-ordinate with individual business units and work together. They should streamline handoffs between the diligence and integration teams so that early synergy findings inform later integration timelines and financial goals.

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