Value Creation in Mergers and Acquisitions
Successful acquirers take a strategic, long-term program to value creation in mergers and acquisitions. They spend time and resources to develop an end-to-end M&A approach, including a broad understanding of how M&A assists their overall strategy. Further, they build the merger management expertise needed to execute, and the long-term capability development that equips them to perform consistently.
Assign M&A a core platform of the overall strategy—They don’t depend on opportunistic M&A.
Many acquirers retreat to M&A as a move to acquire growth or obtain an asset opportunistically. They respond to ready deal flow to spur activity, without an accurate knowledge of how the deal will generate value.
The most qualified acquirers implant M&A in its strategic planning process. They expect businesses to recognize where inorganic progress is needed to develop the firm’s strategy. After that, they turn these moves into actionable deal hypotheses that lead candidate scanning, prioritization, and process evaluation. Only after pressure-testing and prioritizing these cases do leaders produce lists of M&A targets that match the investment themes within the overall strategy.
Continually refine top-priority deal applicants with a programmatic plan, not one-off exercises.
The most significant acquirers source and generate possible M&A suitors continuously and expand them across all steps of the M&A process. These exercises continue from leading a rapid pre-diligence analysis of prioritized targets, including high-level valuation and evaluation of synergy potential, to proactive outreach to target companies, backed by talking points on the acquirer’s partnership insight.
Appraise the complete spectrum of possibilities, including partnerships, joint ventures, and alliances, to realize scale and capabilities.
Extremely innovative businesses like pharmaceuticals and high-tech have long relied on joint ventures and alliances to strengthen their businesses. As the industry progresses further into digitization and advanced analytics, JVs and partnerships are growing much more appropriate. This trend is particularly relevant for regional firms that need digital and M&A sources compared to the more substantial companies. In precise, to win in digitization, several businesses will have to evaluate the full extent of partnership opportunities, from full joint ventures (with or without equity) to strategic partnerships to contractual alliances.
Over this span, firms require a definite strategic purpose and business case for the partnership (versus valuation for a deal). This case will include a methodology for valuing every partner’s participation, a sharp and aligned idea for the end state, a pre-launch partnership structure, and aligned governance systems. This methodology should enunciate distinct management KPIs, transition and operational support agreements, and restructuring and exit terms.
Leverage divestitures to add value creation—don’t purchase without realizing the potential for a concurrent sale.
Companies engaged in divesting, not merely acquiring, achieve higher shareholder returns than the businesses concentrated on acquisitions only.
Triumphant acquirers apply binding mechanisms like the budget process to examine the landscape of potential assets to trade. Further, they actively develop the assets for sale based on a perception of their value to a more natural buyer. These champions also give personal regard to enduring the stranded costs that can realize substantial value leaks for business.
Authorize a value-added integration management office (IMO) directed by an integration CEO—don’t execute integration as a checklist activity.
Many managers say that they have a merger playbook and understand how to execute. However, the numbers show that companies have grappled with generating value in M&A.
Overcoming the odds demands more than checklists used in preceding integrations or third-party means support. M&A champions institute an IMO and authorize an integration CEO to tailor how they run every integration effort to deal rationale and sources of value. For instance, winners profoundly reduce cost synergies envisioned exceeding 24 to 30 months because they recognize the significance of achieving the lion’s share of the synergies in year one. Champions further move purposefully to take charge of the acquired business, particularly its decisions, portfolio management, and back-office systems and expenses.
Value creation in mergers and acquisitions: Don’t stop with the due diligence figures.
Neglecting to refresh synergy expectations during integration is one of the several common, but avoidable, traps in any transaction. The deal team usually fixes synergy targets through due diligence, develops the goals into business operating budgets, and formulates a checklist-based PMO process to watch progress against the targets.
M&A winners always beat due diligence synergy assessments by 200 to 300%. They reassess synergy potential during the life cycle of the transaction, particularly pre-close, accelerating hard to tap upside and transformational synergies. In successful deals, this strategy usually means splitting synergy-capture exercises into two time-based categories. The initiatives that drive swiftly to produce a maximum bottom-line result in the first year (and often achieve 50-70% of the cost synergies). The more significant, longer-term actions are typically technology-dependent. Defending the base business is a crucial element of value capture that usually goes unappreciated in mergers.
Value creation in mergers and acquisitions: Develop an objective technology roadmap.
IT facilitates about 70% of a company’s cost synergies. Without deliberate planning, it can quickly take 50% longer than expected to obtain the value and can attach incremental expenses of 50%-100% to what the firm then spends on IT. Making hard decisions on IT integration is particularly challenging because they rely profoundly on third parties to support their multiple custom-built legacy platforms.
Successful acquirers make IT integration a strategic preference, rather than a PMO-managed integration plan. They form an overall technology outline aligned with their strategy, sources of deal value, and customer-service specifications before starting costly IT integration actions and project management. The firm must decide as early as possible what abilities of the target the deal should protect and what are the critical target-specific attributes (people, processes, and platforms). This decision ensures the integration effort can preserve and sustain those characteristics to scale.
Practice a systematic method for identifying cultural concerns and change management
Mission, vision, and values can look very comparable across companies. Managers frequently retreat from pre-deal announcements assured that the cultures of the businesses associated are very alike and that fluid organizational integration will be a breeze. This assumption is a significant cause of the deal breakdown.
M&A leaders don’t disparage the significance of proactively tackling the difficulties entailed in integrating cultures. They know that cultural significance goes beyond values. They come live in a company’s management systems – the way that work gets completed, such as whether decisions are made by unison or by the most senior executive.
If not addressed correctly, cultural integration hurdles inevitably lead to disagreement among leaders, reduced productivity, increased talent attrition, and spent value. M&A leaders rigorously estimate top management practices and practical norms early and plan the overall plan to align practices and alleviate risks ahead and regularly.
Successful cultural integration usually presents itself to an added area of opportunity in scale mergers. In these cases, the consolidation itself gets leveraged to bolster critical behaviors that may be wanting in the acquiring organization. This process produces not just an integrated culture but putting a halt to harmful practices that might have subsisted pre-integration. In these conditions, leading organizations choose to assess the cultural behaviors, and more broadly, talent management and exercise, holistically across both organizations. Then they set a definite goal for a merged culture that will adequately enable the new organization’s strategic objectives. This approach is especially significant when the acquisition brings in radically unique talent pools that may have varied definitions of success, progression, and experience.
M&A leaders likewise don’t sacrifice on prescribed change management planning. They exert a positive and disciplined approach to each stage of the integration, involving stakeholders through the process and securing a dedicated handoff period for the transition to steady-state.
Value creation in mergers and acquisitions: Develop capacities for coming deals
M&A leaders approach each transaction as an opportunity to enhance their M&A team’s skills and expertise. In M&A, talent is frequently arising as one of the principal sources of competitive edge. Firms that earmark human capital, as well as financial resources, strategically and dynamically stand to create a meaningful economic gain.
After completing a deal, M&A leaders are meticulous in gauging success. They mainly track deal impact across decisive KPIs, such as lower cost-income ratios, increased revenue growth above base trajectory, and more productive use of capital.
Value creation in mergers and acquisitions – Takeaways
Acquirers need to make building M&A and integration abilities a top preference. This approach asks for establishing their talent development needs comprehensively with executive training programs, leadership development, functional capability-building, coaching, to formulating the talent development “playbook.”