An Introduction to M&A Integration In Capability Deals

M&A Integration In Capability Deals

M&A Integration in Capability deals is distinct from the more popular growth scope deals that include acquiring businesses with faster-growing products or in faster-growing markets for an instant growth uplift. Capability deals are regarding linking the complementary abilities of the acquirer and target for a unique value proposition or product development to create future growth. That value creation is more difficult to quantify than both cost synergies (scale) or revenue synergies (growth scope).

We observe three characteristics of the capability deal: those directed at extending a current competitive advantage; those targeting digital possibilities; and those that endeavor to redefine business through cross-sector or cross–value chain moves.

Capability deals is a separate breed of M&A

M&A Integration in Capability deals begins by recognizing that they are distinct from what most acquirers may have effected and encountered before. Capability deals are unconventional in two significant ways: the aspects of the target company itself and the origins of value creation.

In Capability transactions, the target assets are likely to be smaller in size and more entrepreneurial with an Agile working culture. That is, with wholly separate ways of working from the acquirer. The target’s value remains in the people who provide functional knowledge of the technology, R&D ability, or customer insight—an expertise that the acquirer does not yet have.

Second, the value in capability deals is not as apparent and evident as in scale and growth scope transactions. The value in scale deals is essentially around cost synergies and in growth scope deals principally around revenue synergies. The value in capability deals originates from producing a new-to-the-world value proposition or innovative products for possible future growth.

The acquirer and target carry complementary skills to the table, and value creation rests at the junction of these capabilities. While the acquirer’s business model describes the industry business model as it holds today, the target’s skills present a future-back view of what could be—and both must operate together to accomplish that vision.

This kind of deals is a fresh territory to operate for most acquirers, even extremely skilled ones. Many acquirers exercise the conventional method of not integrating the asset in the first few years. It is an ineffective but straightforward solution. No value gets generated, and it makes it challenging to begin integration once the glue has set. The most skilled acquirers choose the appropriate steps while the cement is still wet.

Collective growth planning and promoting collaboration

Successful capability acquirers understand that they cannot solely rely on their established integration playbooks. They need to employ the right mindset by staying open to learning from the smaller target and assuring an equivalent share of opinion for the target management.

When Microsoft started on a list of capability deals under CEO Satya Nadella, cultural openness and transformation was a chief enabler for deal success. The company emerged from a “know-it-all” culture to a “learn-it-all” culture. Certainly, underpinning this transformation was the underlying belief that the firm wanted these acquired capabilities to stay growing.

Additionally, successful acquirers deliberately push collaboration right out of the gate. It is how they discover to work collectively. It entails using the time needed to get to understand each other, aligning the topmost leadership on the expected joint vision, and the dictates of engagement.

When it reaches down to concrete steps, a few things need to occur by deal close to all deal classes—for instance, closing the books, consolidating financial reporting, communicating to employees, and additional stakeholders. These activities have zilch to do with integration or the absence of it.

Successful acquirers get three actions right in capability integrations.

  • Generate a value-creation plan together with the target leadership.
  • Shield the target’s talent, culture, and ways of working, and discover ways to scale it to support the value-creation plan.
  • Contemplate operating model changes in aid of the value-creation plan—both hard and soft tactics to get the organizations to work collectively.

One doesn’t drive with functional integration in capability deal integrations; you start with the value-creation strategy. Given the valuation multiples involved, the actual value rests in the revenue potential. If you pursue after minute cost synergies, you risk using up precious and limited management bandwidth on things that don’t matter. That is a dropped opportunity.

The window before and quickly after deal close is the exact breakthrough moment to establish a consistent tone. Successful acquirers get the apt people together, begin with exercising a future-back view of the customer, expand the product/service proposition in aid of customer needs, and apply that to apprise decisions around where to build relationships. If functional integration is needed, it may be a few years down the line, when the product or service proposition is fit for rollout.

M&A Integration in Capability deals should be different from a conventional path in the following steps.

The acquirer should produce a value-creation plan together with the target leadership:

  1. Early joint sessions should concentrate on knowledge transfer without leaping ahead to opportunity brainstorming and implementation planning.
  2. The value-creation plan should be driven and owned by the target leadership and facilitated by acquirer management.
  3. The value-creation plan should get turned into an action plan, including both product development and go-to-market initiatives, and the enablers expected to take action.

The acquirer should shield the target’s talent, culture, and techniques of working:

  1. It should invest in building relationships and welcome the new leadership team as equals.
  2. People-first precedences, such as engagement and retention strategies, should be handled distinctly from HR onboarding exercises to assure dedicated focus.
  3. Gatekeepers should initially be selected to defend the target management from immediate requests from the acquirer team.

The acquirer should contemplate operating model shifts in aid of the value-creation plan:

  1. Functional integration should get reduced to what is imperative for operationally crucial tasks.
  2. Furthermore, the acquirer needs to exercise a “how can we help you?” attitude that establishes the mood in the early days of integration. Joint growth teams should get formed to draw together the right people from both sides, with proper governance, to ensure the successful implementation of the growth plan.

A purpose without a strategy is merely a fantasy. Successful acquirers starting on capability deals proactively transform the deal thesis into an action plan. They leverage a capability deal’s enormous potential to transform their organization and leapfrog the rival(s).


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