- April 19, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
M&A roadmap post-COVID-19
Significant mergers and acquisitions (M&A) manage to get the most prominent headlines, but, as McKinsey research shows, managers should be spending attention to all the small transactions, likewise. These smaller deals, when proceeded as an element of a planned and systematic M&A program, direct to produce substantial returns over the sustained period with relatively low risk. Companies’ expertise to favorably accomplish these deals can be a fundamental factor in their capacity to resist economic collapses. Hence companies must develop a detailed M&A roadmap post-COVID-19.
The accomplishment of such a programmatic M&A strategy is not uniform, however. Progress in programmatic M&A demands much more than merely executing on a continuing series of deals. Acquirers must enunciate precisely why and where they require M&A to deliver on distinct issues and purposes bearing their overarching corporate strategies. Besides, they must proffer deliberate attention as to how they intend to continue programmatic M&A—including building a high-level business case and preliminary integration plans for every operation in which they aspire to pursue M&A.
The above determinants blend into what we beckon an M&A outline. Holding a definite M&A roadmap is still more crucial as companies start to contemplate how to bounce from COVID-19. Without an M&A plan, it will be more challenging for companies to differentiate between through-cycle opportunities that are consonant with their corporate strategy and “low hanging, distressed asset” transactions that are not.
M&A roadmap post-COVID-19: The construction blocks
The M&A outline can assist managers in clarifying three essential questions: Why and where should we apply M&A to execute our corporate strategy? And how should we employ M&A to develop our corporate strategy?
Knowing ‘why’ and ‘where.’
The M&A plan urges business leaders to administer a comprehensive self-assessment along with a detailed market evaluation. The self-assessment assists in recognizing gaps in corporate objectives as well as the opportunities for M&A to fulfill these gaps. It comprises analyzing a company’s primary sources of competitive advantage and examining its scalability to ascertain whether they would still benefit the company’s position after a transaction. For its share, the market appraisal acts as a “sense test” for business leaders, assuring that the company’s M&A strategy interests on the most current and related trends, reckon for likely disruptions, and recognizes competitors’ possible movements and effects.
An M&A plan should also determine any final specifications or borders to the company’s practice of M&A. These provisions, which are typically forced by the CFO, give a significant reality check. In essence, they set the constraints on specific types or sizes of deals, whereby further narrowing the range of potential targets. In placing these stipulations, business leaders should estimate for preexisting financial hurdles. For example, a dictate that “transactions must be accretive in the first year” suitable would not pertain to deals targeting growth and might consequently overly stifle M&A activity. Ascertaining these boundary positions at the starting—with explicit approval from the CFO and the board—can align everyone on negotiable and nonnegotiable conditions.
What does a great M&A case require? For every instance, senior leaders should recognize crucial deal criteria (classifying likely targets by geography, sales channel, product type) as well as conventional screening metrics like company size, the number of employees, revenue growth, product portfolio, ownership. With this comprehensive knowledge, organizations and M&A deal teams can continuously nurture potential targets within centered M&A themes while yet being opportunistic about transactions that manifest themselves.
Once these themes get recognized, business leaders should examine them to assure that they can execute against them—for example, are there adequate targets available, and do the right companies subsist to satisfy gaps in the company’s abilities? The M&A outline will be especially significant in target-rich settings to help narrow down the listing of potentials.
An M&A blueprint also assists senior leaders to come up with a method for “how” they will apply M&A to advance their overarching corporate strategies. Precisely, the M&A plan should describe the high-level business case and preliminary integration plans connected with each M&A theme.
The business case should demonstrate how the acquiring company intends to attach value to the target or targets within a provided M&A theme—for example, the capital and operating expenditures required (beyond the acquisition cost) to integrate and scale the assets. It should further describe the operational developments and capabilities that will be needed to incorporate the new assets—for example, the formulation of a new business unit or a collection of new business processes to operate an acquired digital platform.
The business case should involve the acquirer to incorporate a preliminary integration plan for the acquired asset or assets that is consonant with the deal’s value-creation thesis.
In their use of the M&A design, business leaders can stay focused on those parts of the deal that can generate the most value—particularly important when companies are attempting multiple transactions within the related M&A theme.
M&A roadmap post-COVID-19: Setting it all collectively
An M&A plan cannot and should not be developed based on “gut instinct” by a particular executive or determined post hoc to validate the rationale behind an exciting deal. An executive or business-unit leader should drive its progress but backed by corporate-strategy and corporate-development managers. The blueprint itself can catch the structure of a continually refreshed and disseminated written report, or it can be a standing list item in each M&A and corporate-strategy meeting. Regardless of form, it can assist decision-makers in evaluating crucial factors linking to deal sourcing, due diligence, and integration planning before initiating any moves and exerting actions to identify targets.
An example of M&A outline
Let us consider an instance of an IT company and how an M&A blueprint could have served the business prioritize a collection of scattershot impressions into a complete programmatic M&A strategy.
With its market estimation, for instance, the IT firm might have seen that the demand for digital transformation gets projected to rise five times faster than the market for nondigital services. What’s more, further, market data might have shown that customers need and assume to digitize their business processes and that there is no apparent leader in the space. In its self-assessment, the M&A organization might also have observed a gap in the company’s product portfolio compared with peers. And a peek at boundary conditions might have shown the time and scope needed to pay off initial acquisition investments, allowing the team to examine beyond “base hit” deals with more economical acquisition costs.
The M&A blueprint would have driven the IT services firm to a distinct outcome—a laser focus on acquiring the set of target firms and capabilities needed to develop a digital platform.
Allocating time upfront, building an M&A plan will pay off over the long term—especially given the volume of deals connected with an M&A strategy. With M&A ideas and guidelines well defined and agreed by all, businesses can not only be more proactive but also more opportunistic.
- The leadership team will be aligned on strategy and centered on deal must-haves before reaching out to likely targets.
- Negotiations with possible targets can be grounded in the business case.
- Diligence processes can be expedited and concentrated only on the most significant sources of value.
- Integration planning can commence early, with a focus on achieving the strategic intent of the deal rather than just preserving companies, people, and processes in the wake of change.
Most significant, the M&A plan can support managers to communicate a compelling narrative on its deal-making strategy and its idea for the future.