More than ever, companies are using M&A in the hope of driving growth and better positioning themselves in a competitive environment. But as the frequency and value of deals increase, so does the gap between M&A winners and losers. In fact, study after study puts the failure rates of M&A deals anywhere between 50 percent and 90 percent.1
As companies increase the number and pace of acquisitions, it is no longer enough to execute against the basic key principles of M&A. In order to extract greater value, leading acquirers distinguish themselves with strategies and activities that better assess potential targets and orchestrate more powerful Day One and ongoing integration activities, designing and executing transactions that are customized and value-rich.
In this perspective we will outline the key principles of M&A transactions against five lifecycle stages, and offer insights into the activities that have the greatest potential to differentiate a successful transaction from the rest of the pack.
Five Lifecycles Stages of M&A
1. Strategic Vision: Legitimizing a Need for M&A
Key Principles: Most companies go through the process of establishing an overall strategic vision by framing the current state of the organization and highlighting noticeable gaps or opportunities of growth or market reach. These exercises generally focus on technology, intellectual property, capabilities or geographic gaps, as well as potential adjacent market opportunities. Traditionally, these assessments tend to be one dimensional; that is, the acquisition delivers a single needed attribute (e.g., access to a new market, product line, IP or capability).
The Differentiators: Successful companies take the self-assessment much deeper. They think in broader terms and candidly scope out what would be required to add any number of strategic elements to their
Moreover, extracting maximum value from a multifaceted transaction requires thoughtful attention both in the point solutions, as well as across functional areas to ensure that interdependencies are coordinated effectively. Equally as important as the investment thesis is the honest assessment as to whether you have the capabilities and capacity to effectively integrate the business, regardless of cost savings or potential synergies.
2. Pursuing Opportunities: Finding the Right Partner
Key Principles: Traditionally, once you have developed a legitimate M&A thesis, companies set criteria to create a pipeline of targets, usually based upon elements such as size, product variance, and geographic scope. They then sort these potential acquisition candidates based upon this criteria, the so-called “rack and stack,” with the most attractive prospects at the top.
The Differentiators: Leading acquirers assess these lists beyond hierarchy, looking at the intangibles that can have a significant impact on fit and sources of value. For example, certain companies may be a great fit with one part of your organization, but the business model might undermine another piece of your business. Another prospect with a supposedly attractive adjacent market may have cultural norms or compensation structures that do not fit into your operational structure. These intangibles must create a re-sort of potential partners. The amount of time and resources spent on this type of operational diligence should be on a par with your financial review and assessment.
3. Target Assessment: Building Your Case for Success
Key Principles: Companies are generally very good at obtaining the information needed -- products or services, financials, position in the market, and the overall structure of the business – to build a business case for a potential target. In addition, companies have become much better at enhancing the business case with potential value sources (adjacent markets, new offerings, new geographies, enhanced or new distribution) and operational efficiencies, such as redundancies or restructuring opportunities.
The Differentiators: Companies that separate themselves as M&A winners not only identify these sources of value but use a disciplined rigor to quantify them, with targeted execution plans designed to unlock, measure, and monitor them. This process goes well beyond traditional revenue enhancement or cost-reduction metrics. They employ channel checking to measure market awareness and customer perceptions, and they develop cultural assessments to fully understand the target’s mission, norms, and brand values.
Then they turn the magnifying glass on themselves. A critical element of any integration plan is an honest assessment of the acquirer’s organizational capabilities. An internal capabilities assessment requires a depth of knowledge and experience your current team may not possess, so consider utilizing an external assessment partner and analytical tools to ensure an accurate, unbiased assessment.
A massive food conglomerate experienced the ill effects of failing to build a case for success by honestly mapping to capabilities in 1994. The company was fresh off the successful acquisition of a now well-known sports drink when they acquired a lesser-known juice beverage brand for $1.7 billion. Despite criticism from Wall Street that they overpaid, the food conglomerate dove head-first into a new marketing campaign and set out to bring the juice beverage to every grocery store and chain restaurant they could.
However, they failed to fully understand their capacity as marketers, or to understand the customer profile of their juice brand, which had found its niche in small, independent stores and gas stations, and was backed by a powerfully quirky advertising theme. The identity crisis rendered massive sales losses and forced the food conglomerate to sell after just 27 months for $300 million, for a loss of $1.6 million for each day they owned the juice brand.
4. Preparing for Day One: Making a First Impression
Key Principles: Almost all companies understand that being prepared for Day One is a must, and if planned appropriately, the transaction will create excitement and momentum. There is a lot of visibility at this stage, along with a myriad of legal and regulatory requirements, so getting it right is not just positive in terms of influencing internal and external perceptions, it’s also absolutely necessary to avoid legal missteps.
The Differentiators: While leading acquirers acknowledge the importance of Day One, they also understand that there is no need for perfection or heroics. There are “tried and true” fundamentals to make Day One a success, but great value is not derived based on Day One alone.
Instead of focusing on putting on a great Day One show, successful companies put their energy into delivering on the fundamentals that pave the way for a sustainable and valuable transaction long term. Their Day One plans are focused first and foremost on establishing business stability. Their strategies aim to deliver what is required to operate the new business (legally and operationally), with critical care given to commercial operations, customer impacts/messaging, and the employee experience. Prior to Day One, the plan is tested internally, and a command center functionality is established to handle issues as they arise. Finally, when Day One arrives, they own the narrative and communicate effectively with stakeholders, being as transparent as possible about impacts and the changes ahead.
5. Integration Execution: Following Through
Key Principles: It is during integration that the heavy lifting of a transaction really begins. Once the euphoria of Day One begins to dissipate, integration efforts should be targeted at optimizing business models, and eliminating the uncertainty created from in-flight integration decision-making and execution. There are tell-tale signs that indicate the program is off-track:
- Loss of leadership focus.
- Attrition of key employees/customers.
- Disconnect between key value-drivers and accountable individuals.
- Lack of key measurable outcomes to monitor effectiveness of effort.
These are often sighted as factors in why acquisitions are not considered successful. But if they are caught and addressed early enough, their ill effects can be reversed.
The Differentiators: A multinational CPG company was able to reverse them in its 2005 acquisition of a well-established razor brand. A key objective of the integration was to retain top talent from the razor brand talent pool, which was no easy task as aggressive headhunters went after its employees.
In response, the CPG company formed approximately 100 global integration teams tasked with merging the two companies seamlessly. Each team was led by two executives, one from each company, who were responsible for similar functions. Instead of bullying their way into an integration, the CPG allowed the razor brand employees to use their own processes until the global integration teams were able to plan and deliver new operating methods. The CPG company also gave the razor brand employees a full year to acclimate before conducting performance reviews or tying bonuses to performance review results.
The approach merged the two companies into a single, stronger one, with 90 percent of the razor brand’s top talent accepting their new job offers with the CPG company. The CPG company went on to meet its revenue and cost goals within one year, and has enjoyed sustained growth since.
Leading acquirers understand that the more granular an integration plan is, the more likely it is to be executed as designed. This includes prioritizing critical work streams and holding people accountable to the results.
In addition, ongoing maintenance and execution of the communication plan is essential. Keep your employees in the loop on integration progress and share specific examples of the “integration at work.” A successful integration thrives on momentum and in sharing the victories that reinforce the rationale for the deal. A periodic “Integration Newsletter” is a leading practice, and it enables the integration office to reinforce messaging and connect with the organization.
While highly detailed, effective integration should also have a mechanism of flexibility. If an expected source of value is not materializing as fast as expected, the integration plan should allow for quick pivots to explore other opportunities.
Differentiation for M&A Success
Extracting greater value from M&A transactions has nothing to do with luck. Winners are diligent in doing more in each life cycle of the M&A journey: more thoughtful partner identification, more honest assessment, more detailed strategy, and more follow-through. The resulting approach is customized and value-rich, rendering new companies that are positioned for sustainable success.
1. “Why Is The Innovation-Through-Acquisition Model Not Working?”, Inc., May 17, 2016