How can M&A create value? V2

What is the purpose of this article?

  • Enable the board of directors, C-Suite, and investors discuss how to achieve value from M&A.

You can download a PDF of this article from: How can M&A create value V2

 What are the critical learnings in this article?

  • More than half of all deals destroy value for investors.
  • Focus on creating long-term value for the merged company’s ecosystem members, especially customers.
  • Accountability for achieving value must be assigned as part of the initial M&A planning and analysis.

More than half of all deals destroy value for investors.1

The root causes of M&A failure at the deal stage are:

  • The M&A target does not fit the business strategy and future business model
  • Synergy estimates (both revenue and costs) are optimistic. Relevant external benchmarks are not used. No bottom-up analysis.
  • Weak due diligence.
  • Those accountable for delivering the benefits are not involved at the deal stage.

The root causes of M&A failure at the integration stage are:

  • Taking too long to put in place the leadership accountable for delivering results.
  • Poor change management.
  • Poor planning and execution.
  • Limited ongoing communications with stakeholders.
  • Losing customers.

The value of the integrated company must be greater than the value of the standalone companies.

I have had the luck to be at a board of directors meeting at which the newly appointed CFO presented the results of the company’s past merger to the board and the newly appointed CEO. The combined sales and profits after the merged company were significantly lower than the pre-merger sales and profits.  I assume this is what led to appointing a new CFO and a new CEO.

Why are you doing M&A?

  • Support the purpose of your company.
  • Provide increased value to the members of your company’s current ecosystem and the future merged ecosystem. These members include: customers, employees, investors, suppliers, partners, the broader public etc.

How will you create long-term value>

#1 Focus on the customer. You must:

  • Retain the existing customers (except those unprofitable ones you decide to drop).
  • Attract additional customers.
  • Increase the profit arising from customers by meeting more of the customers urgent problems and needs. One way to be able to share the merged set of solutions among the merged set of customers, use the merged set of distribution channels and partners.

#2The merged set of talent, technology, intellectual property and external partners may enable the:

  • Improvement and development of new solutions.
  • Improvement of marketing, sales, and customer service.
  • Improve other internal processes.

#3 The merged company may be able to create or access new distribution channels and attract new partners.

#4 The merged company may require new technology.

#5 The merged process may also require the divestiture of: talent, obsolete intellectual property, obsolete technology, distribution channels, partners, etc.  There may be the opportunity to sell some pieces of the business.

What will be your synergy targets?

Only 58% of acquiring companies publicly announce synergy targets.  Of those that do announce synergy targets, only 29% update investors regarding progress against targets. Successful acquirers have higher internal targets than what is externally communicated.1

What are your next steps?

Some of the things to consider include:

  • As soon as you start thinking about M&A, create the VCO (Value Creation Officer) role. The VCO is focused on creating long-term value from M&A.
  • The VCO will: outline the overall stages and journey of M&A, ranging from first considering M&A through to the eventual achievement of value; outline how Value Creation should be built into the M&A process and into the ongoing normal management process; not be a decision maker but will suggest the decision making process and criteria; be a temporary role, reporting to the CEO, and without any direct full-time reports.
  • Define the decision making principles, process, and participants for each stage of the overall M&A process.
  • Outline the purpose of your company and of the post-merger company.
  • State the purpose of M&A.
  • Describe the ecosystem members of the merged company and the impact on them of the merger. Model how much more value will be created by the merged company compared to the standalone companies.
  • Describe your approach for creating long-term value.
  • Describe why you’ll be able to create more value than competing bidders.
  • Determine the maximum amount you are willing to pay. This will depend upon the terms and conditions.
  • Outline the CEO, President, Chief Operating Officer, C-Suite and C-suite direct reports roles and organization structure for the merged company.
  • Assign accountability for the roles, within the merged company, which will be accountable for achieving value. Set the targets for each role. If the people occupying the roles will not commit, then replace those people. If the people who will occupy the roles will come from the merged company, then determine their commitment to targets as soon as possible.
  • The people accountable for value achievement are also accountable for the plans to achieve that value.
  • Conduct a fact based, sanity checked due diligence. Those who will be accountable for creating and achieving value must have a degree of involvement with the due diligence.
  • The scope of the plans may include changes to: board of directors, C-Suite, talent throughout the company, the organization structure, processes, technology, channels, partners, etc.

Footnotes

1 “The real deal on M&A, synergies, and value”, Boston Consulting Group, BCG Perspectives, 2016

https://www.bcg.com/en-ca/publications/2016/merger-acquisitions-corporate-finance-real-deal-m-a-synergies-value

Further reading

Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

“The six types of successful acquisitions”, McKinsey, 2017 May

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

“Change management in merger integration” Bain, 2017

https://www.bain.com/insights/change-management-in-merger-integration/