How can M&A create value?

Overview

  • More than half of all deals destroy value for investors.
  • M&A has three value creation approaches, based on the buyer’s strategy and future business model.
  • Customer-focused growth is key, supported by business model improvements.
  • Accountability for results must be assigned. Results relative to targets must be reported on
  • Small private companies have a unique opportunity to create value.

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.

M&A has three value creation approaches, based on the buyer’s strategy and future business model.

The buyer must have a strategy (i.e. who the future customers will be, and why those customers will deal with the buyer rather than a competitor), as well as the future business model (i.e. how the buyer will profitably sell and deliver to future customers).  Without a strategy and a future business model, it’s hard to determine how the acquisition fits with the future direction of the company.

The value of the integrated company must be greater than the value of the standalone companies.  There are three value creation approaches:

  • Fill holes in the buying company’s strategy and future business model.
  • Fill holes in the acquired company’s future business model.
  • Create a new or revised future business model.

Customer-focused growth is key, supported by business model improvements.

Focus on retaining and growing profitable customers.

Current products and service can be delivered to new customers, via new distribution channels, in new geographies.

For both current and new customers:

  • Improve or develop new products.
  • Improve product/service development.
  • Improve sales process.
  • Improve sales team.
  • Improve customer service
  • Change pricing

Accountability for results must be assigned. Results relative to targets must be reported on.

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

The leaders who will be accountable for driving results should be appointed as soon as possible after the deal is done. Synergies which are not achieved within 18 months are not likely to happen.

Small private companies have a unique opportunity to create value.

A privately owned company with less than $3 million of EBITDA may find it difficult or impossible to raise capital or sell the company.

Successful acquisitions increasing EBITDA to $3 million or more will make it easier to raise capital on favourable terms or sell the company at a better multiple.  Companies of this size will also be able to afford a strong C-Suite, with owner/founder successors, which all contributes to easier and more favourable terms for raising capital.

Conclusion

  • M&A sounds easy, but many companies don’t heed the lessons learned.
  • Your strategy (who the future customers will be and why they will be buying from your) and your strategic plan (how you build the future business model to achieve the strategy) may include M&A.
  • Conduct a fact based, sanity checked due diligence. The CEO’s advisory board should challenge the CEO’s thinking regarding the deal and its attractiveness.
  • Know up front what you’re willing to pay and don’t pay more than what value justifies. You may look at many opportunities before you close a deal.
  • Be clear on the principles or decision-making criteria before looking at a deal.
  • If multiple M&A is part of your growth strategy, create a standard M&A process and team (consisting of both internal and external resources).

Your next steps

There are 5 key questions to ask as you think about M&A.  The focus is on achieving a long-term business strategy and future business model, rather than targeting short-term, one-time potential cost savings.

  • What is your business strategy and future business model to increase sales, market share and profitability?
  • What gaps in your business strategy and business model need to be filled: by organic growth and by M&A?
  • Why will the acquisition be more effective than organic growth?
  • How will you be able to generate sufficient value from the acquisition to finance it and pay a premium for the acquired company?
  • How will you be able to generate more value from the acquisition than other bidders?

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

How can M&A create value?

Footnotes

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

Further reading

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

How can restructuring grow value?

Restructuring is often focused on short-term cost reduction, with workforce shrinkage playing a major role. There is the risk that restructuring addresses short term issues but does not position the company for long term value growth and preservation.

Step #1 Establish a common understanding of what success and business value will look like in the future.

Step #2 Set out the restructuring objectives, based on step #1.  These objectives will be broader than short-term financial targets and consider things such as: reputation, customer retention, employee morale & ability to attract employees in the future, and the need for long-term investments, etc.

Step #3 Assign accountability for achieving objectives to specific members of leadership.

Step #4 Assemble a plan, which includes both short-term options (e.g. terminating current and planned consulting projects, eliminating discretionary spending, staff reductions) and longer-term options (e.g. continuing to investment in projects with clear business cases to grow and preserve value, continuing with select innovation and trials, reviewing and revising the organizational structure.)

Step #5 This may well be the hardest step.  Determine the root causes of the need for restructuring.

  • What changes to the board of directors and board oversight processes are needed?
  • What changes to the executive team and the executive recruiting & development processes are required?
  • What changes to the resource allocation process are needed? Can resources be better allocated to value growth and preservation initiatives? What is the right blend of long-term and short-term resources to provide the agility to adapt to changes in the external environment?

And don’t forget the foundational questions:

  • Who are your target customers?
  • How do your target customers, in their hearts and minds, perceive your competitive differentiated value proposition?
  • What are your internal competitively differentiated delivery capabilities?

 

To enable discussion with your board of directors, advisory board and management, download the following one-page slide:

How can restructuring grow value?

How do you grow your company’s value?

Growing the value of the company requires growing the number of customers.  Depending upon your situation, you may focus on customers who are profitable in the short term or longer term.  There are four steps you can take, starting with growing customers and leading to growing shareholder value or value to the owners.

Step #1 Start by focusing on the customers.

Recognize that you are competing for customers. Agree on your company’s customer metrics e.g.

  • Target customer market share?
  • Customer recommendations?
  • Customer satisfaction?
  • Customer retention?
  • Customer perception of your company’s differentiated value proposition?

Also consider what internal capabilities need to be competitively differentiated in order to impact customer growth.  For example, having the best financial processes (rather than “good enough”) may not impact customer growth for every company.

It is critical to listen to customers.  If you don’t listen to customers and understand customers, then you won’t have customers who understand your company.  The 2017 Edelman Trust Survey for Canada showed that only 36% of people believed that companies listen to customers.  What an incredible opportunity for your company to differentiated itself and grow,

Step #2 Don’t forget to look at what is happening to the overall size of the market, and customers’ ecosystem.

It can be hard to grow the number of customers if the overall market is shrinking.  Blackberry may have 100% market share of customers who desire a physical keyboard, but that that does not help grow the total number of customers.

Step #3 Determine what the appropriate financial metrics are for your company.

Private Equity may be focused on free cash flow.  Other companies may be looking at asset value.

Step #4 Define how value is realized by the owners (often referred to as Shareholder Value)

Depending upon the company, owners may realize value via:

  • Dividends and share buybacks;
  • IPO;
  • Sales of the shares;
  • Compensation; or
  • Products and services provided to the owners.

Have a common understanding of over what time frame value must be achieved.  E.g.

  • 3 years for a high-tech start-up;
  • years for private equity buying an existing company;
  • 30+ years for a pension fund; or
  • Indefinite for a family holding company.

There can be risks in focusing on growing shareholder value.

  • The board and CEO may take actions which grow shareholder value in the short term but do not grow the number of profitable customers.
  • The perception of analysts and investors impacts shareholder value.
  • There can be actions which improve the financial metrics in the short term.
  • It can be easy to overlook customers and customer metrics.

To enable discussion with your board and management, download the one page slide How do you grow your company’s value?