In M&A, successful deal outcomes hinge on the ability to prospect well then start, sustain and repeat a cycle of deal steps. Companies with track records of M&A-led growth do this exceptionally well. The success is no accident; it's built through a well-defined, repeatable and systematic internal processes.
The recently announced “tax repatriation holiday” could have a favorable impact on M&A activity in 2018. This new tax plan will permit companies to transfer (repatriate) cash back to the US under a much lower tax rate. Prior to these changes, many companies have seen a large proportion of their cash reserves effectively locked-up overseas.
Closing a deal is difficult – however, the capturing of synergies post-deal is arguably even more difficult. The objective of M&A is to create value – yet once the dust has settled following closing and “deal fever” diminished, it is easy for an acquirer to lose sight of the goal of synergy capture.
The nature of deal making is changing. For many organizations, the days of closing just 1-2 deals every few years in a limp to the finish line are over. Today, M&A news is awash with stories of organizations running double figure deal counts. Alphabet, Google’s parent company, and Microsoft have both closed 9 acquisitions year-to-date (two years ago, deal count was at 15 and 19 for Alphabet and Microsoft respectively). If corporate venturing initiatives are added to the mix (rather than just outright acquisitions) the figures relating to closed deals are even more profound.
Identifying the right acquisition target is arguably the most fundamental component of a successful M&A campaign. A quick search online for “failed M&A” will reveal a myriad of case studies outlining where things have gone wrong. While failure-factors are sometimes unforeseeable, it is often the case that M&A goes wrong due to poor preparation in the early stages. Turning poor preparation on its head, adopting a repeatable and systematic approach to M&A can greatly increase the efficacy of an M&A campaign and prove extremely valuable when it comes to identifying the right acquisition targets.
When researching targets and building an acquisition pipeline it is important to keep a number of points in mind:
- Market Attractiveness
- Broaden the Search
- Stage Gate Approval
- People Buy-in
The most successful acquirers in M&A take a proactive, systematic and repeatable approach to screening targets and originating deals; these are core M&A best practices. They actively manage a pipeline of suitable acquisition targets rather than making knee-jerk reactions to deals. They do not require intermediaries to source deals for them. They screen potential acquisition targets in line with the organization’s overall strategy.
An M&A strategy might make perfect sense on paper, but the core driver – people – can easily be ignored. While for many organizations hard facts relating to revenue and costs lie at the heart of the deal rationale, the less tangible, human-side of M&A can be equally as important. Indeed, in today’s era of M&A, intangible assets (people, knowledge, etc.) can be the driving force behind value creation – Google, Facebook and Dropbox’s talent-driven "acquihire" M&A activity in recent years is testament to this.
When thinking about corporate venturing, the world of venture capital is a good place to start. The two disciplines overlap to a large extent when it comes to the skills required, some of the objectives pursued and the people involved. Put simply, venture capitalists (VCs) invest in companies to generate a financial return (usually within a pre-defined exit-window). Corporate venturers (CVs) also look towards financial returns (achieved via the nurturing of early-stage companies) but are typically also pursuing access to research and development initiatives, innovative technology and other, more strategic returns.
Many acquisitions are justified on the basis that they will create synergies – being when the combined post-merger value of two companies working as one is greater than the aggregated pre-merger value of both companies working independently (the concept of 1 + 1 = 3). Carefully managed, synergies can contribute to value beyond the sum of the parts of two companies – such as via new revenue channels, access to new geographies, cost rationalization, streamlining of operations, divesting of surplus assets and realignment of market positioning. However, the hope of capturing significant synergies is often misplaced as a rationale for M&A. Identifying and estimating synergies requires a judicious and systematic approach – yet even experienced acquirers can be overzealous in their estimates of the value that can be captured by a deal. The approach to identifying and estimating synergies should be one of realism, with focus maintained on protecting existing operations to maximize the chance of a deal being accretive.
Post-merger integration (PMI) is a fundamental stage to realizing the value of an M&A deal. It is a complex process, usually occurring under extreme time pressure while maintaining business continuity. There is no one-size fits all approach to a successful PMI process. However, careful planning, focusing on the strategic objectives of the deal and the identification and capturing of synergies can help maximize deal value.