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M&A Insights Series: How to Build a Strategy-Oriented M&A Process

Midaxo's M&A Insights Series is a compilation of diverse M&A expertise provided by a wide range of M&A professionals. Ismo Matinlauri - VP at Cargotec Corporation - shares his views on how companies should have a strategy-driven approach to M&A as part of our first installment of this Series. Ismo has over 15 years of experience with M&A from strategy development and target screening up to integration planning and execution. Recently he has moved to project sales.

Typically, M&A activities focus on new practical methods and tools for managing the process. This spans from recognizing opportunities emerging from technology & service and market developments to ensuring business continuity. This is fine as such as long as it is based on sound strategic analysis, an approach that has been thoroughly thought out and that has top management approval and commitment. A good example of the framework for a strategy-oriented M&A process and new business creation is in the following ManMAP framework model:

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Source: M&A as a Strategic Option – from Opportunities to New Business Creation. Mélanie Hassett, Minna Räikkönen, Tuija Rantala, Teknova 2011.

Regardless of the business category you fall under, it is important to take the time to build and understand the strategy behind M&A activities. It creates the basis for the M&A process and ultimately improves the success rate.

Target Search

In many cases “target search” as such does not exist. Rather the target is identified through existing business relationships or other contacts. However, even in these cases certain basic questions should be asked prior to initiating any real analysis or assembling a project team:

  • What would be the high-level investment thesis / transaction rationale?
  • Is the potential acquisition in line with corporate and business unit strategy?

In certain situations, a specific “target search” is conducted. These are typically situations where corporate strategy calls for growth e.g. in certain market segments or geographies where the company doesn’t have enough existing prospects. In these situations it is worthwhile to spend some time and effort on understanding the landscape and different players’ relative positions before approaching any single potential target. These situations or strategies are typically built around issues like:

  • Growth Targets
  • Geographical Footprint
  • Product Ranges
  • Technology
  • Know-How
  • Resources or Competencies Needed
  • Financial Issues

The first step in providing good results is to develop at least 10 key on/off-type criteria to evaluate the target companies based on the strategy. The key here is to only accept companies scoring a 9 or 10. Anything lower means you are not fulfilling all of the strategic goals you have set for yourself. Practice has shown that lower score acquisitions have a lower probability of success, given that they have failed to meet the targets set for the acquisition.

Opportunity Foresight

As in the above ManMAP example, successful M&A strategy is also based on the company’s analysis of its market and technology environment as well as its relative position there. Also part of this analysis needs to be the realistic picture of the company’s own capabilities including maturity of its M&A process and the resources/teams responsible for the transaction and later integration. Analysis should cover themes like:

  • Transaction Rationale
  • Market Attractiveness
  • Competitive Position
  • Value Creation Potential
  • Integration Enablers

Strategic DD

The due diligence process is the systematic and professional investigation of the target company from both a business opportunity and risk assessment point of view. It furthers the basis for the eventual integration process and any possible issues there. The typical DDs executed are (number depends strongly on what kind of business you are in):

  • Operative DD
  • Financial DD
  • Tax DD
  • Legal DD
  • HR DD
  • Environmental DD
  • Technology DD

Detailed DD reports can be quite extensive. They need to be analyzed and then summarized in a way that answers the following basic questions:

  • Does it fit with the strategy, i.e. creates additional business value to justify the investment?
  • Are risks identified adequately and on an acceptable level?
  • Do we have sound integration plans and resources to execute them?

The decision makers should review the summary report as part of the final decision making process. The summary will also be a working tool for the integration manager and team to address the issues identified and reported upwards during the integration period.

Conclusions

A strategy-oriented M&A process is based on the sound and in-depth analysis of the business environment and the overall targets set for the company during the strategy process. When implemented, the ‘real’ need for M&A activities can emerge. Combined with a professionally executed target search and analysis process it creates a sound basis for a successfully executed M&A integration. In short, a strategy-oriented M&A process is based on:

  • Sound strategy to steer the M&A activities
  • Target search and evaluation against the strategy
  • Strategic DD summarization to base decision making
  • Having a professional integration plan and team