The last spike in M&A activity has seen valuations rise to unprecedented levels, with many acquirers paying lofty premiums for their chosen targets. Interested acquirers who were outbid often find themselves asking how the winning bidder could justify the higher deal premium. Finding ways to get an edge over competing bidders when a new target is identified is becoming even more important, as financing has become more expensive, and many companies are shifting their focus towards preserving cash.
This question is particularly relevant, as PwC research has repeatedly shown that a substantial proportion of deals create a negative total shareholder return (TSR) when benchmarked against relevant local market indices.
To get into a position of being able to confidently pay a premium on a company’s valuation, successful acquirers must therefore be able to judge with significant certainty whether a deal will generate an acceptable ROI that creates value for their shareholders.
As our previous research on 800 completed deals over the past decade shows, strategic intent alone is not sufficient to ensure positive returns. Instead, an interdisciplinary and disciplined approach to M&A is what tips the scales in order for buyers to be considered strategic acquirers that consistently manage to create value for their shareholders.
In our experience, these acquirers have three differentiating characteristics which enable them to successfully create value from M&A
M&A as a tool to deliver strategy
M&A is a tool that is deployed in a proactive way to deliver on the organisation's strategy.
Sophisticated buyers have a strategic objective for M&A in place, which is embraced by the C-level leadership and throughout the corporate development team. Deals are sourced based on a clear set of strategic guidelines and criteria.
Identifying the full value potential
A rigorous diligence process is followed in acquisitions to identify and plan the delivery of the target's full value potential well ahead of closing.
Strategic buyers leverage a wide toolbox, from a broader diligence scope to clean teams and competitive intelligence gathering, to create deal models with detailed assumptions on synergies potential and the timeline to delivery.
Delivering the deal ambition
Disciplined planning and execution are applied in the closing and integration phase to deliver the deal ambition in full and on time.
A post-merger integration playbook can be leveraged to define key activities, milestones and integration approaches along with a log of initiatives to deliver synergies and a thorough governance to ensure timely value delivery.
Delivering the deal ambition: unlocking the full value potential
In order to capture a deal’s value ambition, executing the integration strategy in a timely manner is key. Converting an integration strategy into detailed actions that align people, processes and systems with integration objectives is the fundamental task of the Integration Management Office (IMO). Consequently, the IMO plays a vital role in ensuring a successful transaction.
As the IMO guides the organisation through Day 1 preparations and beyond deal closing, the IMO needs to push the organisation to deliver on key areas of the integration strategy to ensure that deal value is delivered on time and in full.
Defining design principles and the future exec-level operating model early on
Setting guidelines in the form of clearly articulated design principles, in conjunction with creating clarity on what the high-level operating model should look like, will enable the new functional leadership to craft the new organisation as well as the respective functional and business unit operating models while ensuring they do not deviate from the deal strategy.
It is key to ensure that the operating models at their highest level are defined before the functional workstreams dive into organisation design. The operating model will guide the organisation design process, and ensure that leadership and middle management roles are crafted based on the organisation’s future requirements instead of the people who are currently in key positions.
Driving value realisation and tracking synergies & existing initiatives
Synergies will have to be specified at a functional and business unit level, and come with concrete cost savings and headcount targets. Accurate financial and headcount baselines will enable the programme leadership to clearly articulate synergies and track delivery. They will also enable a clear distinction between ongoing improvement initiatives and incremental value to be unlocked through the synergies identified.
The teams focused on delivering deal synergies should be closely aligned to the teams involved in the diligence process to keep the story consistent, and to understand the underlying assumptions made in the diligence process when the synergies were identified.
To reinforce transparency, ownership and accountability, the IMO sets a clear drumbeat in the governance structure and the process that tracks and reports on synergy realization progress and manages any risks that arise during implementation. While checking in on the progress made by the initiatives, the IMO should also take the opportunity to regularly challenge initiatives not delivering on budget and should facilitate additional support where required. This will keep the overall programme on track and provide transparency for the Finance organisation or the value creation office to track the progress made against the budget, running implementation costs and the overall margin impact.
Communicating deal strategy, rationale and integration plans
Getting everyone in the organisation on board to deliver on the deal objectives while making them part of the journey is key to ensuring that morale stays high and employees remain focused. Employees who have a clear line of sight on what is happening, why it is happening and how they can contribute to making the deal a success will be motivated to drive the integration forward while ensuring that disruption to business as usual is kept to a minimum.
Consequently, it is key for a holistic communications and employee engagement strategy to be defined and for plans to be put in place early on to ensure key messages are tailored and effectively conveyed to relevant stakeholder groups across the organisation.
The IMO therefore plays a pivotal role in disseminating the integration strategy across the organisation. This involves clearly articulating the overarching deal rationale, including market dynamics and assumptions on competitive advantages, the deal’s value creation ambition as well as the strategic integration principles and direction from leadership. This information should not be confined to top management, but should reach all levels of the organisation.
An additional benefit of transparently communicating the deal rationale is that it helps dispel any uncertainties and foster alignment within the workforce. Workforce engagement can be further increased by seeking input and feedback from employees, creating channels for them to ask questions and voice concerns as well as providing opportunities for them to participate in the decision-making process within their scope of influence.
A well-considered approach to employee engagement will ensure that employees are aware of how changes will impact their roles and departments when the changes are implemented and therefore minimise disruption during the integration process.
In summary, effective communication is an integral part of ensuring that all employees are aligned with the integration strategy, understand the rationale behind the deal and know how to contribute to its success. Appropriate employee engagement not only maintains morale, but also enhances overall productivity and engagement throughout the integration process.
Day 1 readiness and beyond
The success of any integration largely depends on the preparedness of the organisation on Day 1 as well as the execution of the plan in the initial months following deal closure.
Day 1 is where all the preparation culminates in the closing of the deal and the real integration work begins. Consequently, achieving Day 1 readiness requires a comprehensive approach, taking a holistic view of all areas that will be impacted on Day 1. The IMO will work with all integration workstreams leveraging Day 1 checklists to ensure that the ‘must haves’ are covered in functional Day 1 plans and that activities for Day 1 are prioritised according to business necessity.
While all workstreams will have certain Day 1 must-haves, the focus typically lies on the readiness of enabling functions such as HR, Finance and IT to ensure business continuity in core business processes.
An additional focus area is ensuring legal readiness to close the deal on Day 1. This includes ensuring compliance with regulatory requirements, the finalisation of contractual obligations and the resolution of critical legal issues. The Integration Management Office (IMO) should work closely with legal teams to conduct a meticulous review of contracts, agreements as well as any potential legal implications arising from the integration. By resolving legal matters proactively, the organisation can mitigate risks and establish a solid foundation for commencing the integration.
To drive the integration forward effectively after Day 1, a well-structured 100-day plan is an instrumental tool to guide the organisation through the immediate post-close period while maintaining the focus on delivering the deal ambition. The IMO, in collaboration with the integration workstreams, should develop a detailed plan outlining the key value levers and integration milestones that need to be achieved by Day 100. This plan should encompass the most critical value creation initiatives, and should be closely aligned to the stakeholder responsible for the delivery thereof.
Finally, the integration is an ongoing process which extends beyond the initial transition. The IMO continues to play a central role in monitoring and adapting the integration strategy based on evolving circumstances.
A long-term value creation plan that prioritizes identified initiatives based on their value potential and complexity to deliver helps the IMO balance the workload on the organisation and to ensure disruptions to business as usual are kept to a minimum. Regular reviews, feedback loops and a degree of flexibility in terms of the approach are essential to addressing challenges, capitalising on opportunities and refining the integration journey for long-term success.
When the IMO finally dissolves, a clean hand-over of responsibilities to a transformation office or responsible functional leadership is essential to ensure in-progress and pending initiatives are going to be delivered according to plan.
Conclusion
Unlocking the full value potential of a deal requires a meticulous and holistic approach to the integration. The IMO takes a central role in ensuring that the organisation successfully delivers on key areas of the integration strategy. Firstly, defining design principles and the future operating model establishes the foundation for organisational alignment.
Secondly, driving value realisation and tracking synergy delivery requires close collaboration between diligence and integration teams, well-defined initiatives and a robust tracking governance structure. Thirdly, a holistic approach to communications and employee engagement fosters organisational unity and empowers employees to contribute effectively. Finally, Day 1 readiness necessitates a comprehensive approach to planning key activities across functions, demanding meticulous attention to functional preparedness and legal considerations.
As Day 1 marks the start of the real integration work, prioritising synergy initiatives and the creation of a well-structured 100-day plan set the agenda for immediate value creation activities post close. Importantly, the IMO's ongoing role in monitoring, adapting and refining the integration strategy underscores the dynamic nature of this process. By addressing challenges, capitalising on opportunities and maintaining a degree of flexibility, the organisation ensures a successful and value-driven integration journey well beyond the initial transition.
