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
Identifying the full value potential: Key considerations in the deal process to create a compelling equity story
Buyers contemplating an acquisition often make high-level assumptions on a target’s synergy and cost reduction potential in the valuation process, both on a stand-alone basis as well as in its future state as a portfolio company or an integrated business. The due diligence process provides some of the information necessary to make sound assumptions, however, key assumptions on cost and revenue synergies that inform the valuation process often turn out to be too optimistic in terms of magnitude and time to realise post-closing.
As a consequence, the realisation of the deal value may be adversely impacted as integration timelines and the delivery of planned synergies are delayed. The results are discussions between leadership and the deal team on how deal ROI targets can still be achieved and uncertainty among the workforce regarding the future, as the integration team is distracted and forced to dive back into diagnostic work to confirm existing and identify additional synergies to deliver on the deal ambition.
To avoid such costly distractions in the acquisition process, and to provide all stakeholders – including the Board of Directors, the company’s leadership and workforce, and investors – with the comfort in knowing that the acquisition premium is backed by achievable synergies, a thorough diligence and integration planning phase is first required which scrutinises the cost and revenue synergy potential in detail while considering all areas of opportunity.
This article dives into how acquirers can use the diligence and integration planning phase to create an upfront value creation roadmap, from high level synergy identification to planning the value realisation.
Baselines & clean team
Deal synergies are value-adding initiatives which are incremental to the operational improvements that investors would expect the organisation to deliver on a stand-alone basis.
A buyer’s corporate development team will typically have a set of assumptions on the key synergy areas as well as their magnitude, which are backed by insights from the commercial and operational due diligence process.
Clean teams working in a protected environment can be granted early access to privileged information and collaborate with the respective team on the target side to establish concrete plans for synergy implementation that will be ready for execution on Day 1.
At the outset of planning for synergies, it is key that a set of cost, revenue, and people baselines is created that reflects the benchmark against which the implementation of synergies will be tracked. The baselines will serve as the one source of truth regarding the initial financial and organisational state of the combined operations.
Synergy planning and target setting
During the planning phase, the focus is on identifying the full synergy potential of the deal. This involves analysing the operating and business models of the two companies to identify any areas where combining resources and capabilities could create value.
A detailed assessment across business functions and segments typically starts with analysing the baselines, comparing data against internal and external benchmarks and relying on management information and peer company operating model insights to identify a first set of value hypotheses, which are then tested with management and translated into tangible opportunities.
A framework such as the PwC value bridge can guide the team’s analysis to identify priority areas with a high synergy potential and ensure that a holistic view on the deal’s value potential is taken.
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As the implementation of the identified synergies will be the responsibility of business and functional leadership, initial synergy plans will be fairly high level. They serve the purpose of enabling C-level leadership to set synergy targets at a functional and business level while giving the latter leadership teams the freedom in determining the actual initiatives that will deliver the anticipated value.
The actual implementation of synergy initiatives usually doesn’t deliver 100% of the identified value upside, and delays are to be expected. Consequently, synergy targets typically exceed the synergy plans in the deal model. This allows leadership to account for value leakage and risk adjustments
Synergy prioritisation & readiness
Once the key synergy areas and top-down targets have been communicated to functional and business leadership, the actual work of developing a comprehensive value creation plan begins. This involves creating synergy-delivering value initiatives and defining detailed implementation work plans.
The functional leadership will act as initiative sponsors and appoint teams responsible for implementation. Each initiative is appointed an owner and an agreed value and / or FTE savings target. Additionally, clear timelines should be set, and the cost of delivering the initiative should be approximated.
Subsequently, the synergy areas underlying initiatives are prioritised based on their value potential, time to deliver and ease of implementation. This will allow the organisation to identify and fast-track quick wins while creating a realistic implementation roadmap for the remaining initiatives.
Aggregating initiatives into a roadmap is also key for the integration management office to create transparency on critical milestones, and to ensure alignment with functions in assessing critical dependencies of initiatives. This transparency in turn helps to achieve buy-in and to foster a sense of ownership in the management teams accountable for delivering synergies.
Synergy tracking & value capture
To reinforce transparency, ownership and accountability, leadership must ensure that a clear governance structure and process is put in place that allows the integration team to track the progress made and to report on it on a regular basis. Additionally, strong communication channels must be established to ensure that all stakeholders are informed and engaged throughout the integration process. This also helps to maintain visibility, manage risks and to make decisions in a timely manner.
To facilitate tracking and reporting on the progress of synergy realisation, a value tracking solution should be considered that tracks the implementation of initiatives at a financial level. To achieve this, it is recommended to set up a stand-alone BI dashboard that tracks synergies at an initiative level and provides visibility on each initiative’s progress versus the targets set previously. Doing this will further increase a sense of ownership as well as the accountability of initiative leads across the organisation.
Embedding synergies in the integration approach
Finally, in order to prepare for Day 1, leadership must ensure that the synergy plan is aligned with the overall integration plan. All initiative charters and work plans are combined into a roadmap that will give the leadership team, and more importantly investors, a view on when they can expect to realise returns on their investment. This roadmap must be aligned with key integration milestones, and special attention should be given to the activities which can be kicked off within the first 100 days to ensure a timely realization of the deal’s value ambition.
Post-Day 1 Value Delivery
Once the deal is closed and integration begins, the focus shifts to executing the synergy plan and tracking value realisation. This involves aligning the operations and systems of the two companies to achieve cost savings, revenue growth as well as other synergies. It also involves managing cultural and organisational changes to ensure that the integration stays on track.
By focusing on effective programme management and tracking value realisation during the integration process, successful acquirers ensure that the full value potential of the deal is unlocked.
