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
M&A as a tool to deliver strategy
This article examines what distinguishes acquirers which successfully create deal value in more detail and will explore how organisations can pivot to become strategic acquirers. To achieve this, we will focus on four key characteristics of strategic acquirers.
Growth Strategy
Strategic acquirers will have a clear strategy that explicitly defines what role M&A will play in achieving growth, value creation targets, as well as other strategic objectives. M&A is seen as a means to an end rather than a strategy in itself.
Such companies will also have a clear strategy process that informs portfolio priorities based on a continuous evaluation of the organisation’s strengths and weaknesses in its competitive environment, including the M&A activity of competitors as well as threats and opportunities inherent in industry trends.
Role of Corporate Development
The M&A team will work closely with business units to identify growth opportunities and gaps in internal assets, as well as capabilities where inorganic growth is the right approach to meet the organisation’s growth objectives.
The proactive involvement of the business in the M&A process takes politics out of the equation, as it sets a clear governance structure for the role of the business units and puts the corporate development team in charge of leading the process.
Target Criteria
The M&A team will translate portfolio priorities into clear scanning criteria to identify and evaluate suitable acquisition candidates in a proactive manner.
The scanning criteria are selected to be in line with the overall strategy and are a result of the collaboration between the M&A team and the business. They serve to clearly articulate the selection of suitable acquisition candidates to the Board of Directors and the C-level leadership team.
Suitable acquisition candidates will accelerate the acquirers’ trajectory towards achieving their strategic goals, whether this is by providing access to new markets, bringing in key talent or capabilities, diversifying products and service offerings, achieving scale or consolidation efficiencies or other ways.
Execution Excellence
In the event that a suitable target has been identified, strategic buyers follow an execution playbook that sets the process in motion, from the diligence phase through to the eventual integration of the business into the organisation.
During the diligence phase, financials, operations and commercial aspects are scrutinised in detail to ensure that the expected synergies are adequately quantified, and timelines are realistic. This will enable the company’s leadership to convey the deal thesis to investors convincingly and help mitigate any surprises during the closing and integration phase.
Likewise, disciplined planning and execution are applied in the closing and integration phase to deliver the deal ambition in full and on time. Planning and execution are essential to identifying, realising and maximising the value of deal synergies, just as effective leadership, clear governance and strong communication are critical to successful synergy planning and realisation.
By focusing on effective synergy planning and capture during the planning and integration phases, companies can maximise the value of the deal and achieve full value realisation in mergers and acquisitions.
Benefits of pivoting your organisation to becoming a strategic buyer
Having in place a clear governance covering corporate development from strategy definition to deal execution helps strategic acquirers to be extremely focused in the deals they pursue and avoid wasting resources on chasing inadequate targets or reacting to M&A behaviour by competitors.
They understand which targets are worth pursuing based on the organisation’s growth strategy and the prioritisation of their pipeline. The pipeline is constantly being re-evaluated as strategic priorities shift in the context of the competitive landscape and industry trends.
By adhering to the defined governance, deals are only executed which are in line with the growth strategy and where a price can be agreed that is backed by a solid deal thesis with underlying synergies that have been verified regarding magnitude and timing.
Being a strategic acquirer, and diligently following the M&A process as well as adhering to its governance structure requires a team of disciplined executives who closely collaborate with key stakeholders in the business in order to translate strategy into growth and shareholder value.
