M&A as a catalyst to build a faster-growing organization
Growth is a key driver of shareholder value. A study of more than 50,000 M&A transactions taken place since 1990, shows that ‘Growth alone creates twice as much value for shareholders as margin or cash flow improvement’. It is not surprising that there has been an upward trend this year in strategic M&A investment offering higher returns. Nearly 69% of US corporation CEOs indicate they plan to drive growth through M&A for the next decade.
Growth through acquisition or merger is generally much faster and if done right can yield several other benefits that can help make that rapid growth sustainable. However, like every long-term relationship, it’s imperative that M&A also happen for the right reasons. One must be clear about the strategic rationale of the acquisition, develop an M&A screening criterion, and must efficiently search for targets to make the M&A transaction “influential”.
Unfortunately, the long and consistent historical track record of M&A failures highlights the reality that there is no guaranteed formula for success. Therefore, intensive planning and taking the right approach for M&A, from the beginning, must be an integral part of the enterprise’s overall strategy. Data shows that M&A deals that follow an integrated approach to execution have 30% higher success rate. Therefore, success lies in setting a definite criterion for M&A evaluation and prioritizing following broad areas for decision making:
Strategy / Goal of M&A
The first criteria in a growth-oriented deal are to determine where M&A fits in the corporate strategy. Successful acquirers prioritize specific opportunities based on agreed-upon criteria such as:
- What part of the company’s strategy does it want to use M&A to advance?
- Does it want to use M&A to diversify, create new business model, improve competitive capabilities, expand footprint, achieve economies of scale, boost customer base, enter new geographies, enhancing brand equity or acquire talent and intellectual property etc.
- How will the company use a “full potential” approach to identify all possible areas of improvement rather than merely integrating the target company to capture the most obvious synergies?
- How will the company create value through acquisition synergy? Does it seek to turnaround underperforming assets, consolidate to reduce costs, or achieve revenue synergies additive to its own?
Opportunity Validation & Target Screening
A next step is to measure whether the growth opportunity is real. Determine acquisition rationale for identifying the right targets to ensure that combined entities can realistically capture that growth potential:
- How is the combined company positioned to address existing markets? How a combined company can utilize differentiated capabilities to sustain business environment?
- How will the target markets shift as a result of this merger or acquisition? How is the combined company positioned to take advantage of synergies & economies of scale?
- How much (and what kind of) risk is the company prepared to assume related to the target company’s acquisition?
- What new opportunities are available to pursue as a result of the deal, and which of them have the highest growth potential?
- What skills must the targets bring? Cultural fit, management quality and retention key to successful outcomes?
Shareholder Value & Execution Capability
An M&A execution strategy should ultimately create value for shareholders; therefore, the third important criteria is to build shareholder consensus and focus on execution & timing of key priorities & deliberate upon:
- How to get the deal valuation right? How will shareholders view the transaction?
- Is long-term value creation enough to win their support or do acquisition also need to be valued on immediate returns?
- What is the intrinsic & incremental business value of the target based on current operations and future growth potential?
- What is the target company’s financial capacity and what restrictions, should be placed on the value & method of the transaction?
- Does the target company have solid growth prospects or at least generate solid profits and cash flow?
- Does the company have all the skills it needs to execute on the objectives set out in the M&A strategy?
- Does management have the capacity to conduct an extensive post-merger implementation project?
- What are the risks to the business of taking on a post-merger implementation project?
Successful deals require acquirers to consider much of the planning, strategy definition & associated tactical planning prior to closing the deal, allowing execution to begin immediately. By keeping the focus on strategy and results through the detailed due diligence to acquire and integrate, companies can reach their M&A growth goals more successfully.
MergerWare is an expert M&A consultancy, revolutionizing the M&A process by bringing together decades of deal-making experience with advanced, yet easy to use technology to help organizations achieve the best possible outcomes from their M&A transactions. MergerWare provides the expertise and the tools that bring out the best in your teams. Get in touch with us [email protected]