Inorganic growth, are you ready?
January 26, 2018
A new era for M&A
Growth is in the air and so is a level of optimism with global CEOs. In PwC's 21st CEO Survey released recently, when asked what will drive growth, virtually all North American CEOs point to organic growth (94%) followed by new M&A (61%). Western European CEOs will rely on M&A 45% of the time and the global average is 42%. Compare this last figure to CEOs’ view just four years ago, where the global average was just 11% for M&A led growth, that’s a significant uptick. This prompts the question of whether in just this short time, companies are ready to deliver on M&A led growth with the capabilities to create, capture and deliver long-term deal value.
Historically, M&A activity centred on consolidation and geographic expansion. However, the ever expanding digital ecosystem of commerce is drawing on corporates to integrate new skills, capabilities and products to surprise and delight existing customers, or bring in new customers. The need to deliver innovations in big data, artificial intelligence and connect to the broader Internet of Things is bringing an increased focus on transformational M&A deals.
Three fundamentals for CEOs
Whether an M&A is a means to reach specific growth objectives or to fill a white space on the product side, there should be some sort of acid test done before embarking on any deal. In essence, there are three fundamental questions that CEOs and their investment committees should be able to answer before moving forward on a deal:
- Would an investment in building internal capabilities be a more effective use of capital or can we deliver value faster through an acquisition?
- Does the target bring the right capabilities and do we get the right risk/value ratio?
- Can we deliver effectively on the integration and achieve short and long term value?
The last question is always the most elusive. An integration could drive strategic realignment, integration of sales teams, launch of new products, consolidation of processes, operational changes, technology enablement and culture alignment. All of these initiatives may be competing for resources at the same time under tight deadlines and the watchful eye of employees, customers and the financial community. This is just a small sample of the challenges that managers must face after an acquisition. No other managerial project is as complex as an integration and poses such a high risk of error.
Five considerations for company readiness
So what should CEOs and their investment committee ask to judge their company’s readiness to deliver on the deal short and long term? In our experience there are 5 critical considerations:
- How robust is our revenue and cost synergy case?
- How will the new operating model (including organisation structure and leadership appointments) deliver quick value impact, create a path for change, and secure sustainable value?
- Do we have a robust and tested integration capability to manage all of the change initiatives?
- How are we planning to align our leadership incentives to the deal value delivery?
- What is the culture shift and how do we motivate, retain and excite our employees?
In defining what success looks like, leaders need to look beyond the classic financial metrics to prove deal value. Increasingly, corporates are being held to account for also delivering prosperity to their employees and the broader community for an integration to be truly successful.
So are you ready for your next M&As?