Making M&A pay: Five ways to maximise deal value
March 27, 2018
With acquisition prices rising and once reliable sources of deal value generation being squeezed, buyers now have to work much harder to secure the payback on M&A. How can your business boost returns and bring greater certainty to deal value realisation?
Global dealmaking eclipsed the $1tn mark last Tuesday faster this year than ever before, ‘as a wave of consolidation spreads across corporate America and activity in the UK, China, Germany and Japan accelerates,’ reported the Financial Times.
While the permanent search for scale, synergies and savings continues, the deal impetus has been heightened by the need to stay competitive in marketplaces being transformed by digital disruption, aggressive new entrants and the blurring of industry boundaries.
With more than three-quarters of business leaders seeing the speed of technological change as a threat to their growth prospects, according to PwC’s latest Global CEO Survey, M&A can provide fast access to critical technology. With a similar proportion of CEOs reporting concerns over the availability of digital skills within their workforce, prized talent is a further acquisition target. In turn, tech-proficient businesses see opportunity to acquire less modernised companies and run them more efficiently, both within their own sectors and, increasingly, outside.
The bar is getting higher
As always, however, the challenge is how do you realise the anticipated value of the transaction? And delivering has got a lot harder lately. Why?
1. Deals are more expensive
Analysis by Thomas Reuters* shows average acquisition multiples have risen from 11.7 times earnings in 2010 to 14.8 now. As a result, buyers must generate over 30% extra value to make the deal pay. And the multiples in the acquisitions designed to gain access to talent, technology and niche growth markets can be even higher.
This rise in acquisition prices isn’t just a matter of supply and demand – sellers are much better prepared. This includes being better able to quantify and articulate the potential deal uplift upon which valuations are based.
The work needed to convince shareholders or investment committees that the deal is viable and then deliver on those valuations must therefore start earlier, be based on much more precise analysis and be more systematic in its execution.
2. Future-proofing the target is more costly
The challenges and costs of modernising an acquired business currently relying on outdated technology or lacking the necessary talent to compete in a digital age can be huge, which again means more returns need to be generated to justify the deal.
3. Squeeze on tax
A typical element of deal value creation has been the ability to offset tax by placing acquisition debt in a high tax jurisdiction, while posting much of the profit in a lower tax counterpart. The OECD’s Base Erosion and Profit Sharing (BEPS) Action Plan has largely put paid to such arrangements by requiring that taxable earnings are aligned with the location and substance of value creation (e.g. innovation, manufacturing etc.). Not only could the tax bill increase, but the need to demonstrate substance may require operational relocation and restructuring.
So, with the challenges for delivering a deal with maximum value creation ever greater, what can you do to optimise value realisation? Continue reading.
Optimising deal returns
If the bar for deal value creation is now much higher, how can your business meet and exceed it? Our work with clients highlights the need for a whole new approach to M&A strategy, deal targeting and value realisation:
- Deal boost one: Start early and hit the ground running
By developing your investment thesis, quantifying the potential uplift and identifying suitable deal targets earlier, your business can articulate a convincing case for acquisition and develop clear plans for value realisation before going to the seller. Crucially, these early preparations can ensure you’re in a position to hit the ground running on day one of acquisition.
- Deal boost two: Identify the Value Bridges
The foundations for upfront strategic planning are the identification and quantification of the ‘Value Bridge’ – a series of specific drivers (typically six to eight) in areas such as market access or operational efficiency.
New technology can speed up the necessary evaluations by generating in a week key analysis that used to take a number of months. This includes evaluating the growth profile in selected target markets, assessing competition and gauging your business’ readiness to capitalise. This tech-enabled analysis would also enable you to apply hard and reliable numbers to your deal evaluations to help gauge viability and judge progress against objectives, rather than relying on vague and uncertain ‘size of the prize’ estimates.
- Deal boost three: Bring strategy, operations and tax teams together
As tax and technology become ever important elements of deal evaluation and realisation, it’s vital that strategy, operations and tax teams collaborate from the outset of acquisition planning, rather than being brought in once the deal is signed. Key considerations include what tax changes, operational restructuring and systems modernisation may be necessary. How can you use the deal to transform your business?
- Deal boost four: Ensure clear direction and accountability
The need to start earlier, and deliver more, demands end-to-end orchestration, from business development evaluation through to target identification and value realisation. At PwC, we assign a dedicated ‘Deal Value Architect’ to work with you throughout the deal lifecycle. This approach doesn’t just ensure a strong underpinning for the strategic rationale (the ‘why’), it also gives the process of delivering deal value (the ‘how’) greater clarity, momentum and personal accountability.
- Deal boost five: Embed a deal value mindset in your organisation
Delivering deal value requires understanding and input from the entire organisation rather than just a few dedicated personnel.
This starts with an appreciation of the game-changing potential of M&A. For example, what capabilities would enable a business to capitalise on disruption and what role could deal making play in acquiring them? How can you look beyond preconceived assumptions about our own organisation’s capabilities and those of the business you’re buying, to think about what a private equity acquirer might do with the merged businesses to maximise value and lay the foundations for transformation?
Once your business moves onto an acquisition footing, it’s important that everyone is in gear. A key part of this is ensuring that the management teams who’ll be leading the deal integration and value realisation are closely involved in the planning from the outset, rather than simply picking up the reins from the deal team once the agreement is signed. The organisation-wide mobilisation also includes sustaining growth from within the core business. PwC analysis highlights the importance of business as usual – while synergies are realised in more than three-quarters of deals, this is often because all the best people are focused on the acquisition, leaving the rest of the organisation to drift and underperform, and hence offset any gains from the transaction.
Ultimately, the right mindset is characterised by ruthless prioritisation and tracking of value generation. Are you delivering on your targets? If not, why not and what can be done to get back on track? It’s important to ensure that the monitoring and response are proactive by looking at lead indicators such as new product launches or customer enquiries rather than waiting for measures such as sales, by which time the post-deal momentum could be lost.
When everything clicks
What this all comes down to is aim high, focus on the key Value Bridges and make sure the entire organisation is mobilised behind delivering. When everything clicks and the value gains are realised, this is the result of clear vision and early preparations. From the board through to the operational teams on the ground, everyone is clear about how M&A fits into overall business objectives and where the value is going to come from/how it could be lost. They’re also clear about who needs to do what to ensure effective planning and execution, recognising that the hard yards start rather than end when the transaction is signed.
We’ll be talking about how to realise maximum value in every deal alongside some of our existing clients at a number of intimate roundtables in 2018; giving you the opportunity to understand the ways and benefits of embedding deal value creation across your business.
Our M&A report with Mergermarket, Creating value beyond the deal, uncovers how the most successful dealmakers have made M&A pay at every stage of their deal lifecycle. We share detailed insights on what makes an effective value creation approach, as well as insight into the first-hand experiences of executives on both sides of the deal. Download the report.
* MERGERS & ACQUISITIONS REVIEW FINANCIAL ADVISORS, Thomson Reuters 2017 and 2010 analysis