Game-changing M&A: Creating the blueprint for transformation
July 20, 2018
With growth hard won, the pace of mergers and acquisitions is accelerating. Yet, businesses need to work much harder to secure the payback.
As always, buyers will be looking to strengthen the scale and reach of what they already do. The current high acquisition multiples mean the synergies - or value creation potential beyond the initial acquisition - need to be highly significant to make a deal worthwhile.
Much of the M&A we are seeing today looks beyond straightforward consolidation or bolt-on acquisitions. As markets are opened up by digital disruption and the blurring of industry boundaries, there are growing opportunities for genuinely game-changing M&A. The key focus of transformational deals is bringing in new capabilities, enabling a business to access fresh revenue streams or even overhaul its entire business model.
An example is Amazon’s acquisition of LoveFilm in 2011. Rather than just increasing market share by acquiring another online retailer – bulking up – Amazon gained a valuable foothold in the rapidly expanding on-demand streaming market. The subscription service didn’t just offer a new source of income, but also strengthened customer engagement within the retail business. One of the key advantages of this kind of successful transformational acquisition is infusing new skills and capabilities across the entire business, providing the big value boost needed to make up for the rise in acquisitions prices.
So how can businesses make the most of the game-changing potential?
A lot of deals are opportunistic – a target becomes available and the prospective buyer moves in. This reactive approach lacks the firm strategic foundations essential to make a success of transformational M&A. Our work with clients highlights three keys to getting these foundations right:
1. Are you ready to go?
The more you can do at the front end of the deal process, the better placed you’ll be to move when targets come up for sale and have execution plans in place ready to hit the ground running on day one.
Key questions include: what are the market openings that could trigger value creating potential? What capabilities do you need to capitalise? Do you have them and, if not, do you build or buy?
2. Have you prepared your M&A blueprint?
Establishing this deal rationale as early as possible in the process enables the development of a clear M&A blueprint, setting out what capabilities you are looking to acquire and how. These levers might be specific technologies, particular types of talent or securing access to a new market.
The blueprint wouldn’t just include the targets, but who within your organisation would need to do what and when across the deal lifecycle, from quantifying the uplift, through to integration and value realisation.
Ideally, a dedicated ‘Deal Value Architect’ would be responsible for drawing up the blueprint and seeing it through to execution.
3. Are you making the most of your network?
Steering the deal isn’t just a matter for the CEO and CFO. There is likely to be a huge wealth of deal experience and expertise among other corporate stakeholders, in particular the non-executive directors (NEDs). They can advise on strategy, targeting and execution to help steer clear of pitfalls and maximise the return, in short, helping to safeguard value.
NEDs could provide key input from the outset, rather than simply vetting deals already in train. As technological capabilities become an increasingly important acquisition target, it’s important NEDs have the necessary expertise to help guide tech-focused deal-making.
No margin for error
Deals are increasingly expensive – there are few obvious “bargains”. So there can be no hit and miss approach. The value boost needs to be considerable and the delivery assured.
Transformational M&A allows a business to gain a much bigger return on the acquisition price than straightforward scale plays. The precise analysis and systematic planning – the deal blueprint – needed to capitalise on more complex transactions should provide clear direction for value creation and ensure nothing is left to chance.
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, the role of people in culture in value planning, as well as insight into the first-hand experiences of executives on both sides of the deal. Download the report.