Assembling the components of a winning industrial products and services deal
April 14, 2020
What did our recent survey of 100 IPS executives reveal about creating value beyond the deal in industries that are operating in challenging market conditions?
As cost pressures mount, scale and synergies are important drivers of M&A. We’ve been seeing diversification into adjacent markets as businesses seek out fresh revenue streams and look to avoid over-reliance on a single product or geography.
Within the UK market, the search for complementary products is moving in innovative new directions. An example might be an equipment manufacturer buying a company making the tools used by mechanics working on its products. The benefits not only include new sales opportunities, but also synergies within marketing and distribution.
Similarly, many IPS businesses are looking to acquisition to help engage more closely with decision makers along their value chain. This might include a boilermaker buying a company producing regularly replaced components such as pumps or filters. The result is more frequent interaction with customers, which can help to drive sales within their core business. It could also lay the foundations for a move towards a subscription service.
Whilst this research was conducted before the COVID-19 outbreak, over the coming months many businesses will find themselves in a position where they’re considering M&A and maximising value creation through these transactions will be more important than ever.
A good track record
Overall, the deal value track record of IPS companies is commendable. Our research shows more than two thirds (67%) of IPS deals generated moderate or significant value.
IPS dealmakers have some advantages over other sectors. In particular, most IPS deals involve market peers, which tends to make them easier to integrate. In turn, many of the larger companies can call on experienced in-house deal teams. However, most IPS businesses here in the UK aren’t big enough to maintain that kind of dedicated resource.
What’s equally clear is that there’s still plenty of value being left on the table. For example, when we asked the IPS dealmakers what they would do differently next time around, many pointed to the need to pay more attention to cultural and talent retention issues.
Set up to deliver
What then does our survey reveal about the foundations for a successful deal? If we look at the market environment here in the UK, five priorities stood out:
1/ Stay true to your strategic intent
33% of IPS companies said that their last acquisition taught them that they need to do more to put value creation at the heart of future deals. The most successful deals are driven by a strong management team, with a clear vision for the future and sense of how merger, acquisition and divestment fit into this. Opportunistic dealmaking can create value, but not as often as strategic deals do.
2/ Keep looking ahead
Our survey reveals fewer tech and talent-focused acquisitions than we’ve seen in many other sectors. This is surprising given the impact of digitisation on IPS and potential for further disruption in areas such as 3-D printing. I believe we will see more of these types of deals in the future. Acquisition could also help companies to bring in the capabilities they need to keep pace with the shift to a low emission economy.
3/ Put people at the heart of the deal
Holding on to key talent has always been critical to deal value. And it’s set to be even more important as acquiring innovative capabilities and expertise in areas such as sustainability move to the centre of the strategic agenda. Many of the ‘rainmakers’ may not occupy prominent positions. It’s therefore important to find ways to identify, incentivise and retain them.
4/ Base valuations on the strategic uplift
The key component in valuation is the target’s ability to help realise your long-term strategy, rather than a nominal market value. Along with production capabilities and market share, the evaluation should include the people and access to data being acquired.
5/ Hit the ground running
A clear and actionable integration plan enables you to hit the ground running from Day One. This includes identifying the crucial first hundred days’ priorities and hurdles that need to be overcome. It also includes early moves to build relationships between the acquirer and the target company and help forge cultural alignment.