The article was originally co-authored by Rickard Åkesson.
Five M&A strategy considerations that have proven to increase the likelihood of successful M&A across industries over time.
Acquisitions can significantly accelerate top line growth and often make the headlines, but the failure rate of M&A is extremely high – measured in net financial value creation. Extensive studies and research show failure rates for M&A deals ranging from 50%1 and up to as high as 90%2. In our own 2016 pan-Nordic M&A survey, respondents from across the Nordic M&A community – including business development, line management and private equity – rate only 62% of their own deals as successful. However, studies also show that companies that are actively engaged in M&A, i.e. frequent acquirers, on average over a multi-year period outperform inactive M&A companies, i.e. companies that do not make any deals, in terms of total shareholder return results generation3.
This begs the question: What is it that the most successful acquirers do to achieve success? Our guide is meant as a practical reference handbook on how to increase the likelihood of M&A success for business executives who may not already have significant M&A experience. In this introduction, we share tools, methods and insights that are tried and tested and have proven to increase the likelihood of M&A success over time. It is not our ambition to provide an exhaustive guide to how to manage all M&A situations, but focus is on the following three themes:
Successful M&A strategies – outlining five M&A strategy considerations that have proven to increase the likelihood of successful M&A across industries over time.
Read article 1
Due diligence success factors – focussed on practical tips and tools, including due diligence for commercial, operational, supply chain, IT as well as leadership and team.
Read article 2
Success factors for post-deal impact – outlining key considerations for impact post deal, which synergies have the highest success rates and the key to realising these synergies. Each theme is published as a separate article.
This article focusses on the third theme: Success factors for post-deal impact.
We share findings based on our experience from working on a large number of pre-deal and post-deal situations, our latest 2016 pan-Nordic M&A survey and the recent M&A with Impact event in Stockholm where 40+ senior M&A professionals shared their insights, tools and experience with how to improve the odds of M&A success.
We know from countless studies that succeeding with deals is very difficult, in terms of delivering the intended value – be it commercial or operational synergies or stand-alone value creation. The underlying reasons can often be summarised into a few simple rules:
One of the most central (and most often overlooked) aspects of a successful PMI process consists of securing the correlation between the due diligence process and the following integration process.
The activities before and after the deal are often regarded as isolated processes – and this creates a lack of consistency and results in a significantly slower fulfilment of both the cost synergies and the growth potential.
Basically, there are two ways of creating the necessary correlation between the pre-merger and post-merger processes:
When going through large change processes, organisations typically withdraw in order to make the internal life work and get the critical processes into place.
This is to a certain degree necessary – but it often takes place at the cost of the customers and working partners from which the company lives.
In the end, a successful PMI process depends on satisfied customers, and thus the question of how the key customers benefit from the merger/transfer should be the focal point of the entire integration process.
In other words, the customer’s business case should form a central part of:
Integration processes involve all parts of the companies – finance, legal, HR, IT, sales, marketing, production etc. – and often there will be a battle for resources across the company’s functions/departments.
The financial department is often given the primary role in the first part of the integration process. This happens for a good reason – homogenous reporting needs to be established, the cost synergies are to be harvested, and profit from the core business needs to be secured.
These aspects need to be put in place no matter what, but in our experience the commercial disciplines can, with advantage, take on a stronger role in the initial KPI structure as well as at the central meetings in the actual process.
Some of the reasons are:
During this article, we will highlight a few sections to help you consider some key factors for post-deal success. We will explore why deals usually break down, why they succeed and furthermore provide Implement’s view on helpful frameworks and tools to consider along the way.
Our pan-Nordic M&A with Impact survey, which comprised 67 respondents with a background in the industry and private equity, revealed that the top four reasons for failure were4:
(Source: Implement Consulting Group pan-Nordic M&A with Impact survey 2016, N=67)
In the light of this, the subsequent two sections of the guide will address these concerns and provide a comprehensive set of robust frameworks and tools that will prove useful in helping companies achieve M&A with impact.
The closing of the deal now leads us to the crucial question of how best to add value to a new acquisition and draws our focus towards the post-deal key success factors. This can be summarised in five key factors:
Our recent M&A with Impact panel discussion further reinforces the above points. We highlight the interesting key insights drawn from the panel5:
Clear step-by-step roadmaps are important to keep projects on track. Plans should be adjusted to specific needs and kept within a shorter time frame to be up to date and relevant.
Referred to as the “J-Curve” – often things start out worse than expected before value creation starts to show. It is an important part of the pre-deal analysis to be aware of this risk, which should also be taken into account when going into the post-deal phase.
Assessment of management during a due diligence is difficult. Show trust and patience with the CEO and management but stay attached. The company culture is highly important, especially during the first phases of post-deal, where management can have a positive impact on the transition.
Cost synergies are considered the best way to get going during the 100-day plan, the first phase of the post-deal. Remove obvious fat and get an understanding of the cost structure. Do not focus on too much; the PMO should only handle three large projects to begin with. A minimised but effective project portfolio.
Successful integration is always a great challenge, particularly complicated by the fact that each deal is unique; firstly, not every type of deal requires integration, and, secondly, no two deals should be integrated in the exact same way. However, if executed well, successful integration offers the potential of delivering great value both to the acquirer and the acquired company.
It is crucial to ensure alignment of the integration strategy with the deal thesis, first and foremost by clearly distinguishing between two key dimensions, whether the acquisition is a scale or a scope deal or a large or a small one. This identification will determine subsequent judgement about what to integrate and keep separate, the organisational structure, the cultural integration process and the retention of key management and talent, among other things.
Scope deals are extensions into new markets, products or channels and present new business opportunities in terms of generating additional revenue for the acquirer. On the other hand, scale deals are expansions in an identical or vastly overlapping business, where the main goal is to achieve cost savings, economies of scale and rapid economic benefits through synergies and speed. We present a simple framework to determine the approach to adopting integration approaches, depending on the type of deal identified:
Scope deals, which comprise bolt-ons (small) and portfolio deals (large), typically require limited integration to preserve the value of the acquired business. Initial platform deals done by private equity firms are generally classified under scope deals. On the other hand, an example of a company doing frequent bolt-on deals that are only to a limited extent integrated is the Swedish company Indutrade, which has made a series of small acquisitions over the years. However, it does not integrate them heavily, but instead uses “clusters of excellence” where similar types of companies get together to talk about how they can work together without any forced integration among their respective functions.
Among scale deals, small deals can be classified as takeovers. An example of this includes ASSA ABLOY that has acquired many small companies in the same space of their business to achieve rapid economic benefits and synergies. On the other hand, large complex scale deals typically require comprehensive integration.
When considering the integration approach and determining what exactly to integrate and what to keep separate, two key considerations are the costs and capabilities and the customers of the business - see the figure below.
Having the same customers but different costs and capabilities requires frontline integration, while having dissimilar customers but the same costs and capabilities requires backline integration. The scenario where full integration is relevant is when the business acquired is the same business as the acquirer, where both customers and costs and capabilities converge. However, should there be no overlap whatsoever across the customer base and costs and capabilities, then one should critically question the need for full integration, since the deal is essentially a scope deal of which the new business presents novel business opportunities.
A number of private equity studies carried out over the last decade have confirmed the critical impact of the management team in the best performing deals with the common view that the right CEO with the right 8 to 12 key team members is what makes the difference to the value creation process6.
To support the view that retaining key management and talent, clarifying roles and addressing cultural conflicts are crucial to post-deal success, results from our M&A with Impact survey similarly identified the swift establishment of an effective top management team and the retention of key talent and managers as most crucial during a post-merger integration7 - see the figure below.
Yet, while a strong management is important, it is difficult to predict. Research into 155 changes of CEOs in European-based portfolio companies during the eight-year period from 2004 to 2011 shows that 50% of CEO changes were unplanned at the time of transaction8 - see the figure below.
As the probability of a CEO change during the life of the deal has increased, it is important for firms to refine their skills in managing a CEO or top management transition. Firms are increasingly investing more time and resources in taking a much closer look at the management team at the outset and adopting a new approach to the assessment of the individual’s capabilities and the team dynamics.
Broadly speaking, several scenarios could play out9. Here are some examples: Firstly, acquisitions involving family-owned businesses would often be missing a “strategic number two” and are typically largely owner-dependent. Putting a professional management team in place and developing a transition is crucial here. The second scenario could include a successful and highly entrepreneurial business but lacks the ability (financial, managerial, infrastructure) to further grow the company. Here, the previous owner may remain instrumental in ongoing operations with additional resources needed to execute the growth strategy. In acquisitions where a professional management team is already in place, there must be no fear of making management changes, if necessary, which could also involve moving people around within the organisation to maximise their talent. Certainly, other variables could also influence the circumstances such as a distressed company, an industry in the midst of big changes or a company lacking capital investment.
Post deal, it is crucial to drive execution through clear, consistent and frequent plans and a laser-sharp focus on operations to drive value creation. This is where the last three post-deal key success factors come into play, namely focussing on prioritised value creation initiatives and applying plan/do/check/act reviews, maintaining an external focus and momentum in the daily business, and, finally, following a structured approach with dedicated champions and frequent communication.
Specifically, which areas to focus on in the value creation plans depend on the situation, e.g. what is most likely to yield the highest impact. When it comes to value creation initiatives, let us say that these area initiatives are put in motion to improve company performance in a specific area, and that these areas are not synergy actions, i.e. value creation can be done and initiated with an acquired company whether it is acquired to be run as a stand-alone company or integrated with other companies. On that basis, the M&A with Impact survey asked companies to rank what areas are most likely to add value in new acquisition situations – irrespective of whether they are in an integration situation or to be run stand alone.
Interestingly, the results show that no specific area is vastly more important than another. Here, what drives value will typically be very case specific, which is not visible in the average view, and some areas will be more important in some situations and others in others. See the figure below for the results.
In our M&A with Impact survey, we also asked companies to rank what synergies are the most valuable and easiest to realise.
The survey points to the following synergies as on average most attractive, i.e. highly valuable and easy to realise.
Interestingly, while cost synergies are generally the most reliable, the M&A with Impact survey finds that revenue type synergies come out as the most attractive. This is probably influenced by the fact that, generally, the survey results reflect small and large companies buying small companies – where revenue synergies are most often important.
When it comes to designing plan/do/check/act reviews, we present an example of how a 100-day development plan for an acquired company (post due diligence), supported by concrete action plans and financial targets, could be structured:
It is absolutely critical to start planning early – a great deal can be done prior to closing, and the key is to make sure that you are able to be ready to hit the ground running on the closing date as the new owners of the business rather than to start putting a strategy in place only then. Lack of preparation will lead to a loss of critical momentum, and the capacity to initiate change will dissipate swiftly.
In addition, it is extremely crucial to keep focus on growth and on moving the business forward. Throughout the implementation, it is key to remember that even when things fail to go according to plan, management must push forward. Despite the obstacles that crop up, management must maintain the momentum and keep moving to avoid getting bogged down and losing steam in the process.
As previously highlighted, it is important to “hit the ground running” on day one. To support this, the 100-day plan has become an integral part of many deal transactions, particularly in the private equity world. The main objective of the 100-day plan is to serve as a structured roadmap that provides a direction for what needs to happen in the first 100 days after deal closing.
Regardless of who is specifically responsible for the plan, everyone in the team, particularly top management, must be held accountable for execution, and it is important to have regular follow-up sessions to check on the team’s progress and hold teams accountable for their promised objectives.
Here is an example of a 100-day plan for getting the acquisition organisation in place centred around a merger office:
In mergers, everything tends to become equally important, and prioritisation proves difficult in practice. Therefore, it is important to design the merger effort around a few prioritised work streams – and to focus intensively on these – with good representation from both companies. The individual work tracks should have the responsibility for defining success criteria, goals and clear milestones for their tracks.
Furthermore, it is decisive for the merger team to have access to top management, and at the same time it is important to follow the principle of “letting the line steer”. The merger team leadership should have a pre-defined meeting schedule with participation of at least one senior executive to ensure management team link.
All in all, M&A can be a great source of value creation if managed and worked with in the right way, and most successful post-merger integrations are well prepared. Below is an example of a typical approach to preparing and implementing a merger, where there is a distinct preparation phase, then the first 30 days of mobilisation, then the focussed efforts in the 100-day plan, and then what happens after the first 100 days.
A lot of work effort should be put into the preparation phase – please see below example of such an effort with the aim of reaching a high-quality level for decisions, validating and prioritising synergy potentials, securing engagement in the core team and preparing for a successful post-merger integration.
This section sums up on how to ensure that a strategic change is successful. It is a collection of best practices when making strategies come to life, and we believe it is highly relevant in a post-merger setting.
While most organisations would instantly agree that effectively implementing strategies is key to success, only a few have repeatable processes and management systems in place to support strategy implementation. Consequently, how we make strategy work is often reinvented at the frequency of the development of new strategies defining what to do.
From numerous studies, we also know that roughly 30% of all strategies deliver the expected impact. The same statistics are roughly true when integrating companies.
To excel at PMI and strategy implementation, organisations must pay careful attention to both the content of the strategy and their implementation model. The implementation model should always be tailored at the level of the individual organisation – mindless import of best practices should be avoided. However, five guiding principles based on experience and research serve as a strong starting point for designing the right implementation model:
The guiding principles play together in concert. At any given point in the journey, they will help consider implementation aspects of strategy work. Here are selected takeaways for each step of the model that we believe are relevant to the execution of any major strategic change such as a PMI process:
We hope that the above tips are helpful when considering implementation of any major strategic changes in a post-deal setting – be it a fully-fledged integration of a small target or a full merger of equals.
This concludes Implement’s three-step article series on M&A with impact. We hope that you have enjoyed going through article 1 on M&A strategy, article 2 on due diligence and article 3 on success factors for post-deal impact.
You are always welcome to contact the authors of the article series if you have any questions. We would be happy to hear from you.
More on m&A
1. Sher, Robert (19 March 2012). Why Half of All M&A Deals Fail, and What You Can Do About It. Forbes
2. Christensen, Clayton M., Alton, Richard, Rising, Curtis & Waldeck, Andrew (March 2011). The Big Idea: The New M&A Playbook. Harvard Business Review
3. Harding, David & Rovit, Sam (2004). Mastering the Merger: Four Critical Decisions That Make or Break the Deal. Harvard Business Press
4. Implement Consulting Group pan-Nordic M&A with Impact survey 2016. Note that a similar international survey from 2002 is referenced in: Harding, D. & Rovit, S. (2013). Mastering the Merger: Four Critical Decisions That Make or Break the Deal. Harvard Business Press.
5. Panel included: Peter Nilsson, Senior Industrial Advisor to EQT and former CEO of Sanitec; Conny Karlsson, Partner at CapMan; Jan Dahlqvist, Partner at Polaris; Mikael Norlander, Senior Investment Manager at Ratos; Henrik Åstrom, Group Finance Director, Head of Treasury and M&A at Fagerhult.
6. Spencer Stuart (2011). Is the Management Team Right?
7. Implement Consulting Group pan-Nordic M&A with Impact survey 2016.
8. Spencer Stuart (2011). Is the Management Team Right?
9. Grant Thornton (October 2013). What can be done in 100 days?
Successful M&A Strategies
The employee motivation pitfall
Implement Consulting Group