Warning: Undefined array key "et_header_layout" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1342

Warning: Trying to access array offset on value of type null in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1342

Warning: Undefined array key "et_header_layout" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1343

Warning: Trying to access array offset on value of type null in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1343

Warning: Undefined array key "et_template" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1344

Focusing on Value Creation in M&A

50–90% of all Merger & Acquisition deals fail.1 The root cause is fairly simple: the M&A industry is focused on “getting deals done” and is not focused on value creation in deals. A majority of the time and expense are front-loaded into finding a company to acquire and executing the deal. Deal advisory and execution is only 30% of the battle.

Creating value from M&A requires a broader time commitment and understanding from a company. The time commitment required is years. After the deal is done and the 100 day integration is complete, most CEO’s stop actively tracking the deal. Most companies don’t realize that the hard work has only begun. Without continually managing value creation, companies move onto the next thing and only realize years later that the deal didn’t create value.

To understand value creation, a company must see it as a completely separate thread that must be managed throughout the entire deal lifecycle. During each phase of the deal lifecycle, companies must perform key activities and monitor deal execution to ensure the deal stays on target. Below are some of the key activities required for value creation:

M&A Strategy: the M&A strategy needs to be tightly aligned with the corporate strategy to ensure that any M&A deals are accretive to the company strategy, and are not distractions. Once deals become a distraction, they don’t receive the necessary attention, funding and management to achieve success.
Deal Sourcing: value creation requires defining clear criteria for the target. The list of criteria must include (1) strategic: your company’s target market, core competencies/DNA, culture and DNA and (2) tactical: deal size, location and other. Without clear criteria, the task of integration and realizing the strategy is much more difficult.
Deal Structuring: the traditional issue here is valuation and ensuring that a company doesn’t overpay or that the hurdle rate isn’t too high for the deal. However, creating a complicated deal to lower the deal price may be self-defeating. Beyond valuation, aligning incentives is very important, and ensuring anyone from the seller still involved is properly incentivized to perform.
Deal Execution: value creation requires getting a sense of the company and potential problems. During diligence, the buyer needs to start finding the skeletons and any potential landmines. From an M&A standpoint, every seller has some level of dysfunction or complications. Even the highly efficient purpose-built companies with a strong culture create significant challenges with integration.
Integration: this is where a buyer usually finds out “the whole truth about a company”. Many of the assumptions turn out to be wrong. The goal here is to be realistic about the situation, prioritize the value creating activities, and track execution. Usually, someone other than a project manager needs to manage integration. Value creation requires someone who understands how to make a deal successful take an active role in monitoring and tracking execution.
Deal Realization: in the 6 – 18 months after the deal closed, the real work begins: fixing problems, wrong assumptions, and poor execution. Value creation requires acknowledgement that it is normal that not everything goes as planned. Without this understanding, execs will hide potential problems.

For most companies, focusing on valuation may require a fundamental shift in thinking about M&A. However, once companies begin to identify the activities and required commitment for value creation, the success rate for M&A will improve.

1 http://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1
http://www.relationshipeconomics.net/blog/to-improve-mergers-acquisition-success-rate-align-strategic-relationships/

A New M&A Role: Deal Manager

M&A deals are normally run like football team without a coach. Each specialist has a particular skill set, but each specialist is not positioned to understand how his or her activities relate to the ultimate deal success (value creation). Companies need to take an integrated view of the entire deal cycle. For example, M&A strategy decisions should be informed by integration experience (when things go wrong) so that the strategy assumptions have real-world validation, and can avoid sending a company down an unnecessarily difficult road.

Companies need to implement a new role into every deal: the deal manager. This is not project management. A deal manager has to be an M&A subject matter expert and a leader. The deal manager is more like a coach, conduct or CEO, because they need to have a vision for where the deal is heading, and need to lead the deal efforts.

Below are 5 keys deal management duties in a M&A transaction:

Big Picture View: Throughout the deal, the deal manager must maintain a big picture view of the deal and what it takes to make the deal successful. There are many handoffs between the teams and services providers (bankers, lawyers, due diligence teams, integration, management, etc.). The deal manager needs to understand how all these tasks interrelate and intervene when necessary to keep the deal on track.
Subject Matter Expertise: The deal management requires subject matter expertise across the deal lifecycle, not just in one or two areas. Just knowing strategy and M&A advisory is insufficient, or just know integration is insufficient. A deal manager needs to understand every role in a deal so that they can proactively monitor progress and intervene if someone is falling off the rails.
Feedback and Coaching: With subject matter expertise, the deal manager must provide substantive feedback to the stakeholders and coaching where the team members could use assistance. There will always be someone new to the team or lacking M&A experience. When this occurs, the deal manager must recognize this and provide coaching to the new members.
Collective Wisdom: As the deal transitions through the different stages, the deal manager must retain the collective wisdom learned in each deal stage and disseminates this information to other teams. If the sales team looks weak during the due diligence phase, the deal manager must ensure that the sales team is supported after integration and must set up specific KPI(s) to track their progress. With most companies, these learnings from diligence was lost in the handoffs and are never tracked, even though it was a known problem.
Deal Process: Finally, the deal manager must ensure that each step in the M&A process is completed and sufficient attention has been given to the relevant issues. This is the classic project management aspect and is an essential role in M&A. However, without the other 4 roles above, project management is a net negative to make a deal successful.

Once companies adopt the deal manager role, they will wonder how they ever lived without this role. The deal manager will lead to value creation in M&A and to making deals successful.

M&A: Optimizing for Value Creation

With M&A, most companies are focused on deal execution, and not enough time is spent on value creation. In fact, most companies aren’t optimized for creating value with M&A, which requires rethinking the approach to M&A.

M&A is a 4-quarter sport. M&A strategy and advisory is the 1st quarter. Deal execution is the 2nd quarter. Integration is the 3rd quarter. Deal Realization is the 4th quarter.

Companies utilize different coaches and different teams for each quarter without anyone overseeing the entire game from beginning to end. A consistent game plan and team management is required to keep everyone focused on the same end goal.

Below are 5 key ways that companies can begin optimizing for value creation.

Deal Manager: Companies need to empower a new role in M&A: deal manager. This is not project management; the deal manager must have the knowledge, experience and authority to make the deal successful. The deal manager must understand each aspect of the deal and how all the different activities relate to value creation.
Guided Deal Execution: A lot of time and energy is wasted in deal execution. Specialists are brought in to perform specific tasks, but each specialist is not positioned to understand how his or her activities relate to the ultimate deal success. For example, due diligence is handed off to associates and other junior team members to look at specific issues. However, the due diligence process is fantastic opportunity to understand how the target was run, the skills sets of team members and potential problems. Buyers need to optimize around deal execution to gain deeper insights.
Experience Driven Strategy and Advisory: M&A strategy and advisory roles need to be filled by people with proper deal experience. They need deal execution, integration and optimization experience. Any deal can look good in theory, but an experienced deal person will be able to identify and troubleshoot potential issues before deciding to proceed with a deal.
Focus on Deal Realization: Most companies only play the first 3 quarters, and lose the game in the 4th quarter. The 4th quarter is left to chance and is not actively monitored by the CEO or the deal advocates.
Acknowledge and Address Problems: Deals don’t always go as planned. This is the nature of M&A. The strategy may prove to be unsound; the execution may be poor; the competitor may have seized on customer fears of M&A integration. The important thing is to quickly acknowledge when things aren’t working out, trouble shoot the likely cause, and take corrective action.

Once companies recognize M&A is a 4 quarter game, they will start to understand that M&A deals must be managed across all 4 quarters and how to optimize for value creation. M&A is not about getting the deal done, but creating value through M&A.

When Should You Begin Exit Planning?

Exit planning is essential to achieving maximum shareholder value and ensuring that all your hard work is rewarded. Without an effective plan, market forces or some unforeseen event could leave you scrambling to find an exit. If you sell under distress and without preparation, your valuation will be significantly less.

Exit planning is like an insurance policy. You pay a small amount (of your time and energy) per month to ensure that you are protected against downside risks or worst-case scenarios. Even though entrepreneurs are risk takers by nature and don’t always think about the downside, their friends, family and other investors would certainly appreciate insurance against downside risks. Also, entrepreneurs often don’t realize that their future ability to raise capital may depend on a decent exit with the existing company.

Once you have accepted the need for exit planning, the next question is when to begin exit planning? The answer must be divided into two phases (1) Exit Strategy, and (2) Exit Execution.

Exit Strategy
Your exit strategy should be baked into your overall strategy from the very beginning. In fact, thinking about exit planning from the beginning will help you grow your business. The questions asked during your exit strategy discussions will force you to expand beyond the “comfort zone” of your current business and should create new opportunities.

An example will illustrate this point. Exit strategy discussions start with the basic premise that the most likely exit will come from a partner or someone who knows you. With these partners, the key M&A decision maker could be a variety of different people, including the CEO, CFO, CTO, BU leader, VP or Products and/or Corporate Development. As part of your exit strategy, you will need to figure out who is the M&A decision maker(s), and begin building relationships with these key people. By taking this extra step, you will actually be building a stronger relationship with your partner and may create new business development opportunities by building these relationships. Too often, companies stop at simply building a relationship with middle management, because this relationship is sufficient for your immediate business needs. Thinking about your exit strategy will force you to push further into an organization and to create new opportunities.

Exit strategy discussions will also benefit other areas, such as ecosystem development, financial optimization, customer acquisition strategies and numerous others. These exit strategy discussions will focus your thinking on value creation and how to expand your business beyond its current trajectory.

Exit Execution
The exit execution process should start six months before you desire to have a letter-of-intent (LOI) signed, assuming you are initiating the M&A conversations. Without an effective M&A strategy, the process may take longer. If your M&A advisor must introduce your company to decision makers during exit execution, it can take a long-time to find the right decision makers, get their attention and convince them that acquiring your company should be made a priority (over their other priorities).

Often, companies looking for an exit underestimate the amount of time required to execute an M&A deal. On the seller’s side, you must create all the marketing materials, collect the due diligence materials, and complete numerous other tasks. On the buy-side, time is required to align decision makers around doing this deal, to conduct due diligence and to adequately plan integration.

To avoid the time crunch, a clear exit strategy and a disciplined execution plan are essential to achieving shareholder value.

How Risky Is Your M&A Strategy?

Some M&A strategies involve more risk than others. The biggest risk factor is the disruptive change required in your core business. For example, if you are trying to consolidate an industry through multiple acquisitions, then significant risk exists in the integration process. On the other hand, the classic private equity “financial engineering” is less risky. While you are slashing costs, there is no disruptive change happening to the core business. You’re still in the same business and don’t need to integrate different teams and products.

Riskier strategies are sometimes necessary and can achieve greater returns. You can’t avoid shifting market dynamics or other potential disruptions to your business. For example, if you are facing a rapidly declining market and technology disruption, a transformational M&A deal may be your best option.

common-m-and-a-strategies

The above chart categorizes the different M&A strategies from less risk to more risk based on the inherent risks in the M&A strategies. These strategies include:1

Financial Engineering: reduce costs/optimize taxes to increase profitability
Consolidate Capacity: remove excess capacity to fix oversupply problems
Sales Leverage: buy product to sell through your existing sales channels
Buy Tech/Skill: buy new technology or talent
Emerging Market: make small bets with startups in high growth new markets
Defensive Play: buy a disruptor company that threatens your core market
New TAM: buy into a new market to increase your market size
International Expansion: buy competitors in international markets to expand
Consolidate Competition: buy competitors to consolidate the market
Industry Rollup: consolidate a fragmented industry
Transformation: move a company in a new direction via acquisition
Buy Cheap: buy an asset because it is cheap

To ensure that your deal is successful, you should assess the risk factors to understand potential problem areas. If you are engaging in a riskier M&A strategy, you can significantly reduce the risks through an effective deal strategy, including utilizing a Deal Manager with experience in these deals and focusing on value creation throughout the deal process. You can never remove the risk from M&A, but you can achieve success if you understand the risks and diligently mitigate these risks.

1 See McKinsey article for their analysis of different M&A strategies. The five types of successful acquisitions, July 2010 | by Marc Goedhart, Tim Koller, and David Wessels.

Choosing A Buy-Side M&A Advisor

Choosing a buy-side M&A advisor requires deciding what skills and expertise you need to make your deal successful. Most M&A advisors focus on sourcing and structuring the deal, which is logical since most M&A advisors come from investment banking. However, if you want to make your deal successful, you should think about what other skills and expertise you need throughout the M&A deal cycle.

As the chart above illustrates, the M&A deal cycle requires significantly more skill than simply sourcing and structuring a deal. There are numerous areas where your company could utilize M&A expertise. Two examples will illustrate this point:

An M&A target could show signs of significant integration problems. An advisor with skills limited to sourcing/structuring wouldn’t necessarily see these problems, nor are they incentivized to deal with these problems (they are only responsible to get the deal done).
Your internal teams may have limited M&A experience and may not know what is expected of them or how to successfully complete their tasks. An advisor needs to recognize this problem, and have options to address the issue. Ideally, your M&A advisor would have sufficient experience to coach and guide the teams through the process.

These are just two examples of why you should expect your M&A advisor to have experience and expertise across the entire deal lifecycle. Even if you don’t need to hire the M&A advisor for the entire deal lifecycle, this integrated expertise will add significantly more value when you do need them.

When choosing an M&A advisor, you should utilize three basic questions to differentiate the advisors:

What direct experience do they have in each phase of the deal lifecycle: strategy, integration, etc.?
Does your advisor know what it takes to make a deal successful (not just getting the deal done)?
How can the advisor help your teams execute better at their tasks?

These three basic questions should enable you to differentiate between M&A advisors so that you can decide who is in the best position to make your deal successful.

If you want to dig deeper during the interview process, the chart below illustrates how an M&A advisor can and should be an effective Deal Manager. The role of a Deal Manager is to guide a deal from the beginning to the point where the deal achieves its expected outcome. To be successful, there are general skills required from a Deal Manager as well as specific tasks assigned to the Deal Manager at each stage of the deal lifecycle.

The “General Skills” are key attributes and tasks that a Deal Manager should perform across the deal lifecycle. For example, with Collective Wisdom, the Deal Manager should understand why the deal is being done (stated objective), and should track its progress across the deal lifecycle. The accumulated collective wisdom from strategy, sourcing and due diligence will enable the Deal Manager to keep the teams focused on what it takes to be successful and to guide the deal towards successful conclusion.

The “Specific Tasks” are separate from the traditional M&A tasks (valuation, legal negotiations, etc.). These tasks help you identify risks, deal with problems and drive the deal towards success. For example, in the strategy phase, the Deal Manager should quickly identify the riskiness of the strategy and outline a plan for managing these risks during the deal lifecycle (for more information on the risk profiles with different M&A strategies, please see my other article, How Risky Is Your M&A Strategy?).

You can and should expect more from your buy-side M&A advisor. These advisors should have the skill to make your deal successful, not to simply get the deal done.

Warning: Undefined array key "et_footer_layout" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1392

Warning: Trying to access array offset on value of type null in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1392

Warning: Undefined array key "et_footer_layout" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1393

Warning: Trying to access array offset on value of type null in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1393

Warning: Undefined array key "et_template" in /home1/tcox15/public_html/wp-content/plugins/pdf-print/pdf-print.php on line 1394