A Peek into current Value Creation Planning Practices in M&A

A Peek into current Value Creation Planning Practices in M&A

A Webinar with Midaxo and BTD

A few weeks ago, BTD partnered with Midaxo to conduct a webinar on approaches to value creation in M&A – yes, certainly one of the oldest, most long-standing discussion topics in the field (it is after all why most of us do M&A, right?); but one that clearly continues to challenge many acquirers. In the webinar, we outlined the approach that forms the basis of much of our own work with clients: one that tightly connects identification and assessment of deal benefits, operating model design, planning and post-close execution; while also reflecting the need to manage leadership engagement and behaviours along the way. If you’d like to read more on this approach, visit https://resources.midaxo.com/products/synergies-in-m-a-a-framework-for-value-creation, or download one of our papers on the subject, Connecting the Dots, at https://btd.consulting/wp-content/uploads/2017/06/Connecting-the-Dots-March-2015-3.0.pdf.

As part of the webinar, two polls were conducted, both of which produced some interesting insights on the current practices around value creation of the ~100 M&A and integration leaders participating. The first question asked was, “When you go into potential acquisitions, do you have a pre-set view on which synergy type to pursue, if so which one(s)?

It’s pleasing to see that revenue-based ‘synergies’ received the highest count; in fact, many studies over the years, as well as our own experience, continue to suggest that revenue-based synergies, while being harder to achieve, are in fact the foundation of most long-term successful acquisitions. Also good to see was the prevalence of ‘capability-based’ synergies as these also form a key component of most successful deals – provided however these benefits are properly quantified (using non-financial metrics) and fully planned for; these are not the ‘strategic synergies’ often used to describe ‘things that might help push the business case over the line, but which we never really expect to see’.

Capital synergies are often relatively small in the overall mix and often fall ‘below the line’, leading to the relatively low priority reflected in this poll. However they can offer significant ‘quick win’ benefit (e.g. working capital reductions through warehouse consolidation or the avoidance of future investment planned in the target’s IT systems that is no longer required), so in future we’d like to see this figure increase. In any case, the key is to consider all four sources of value creation every time you develop your synergy and benefits hypotheses for a potential deal.

The second question asked of M&A and integration leaders was an old favourite: “When do you typically start integration design and planning?” Compared to our own view of good practice, results of this poll were less encouraging:

While it typically takes place alongside even the final stages of the pre-deal process, integration design and planning should start before due diligence, something only 23% of respondents said they regularly do. Starting early will help you ensure that the unknowns and assumptions that emerge from your value creation analysis and plan can be tested through tailored, prioritised due diligence: How long will it take to change the CRM processes and IT systems on which your cross-selling benefits depend? How supportive is the target leadership likely to be of your office relocation plans? What may prevent you from increasing capacity in their – or perhaps your own – production sites? How different are the cultures of the two businesses, and what might these differences do to staff retention in their NPD group? Clearly, due diligence has a role in confirming elements of the target organisation’s past history, but if creating value is the ultimate point of this deal, then the best use of your due diligence is to validate your plans for them in the future. The insights gained through this approach applies equally to target valuation (How accurate are your estimates of post-close integration costs, and have they been incorporated into your valuation models?); deal negotiations (how important will it be to keep their Commercial Director, and what will it take to do so?) and more.