Navigating the New World of M&A and Integration Part III: Charting a New Direction

Navigating the New World of M&A and Integration Part III: Charting a New Direction

In this post, the third of four in the series, BTD UK Partner Carlos Keener discusses some of the emerging strategies clients are considering for inorganic growth, and provides an alternative perspective on the key factors necessary for success. You can read the first post in the series discussing immediate challenges facing deal makers and integrators here.

Three months into the global pandemic and while much about the post-lockdown future remains uncertain, some themes are beginning to emerge. It’s clear from our earlier posts and weekly webinars that these include the need for businesses to maintain flexibility and reduce risk in their future merger and acquisition activities. This appears to be taking two main forms:

  • Extended, more creative deal terms and earnout structures;
  • A reconsideration of alternatives to M&A, e.g. alliances, minority investment and joint ventures.

This prediction is proving true: We’re already seeing acquirers across sectors show an increased interest in alliances as a route to new capabilities and growth in times of extended uncertainty, or as a half-way house to full acquisition, allowing them to ‘try before they buy’.

But guess what: it turns out that the typical success rate for alliances is just as poor as that for M&A. Yet again, despite decades – if not arguably centuries – of practical experience in alliances and joint ventures, one recent study[1] suggested that approximately 45% of JVs neither met nor exceeded the expectations of either side. Sound familiar?

Beyond the Deal has spent close to 20 years focusing on what makes M&A work, and we know that, as much as commercial rationale and strategic fit, it is the organisational and leadership factors that make, or destroy, deal value – be it the smallest of bolt-ons through to mega-mergers such as that which created GlaxoSmithKline or E.On/innogy. Clarity and rigour are required in two areas: the organisational integration and improvement post-close (the ‘journey’); and the shape of the long-term operating model (the ‘destination’). We believe the same principles hold true for alliances, so with one foot firmly grounded in our acquisition and integration roots, we would like to offer this perspective:

When deciding on whether to establish an alliance (in whatever form it takes, from licencing franchising and outsourcing models through to joint ventures and minority investments), we believe three aspects of the final operating model (the ‘destination’) should be carefully considered alongside strategic and commercial considerations, and alongside the traditional merger or acquisition model:

  • The degree to which tangible capabilities will be added to your broader enterprise – what can you now do more/better/different than you could before this event?
  • The degree to which the alliance is likely to increase the agility of your enterprise (while partly related to how much control you retain, it’s not a simple correlate: think of cases in which you’ve intentionally ceded control of part of your capability to a more agile organisation to the benefit of both.  More importantly, it’s about the ease with which the business can proactively change quickly, e.g to take advantage of new opportunities.
  • The degree to which the alliance is likely to increase your reactive adaptability. More than just resilience (the ability to recover the status quo from shocks or challenges), you should also consider the ability to take advantage and evolve quickly through tough times; the ‘antifragility’ concept developed by Professor Nassim Taleb [2]

[1] Joint Ventures on the Rise; McKinsey & Company, 2014

[2] Antifragile: Things that Gain from Disorder; Taleb, 2012

With the aim of opening up debate, you could even go further and present your options on something that might look like this:

While clearly related, we also believe that – just as in M&A – three quite different factors are key in ensuring the successful creation of an alliance (‘the journey’)

  • The ease and speed with which the value can be captured/realised; not the theoretical end-value your spreadsheet or business case suggests, but rather a measure of your organisation’s ability to achieve it.
  • The commercial risk your business may incur in establishing the alliance (anything from market confusion to loss of customer service or key staff).
  • The organisational stress that creation of this alliance is likely to impose on your business: new or adjusted IT systems, differences in cultures and working styles, staff separations and relocations, change fatigue etc.

Again, visualisation of your views on these ‘journey’ factors may provide a different perspective on the potential alliance options, or the right form any one potential alliance might take, e.g.:

…and while we’re on the subject, this framework can also be usefully applied to the other side of the coin, namely divestments, outsourcing and separations/demergers.

While no consulting model can (or should) give you ‘the right answer’, an assessment such as this can provide insights on the opportunities and perils of any given option; and help communicate these to senior executives and boards.

 

As a specialist firm with a senior team and over 20 years of experience, BTD is providing the new thinking, advice, resources and tools to help M&A, integration, alliance and divestment teams navigate the new world. This includes helping our clients evaluate the merits of potential inorganic options using the above proprietary framework. If you think we can help you achieve your goals, give us a call.