Home Management M&A Best Practices: The Art of Value Creation

M&A Best Practices: The Art of Value Creation

by Guest Writter
Ronald J. Recardo, Managing Partner, The Catalyst Consulting Group LLC

Many Presidents and CEO’s have come to the realization that they cannot achieve their growth objective by relying only on their internal growth engines (e.g. new product development, 5 P’s of marketing).  Unfortunately, there have been a plethora of studies that have concluded the success rates of M&A deals are in the 30-40% range.  Instead of having 1+1=4  scenario and value is created, all too often post close the companies have less shareholder value.

In this article we will share with you several M&A best practices that if implemented will reduce the amount of stakeholder resistance, increase the percentage of targeted synergies realized, shorten the overall implementation cycle time, and increase shareholder value. Each best practice is discussed below:

  • Manage the M&A process cradle to grave like a chain with interdependent links. The process must start with robust strategic planning and include market strategy and financial forecasting. This will help ensure you have mapped financial projections to each internal and external growth engine channel.  All too often companies go after the “homerun M&A deal” when it is not needed and growth objectives can be realized by improving your strategic planning process.
  • Exercise restraint: Potential deals gain momentum as you progress through the M&A cycle. Use the deal drivers and synergy targets as decision filters. Also before entering negotiations, agree on a maximum acquisition price and deal terms so as not get involved in “deal fever” and agree to terms that exceed your maximum offer without data to support the decision. Sometimes larger companies find themselves in a bidding war against other giants with deep pockets. To secure the prize they often have to pay a higher premium to outbid their competitors making value creation that much more difficult.
  • Use a balanced, robust “due diligence” process.  Most companies do a fairly good job of addressing the financial, environmental, and legal issues. The untapped opportunity is to bolster their operational and organizational due diligence activities.  Operational due diligence should include a review of the business model/structure, core processes, supply chain, and any other activities that relate to the delivery of the targets core products/services. This will allow you to both quantify synergy targets and identify how and where to realize the savings. There are a number of organizational and people issues that can have a material impact on the value (unfunded pension liabilities, benefits/compensation costs) of the deal or the success of an integration. Organizational due diligence is much more than checklists of HR programs, cataloging HR benefits, and understanding the compensation structure of the target.  These tactical efforts serve as a baseline of organizational due diligence but it’s the more strategic HR activities discussed later in this article that add considerable value to the M&A deal.
  • Identify the value drivers early in the process and translate these into an M&A vision and scorecard. Once in place, ensure they are properly communicated by:
    • Cascading the metrics to each M&A team.
    • Providing visibility at the individual level so that team members are held accountable for realizing targeted synergies.
    • Aligning metrics with appropriate HR practices (performance management, base, bonuses, and equity) to ensure consequences.
  • Start detailed integration planning during due diligence. The primary deliverable of due diligence should be the100 day plan. The post close 100 day period should not be focused on figuring out “what to do” but focused on “how” to realize the targeted synergies and deal drivers that were identified during due diligence.
  • Leverage speed as a critical driver of success. Identify the key decisions and don’t let them languish. Decisions about leadership, structure, layoffs, and initiative integration efforts should be communicated right after the deal is announced.
  • Drive accountability. The senior management team of the acquired company must be held responsible for the success of the deal – achieving the targeted synergies. Success cannot be delegated to a non executive Integration Project Leader.
  • Involve Human Resources early in the process and make sure they can provide the higher value strategic M&A skills to address the organizational/people issues. These include:
    • Culture assessment/alignment  (what are the key gaps and how do you evolve culture)
    • Leadership assessment (Identify keepers, staff in the wrong role, etc.)
    • Organization design (What aspect of the structure need to change, when, how)
    • Talent loss forecast/retention  (Loss of knowledge/experience is one of the key reasons for value destruction)
    • Provide coaching support to leaders
  • Use a formal integration playbook. The playbooks we have developed for such companies as Johnson & Johnson and GE have multiple pathways for both simple and complex deals, detail the key activities and tasks, and clarify roles. The playbook should also include a toolbox of due diligence, integration planning, and acquisition integration tools that are standardized and used by all integration teams.
  • Use a cross-functional M&A project structure with representatives from both the parent and target organization.   Our experience suggests this will expedite the information handoffs across the phases of M&A such as target identification/negotiations, due diligence, integration planning, and the 100-day plan. Make sure the cross functional teams have overlapping membership from phase to phase to ensure organizational learning is not lost.
  • Aggressively utilize change management principles. This can include:
    • Segmenting and prioritizing stakeholders. Once completed, develop and execute a commitment strategy.
    • Use the stakeholder analysis to target communications to key groups. Periodically use sensing mechanisms (pulse surveys, focus groups, etc.) to evaluate the effectiveness of communications.
    • Align the technology, people practices, and processes to with the new business plan and integration strategy.
  • Emphasize robust program management and governance. Acquisition integration is a series of mini projects directed toward achieving targeted synergies. Employ project governance, standardized processes (key decision identification, issue escalation, risk management, progress reporting, etc.) and common tools and templates to maximize success.
  • Place emphasis on knowledge capture and sharing. At the completion of each integration collect data from employees of acquired companies, integration team members, executives from both organizations, and integration team leaders to identify:
    • What worked/what didn’t.
    • Recommended changes to the playbook activities/tasks.
    • Recommended changes to the integration tools and templates.
    • Identification of new tools and templates that are needed.

M&A is not a silver bullet that will instantly cure the ailings of your organization. The potential benefits of a properly executed M&A transaction range from increased market share and top line revenue growth to cost synergies and access to new products or technology. In today’s competitive landscape, many leaders are under extraordinary pressure to generate top line growth. M&A is often the tactic of choice used to achieve “home run” results.

About the Author

Ronald J. Recardo is the Managing Partner of The Catalyst Consulting Group LLC, a professional advisory firm founded in the early 1990’s that helps its clients grow their business, improve their performance, and address organizational issues. He has more than 30 years of experience as both an executive at J&J and Fidelity Investments and a senior-level consultant for Arthur Andersen & Co. Ronald has completed projects for over 130 companies across a range of industries and is the author of 8 books and more than 60 articles. He can be reached at rrecardo@catalystconsultinggroup.org if you have any questions on this topic.

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