It’s becoming clear from our work that there are new challenges facing acquirers that are even more daunting than the rush of deals.
"It feels like everyone’s chasing the same deal," said one M&A executive we interviewed. With multiples still at their highest, there’s even more stress on internal teams charged with being sure the acquisition is a good one.
So, why do 70% to 90% of all acquisitions fail to achieve the results acquirers want? Most often, failure is directly tied to the integration plan.
According to a recent global industry study by McKinsey & Company, companies with the best M&A results have stronger capabilities in post-close integration. We’ve found that high performing M&A firms use the diligence exercise to gain critical insight into the company, its management, key employees, its culture, and its customer relationships. They take a hard look at not only the financial numbers, but at the intangible assets that drive a company’s success plan.
Importantly, they have tools and processes to statistically document the value of the intangible - to help them see into the future. In essence, they start building relationships with the potential target throughout the due diligence process, months before close.
Buy to Build; Buy to Sell - In Both Cases, Value is Dependent on Growth
In every case, the expectation post-close is that the value of the deal will increase. So how do you put a predictor on future success? Here are ten traits we see in our highest performing clients’ best practices in M&A:
- They examine how closely aligned the target company is to its customers - and specifically to customers’ needs and expectations.
- They look at the target company’s best customers - those who buy the most - and determine how they perceive the company’s strengths and areas for improvement.
- They take a hard look at key attributes - why a customer selects one company to do business with over another. And they drill down on how the target company performs against those attributes.
- They look at customer concentration - how much of the business’s revenues are controlled by only a select few? And importantly, assess if that concentration is a good thing or not long term. Is there still more growth to be had from these few customers? If so, how?
- What is the company’s share of wallet by customer, not just market share?
- What are customers’ perspectives of competition - how does the target company compare?
- What unmet or underserved needs do customers have from not only the target company but from the industry? Where are the opportunities that have not been capitalized on?
- They determine the cultural fit, if a bolt-on, or the cultural opportunity, if structuring a new platform. How hard will it be for existing management and staff to execute a future roadmap that is both operationally-oriented and customer-centric?
- Both the acquirer and the acquired collaboratively set priorities and action plans before the deal is closed.
- Lastly, high performing acquirers measure and define where the starting point is - so they can gauge what impact the acquisition has on overall performance. They not only measure the synergic savings and revenue increases, but as importantly, they measure how much improvement there is in customer loyalty, satisfaction, and share of wallet.
When we evaluate all the successes of our clients in M&A, we know the highest performers identify sustainable competitive advantages that are pulled directly from their Due Diligence Pre-Acquisition discovery - regardless of the deal size, shape, or industry. For them, following these ten steps has become second nature. For their target companies, these steps provide a great launching pad into the future. Importantly, for both acquirer and acquired, it’s a win-win.