2015 and 2016 were record years for mergers and acquisitions, and 2017 appears to be more of the same. According to MergerMarket, H1 recorded an 8.4% increase in deal value globally, compared to the previous period. 17 mega-deals equating to more than $10B have already been announced in 2017 – including Amazon/WholeFoods, Essilor/Luxotica and Mars/VCA. And with PE raising record buy-out funds, and several massive deals announced in 2016 that have yet to close – see AT&T and Time Warner or Qualcom and NXP – M&A will remain at the top of the agenda as the search for growth continues.
But will all these deals pay out?
It’s not entirely clear that they will. M&A has an inconsistent record. Mega-deals tend to underperform while other M&A strategies appear to fare much better. Last year HBR challenged the industry, stating that M&As are a “mugs game” with 70-90% of acquisitions ending up as “abysmal failures.” Despite the debate, M&A deals, especially for larger organizations, will continue. The prospects for organic growth are simply too low and the competitive risk on not moving too high.
How to Build a Successful M&A Strategy
M&A transactions are modeled against a value creation logic: the economic theory for how a new combination of assets will create shareholder value through a superior use of funds. The larger the deal, the harder it is for this logic to play out.
Mega-deal success demands that multiple strategic and operational assumptions of staggering size and complexity fall into place. Future market dynamics must play out as envisioned. Large employee populations and cultures have to mesh. Cost-savings schemes requiring intense operational discipline must be driven to completion in a marathon of sprints. Throw in systems integration, customer defection risk, key talent discounts and the occasional black swan event and the checkered history of mega-deal M&A becomes more understandable. But not inevitable.
3 M&A Strategies to Drive Mega-Deal Success
Drawing from decades of experience helping executives through M&A integrations, we have identified a blueprint for managing downside risk and accelerating growth.
From that blueprint, here are three plays to run at the beginning of the M&A process to maximize the possibility of success:
1. Model Marketing and Branding Decisions Before You Make Them
After the deal is signed and bankers clear the room, the hard work of realizing new value begins. Typically, this involves dozens of parallel initiatives including system integration, organizational restructuring, expense rationalization and branding/customer experience work streams. These projects are bundled into a broader integration plan, coordinated through a PMO and funded from tax-advantaged integration budgets. Curiously, while essential to the post-close success of the deal, the marketing/branding work stream is often not managed with the rigor of other integration initiatives.
We frequently observe teams passing on high-potential strategies either because of a lack of analytical rigor or a failure of strategic focus. Often, companies do not recognize the power of available financial and risk modeling tools to support marketing and branding decisions. Additionally, because these techniques are often less familiar to marketing leadership, their insights can fail to sufficiently influence internal decision-making.
Case in point: Recently, a large multinational made a transformative acquisition (>$10B) that extended its reach into an adjacent category. Using an econometric model based on demand analytics, we estimated the potential market share increase of several new brand and product architecture scenarios. In the leading scenario, the model estimated a multiple-point increase in share on the acquired company’s base business. Unfortunately, that scenario never made it to market as executives selected a suboptimal strategy based on pre-merger working assumptions.
The same holds on the cost side. Post-deal integration of a marketing system will demand significant resources of capital and time. The data is available to model scenarios that remove cost and process layers, while optimizing the capital deployed. The tools and capabilities are available but too few, we find, take advantage.
The lesson: the marketing and branding moves that could tilt the balance of power in your favor require:
- Decisions based on analytical precision
- The leadership wherewithal to make them
2. Operationalize the Value Creation Logic Into a Plan to Win
Execution creates new value, not strategy. Almost all mega-deal structures rely on often aggressive cost-savings assumptions. They are central to securing financing or shareholder approvals. However, this focus on cost-take outs and backend integration often distracts leadership from building actions plans that bring the new assets of the post-deal firm directly to customers.
A few years ago, we were working with the CEO and executive committee of a Fortune 200 financial services player. The company had nearly doubled in size through a mega-deal that combined banking and asset management into a single entity and brand. The firm was tracking on its multi-year cost reduction plan but wasn’t gaining traction with clients. During a working session with the executive team, it occurred to us that the combined company had never articulated new customer (or employee) value propositions. At one point, we asked the straightforward question: “How does this deal actually create value for your customers?”. The absence of an answer from leadership was startling. A year later, an activist investor was in the boardroom and the CEO was out amid calls for a break up.
The value creation logic will vary from firm to firm. For deals of significant size, the logic always features significant cost savings components (scales economies, tax inversion strategies, etc.). But M&As also present an opportunity for firms to significantly increase the value of their products and services to customers. Smart deal-makers realize this top line advantage by building a plan to win that operationalizes the value creation logic. These plans will include an expanded customer value proposition, updated strategies for key accounts, product enhancements and an expanded client servicing model that uses data and UX to enrich the customer experience, among other moves.
When Microsoft announced its acquisition of LinkedIn at $26B – the largest in the company’s history – they immediately articulated a new customer value proposition for the combined firms. Their investor presentation laid out realistic product use cases that showed how customers will benefit when Microsoft software is embedded into LinkedIn’s platform and UX.
Investors care about the cost base; customers don’t. In the M&A context, customer sentiment is clear: “I’m happy for you to bring new value to the table. Just don’t change my team”. Companies that operationalize the deal logic into a value-add for customers will simply create shareholder value faster than those that don’t.
3. Build a Culture That Keeps Faith With the Deal
Beyond the models and strategies, the deal’s value will ultimately be secured or forfeited through the actions of employees. Irrespective of the size of the deal, retaining talent, focusing teams and nurturing cultures is the most challenging M&A leadership task. It simply gets harder for mega-deals.
Success requires that the talent levers of the organization line up with value creation logic, which my colleague Helen Rosethorn in her seminal book calls “keeping faith with the deal”. This often includes reorganizing operating units around new capabilities, recoding sales scripts and customer engagement models, and reengineering operations. Heavy lifts, for sure. But tending to culture is probably harder and more important.
Nothing grinds post-M&A value creation to a halt like resistant culture. Mega-deals create change and ambiguity for large employee bases. The M&A stimulates the free-market dynamics among employees – basically, they become open to considering other deals. It occasions big questions like “How does my world change?”, “Am I still valuable?” and “What’s it in for me?”. Change is difficult to process at a human level; ambiguity is always interpreted negatively. To unlock the full value of the deal, leaders must frame the big move in the context of a deeper purpose for the organization, strengthening the employee value proposition by focusing not just on the “what,” but on the “so what?”
Satya Nadella was clear how the LinkedIn acquisition fit into his broader goal of reanimating Microsoft’s purpose. Similarly, when Roche acquired Genentech, it ring-fenced the biotech’s vaunted talent and culture by retaining its identity and independence. Others have not been as successful.
When Xerox bought ACS, it’s largest acquisition ever, it correctly foresaw the need to swim upstream into higher margin services. But the deal logic never panned out. Revenues failed to reach targets and the market cap had fallen 37% by the time CEO Ursula Burns capitulated to investors and abandon the vision, spinning out the old ACS business off in a stand-alone services play. While Xerox found some cost synergies, people and processes never coalesced around a shared purpose worth fighting for.
Bottom line: making M&A potential a reality requires smart moves up front which, unfortunately for investors, are often missed by leadership amid the complexities of mega-deals. For more information on capturing greater value in the M&A, please get in touch.