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A VALUE CREATION FRAMEWORK FOR M&A TRANSACTIONS



A number of studies have been showing that often, M&A deals destroy value instead of creating value.

While there’s no magic formula to ensure that all deals are value-creating, my experience has been that disciplined corporate acquirers who follow a repeatable process are much better positioned to beat the odds.

Here are a few best practices, based on working with clients, that might be helpful considerations.

 

1) PRIORITIZE STRATEGIC SOURCING VS. OPPORTUNISTIC DEAL MAKING

Corporate acquirers usually find deals through either (1) strategically building a pipeline and bringing deals to the table OR (2) participating in sell-side process (usually an auction process) and doing deals opportunistically.

Generally speaking, strategic deal making – which starts with an assessment of the acquirer’s long term priorities (e.g. around building new capabilities, entering new markets, cross-selling products), and then finding deals that fit the mold – tend to result in acquisitions that are a better fit and cost less.

Opportunistic deals are generally done in a competitive environment, with limited time for due diligence, limited access to the target’s management team and usually are more expensive.

 

2) FOCUS ON POST-DEAL VALUE CREATION FROM THE VERY START OF THE PROCESS

This starts right from the point when a business case is being prepared.

Fully engage the business team that will sponsor the deal, and develop a long term plan for how the acquirer can create value long term.

There are numerous levers for value creation but a couple of common ones are:

  • Thinking about pivots that can be made to the target’s business model to grow in new markets (leveraging the acquirer’s footprint)

  • Developing and quantifiying revenue and cost synergies, identifying who’s on the hook to deliver these synergies and how these synergies will be tracked

 

3) VIEW INTEGRATION PLANNING AND SPENDING AS AN INVESTMENT RATHER THAN AN EXPENSE

Sometimes, especially if the buyer is not a serial acquirer, integration tends to get pushed to the back-burner.

The strategic work of finding the deal is done, the flurry of activity around diligence and closing the deal is completed, and integration is left as a post-deal issue to be dealt with.

Unfortunately, this is a recipe for value destruction.

Successful acquirers think about integration at the same time as they’re conducting due diligence and negotiating the transaction.

Again, there are numerous considerations for integration, but some common ones are:

  • The integration strategy (what will be integrated on Day One vs. interim or longer term), and how this strategy will impact the go-forward operating model

  • How to incentivize key employees and talent to stay engaged in the deal, and to be valuable members of the post-close organization structure

  • Communicating the deal and the transition plan to customers, suppliers, regulatory bodies, and employees inside both the Acquirer and Target organizations

 

4) DEFINE SUCCESS CLEARLY, IDENTIFY POST-CLOSE KPIS AND ESTABLISH ACCOUNTABILITY

Often, the revenue and cost synergies identified during the business case development case ends up in a spreadsheet that is never looked at again.

This usually happens because the Target’s business may need to pivot, and the Acquirer gives up on the anchor that was established during the evaluation phase.

Or, the performance is tracked closely for a couple of quarters after close and then abandoned when the next shiny deal comes across everyone’s desk.


Best practices I’ve seen around post-close processes include:

  • Setting up a post-close deal tracker system (even if its as rudimentary as yet another spreadsheet) to track key financial and operational metrics around revenue, EBITDA, customer retention or new accounts.

  • Making it a part of the corporate development team’s deal governance process to revisit this with the business sponsor every quarter

  • Establishing “what does good look like?” for non-financial metrics – such as employee retention, employee engagement scores and customer satisfaction.

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