By Pat Voll
SPAC acquisitions are taking up a lot of attention, but they’re not the only deals getting made. Virtual handshakes are also happening in multitudes for traditional mergers and acquisitions. Despite concerns that the M&A deal pipeline would dry up when the pandemic struck a year ago—which did lead to a Q2 dip—2021 acquisitions are at an all-time high so far. A record $1.77 trillion worth of M&A deals occurred worldwide during the first four months of the year. While some of those transactions involved special purpose acquisition companies, technology and private equity backed deals have been notably active, too.
If your company will be jumping into the M&A fray anytime soon, you’ll want to pay careful attention not only as you seek out potential targets but also to how you can maximize value of the deal—including as you integrate the new organization into yours.
What’s Driving M&A Activity?
PE firms and corporate investors have money to invest. We’re also seeing the effect of companies’ shift toward a longer term strategy after a period of laser-focusing on the short term amid the initial uncertainty surrounding the pandemic’s impacts. Now, companies are looking out further, and adopting a strategy for mergers and acquisitions that’s based on these drivers:
- The need to continuously innovate: Innovation is the lifeblood of your business. Without it, your competitors will catch up with you—and they’ll likely do things better or cheaper. As it is, how business gets done has fundamentally changed as a result of COVID-19, and new breakthroughs in technology (or even new uses in existing technology—think how Zoom has transformed your daily routine!) are driving companies to look outside their organization for innovation.
We see this in pharmaceuticals, where new drug development requires high early-stage investment for low probability success. By the time things progress to late stage clinical trials, the landscape has shifted and the probability of success has increased, but so has the required capital to fund the large trials. This can make for a great pairing of smaller drug discovery companies partnering with larger pharma companies.
- Realizing synergies for scaling up: There can be substantial annual cost savings in merging complementary product portfolios and organizational structures.
- One man’s junk is another man’s treasure: We also see an increase in divestitures as companies evaluate how their current product portfolio fits into their growth strategy. Some realize they have a valuable gem that no longer has a place within the organization but could, under more attentive ownership, prosper. By identifying assets that no longer serve a strategic purpose to the company—and will likely languish if nothing changes—a divestiture could free up cash to focus on areas that do have the greatest strategic value.
Taking the M&A Strategy Beyond the Deal Close
Regardless of the primary motivation behind a deal, every M&A strategy should include clarity on the value drivers and how your company can maximize that value. And then it is equally important to take a focused approach to integration, ensuring you derive the value you are betting on. To do this:
Set up a cross-functional integration success team before the deal closes. You’ll need executive participation on this team, and the execs should be aligned around the underlying reasons for the deal and the value you anticipate creating.
Understand how each function contributes to the success of the deal, and how the functions are dependent on each other. For example, the innovation and planned revenue growth may be highly dependent on the cost savings realized from synergies in order to fund that growth. By having defined, documented and communicated the primary sources of value, key risks and assumptions, as well as priorities for integration, you can stay focused on the success of the deal and maximizing the value derived. Incorporate key drivers and expected outcomes into operating budgets and hold those involved accountable.
Don’t overlook the role of culture in the success of an acquisition. Take the time to understand the target company’s culture during the diligence process, and assess how it aligns with yours. Incorporate cultural alignment in your integration plan and then actively managing it. Talent acquisition is a big piece of the value driver, and to be successful, you’ll need to retain your newly acquired workforce. Unfortunately, we’ve seen this go horribly wrong—either the newly acquired team doesn’t understand how they fit into the new parent company, or the parent company culture is missing some key elements of the old culture that allowed that team to be innovative and successful.
We often see this mismatch when a very mature, established company acquires an entrepreneurial startup. The startup team doesn’t know how to operate within the constructs of the parent company infrastructure, and the parent company doesn’t provide flexibility to allow the innovation to flourish. We’ve also seen the flip side, when the parent company talent doesn’t understand how their roles will change. Either of those scenarios can result in regrettable turnover. And you won’t realize the hoped for value.
The M&A Process and Achieving Post-Deal Success
Integrating operations takes up a lot of time and energy. Be careful not to stretch your team too thin, or you run the risk that nobody will be focused on your core business, and you’ll lose ground. The longer it takes to complete the integration, the greater the risk that your customers may be getting mixed messages—you can bet your competitors will take advantage of any confusion in the market. Lean on an expert team that’s been there, done that to help you maximize your investment.
Learn the valuable takeaways a global public company gleaned after asking RoseRyan to take a look back at a strategic acquisition. See our case study: Checking the Compass on the M&A Trail.
Looking for lessons learned post transaction or before taking on your next transaction? RoseRyan’s strategic advisory experts can help.
Pat Voll is a vice president at RoseRyan, where she guides and develops new solutions for our strategic advisory practice, which includes corporate governance, strategic projects and operational accounting. She also manages multiple client relationships and oversees strategic initiatives for the firm. Pat previously held senior finance level positions at public companies and worked as an auditor with a Big 4 firm.