4 Pillars of Modern M&A Integration
Over the last few years, the rules of business have changed a lot. Technological shifts have been exponential spawning new business models, and older incumbents have been left behind or are trying to acquire themselves into the modern era.
The art and science of M&A, particularly integration has not kept pace with these changing rules. M&A integration is at the heart of value creation and needs to rapidly adapt to this change.
M&A leaders should pay attention to these four specific areas of change as they align with the market dynamics.
Function to Business Model
Acquirers are looking for creating value not merely protecting the asset they bought, in the new world order most deals must affect the growth trajectory of the company or transform their business model. In a survey I ran with 100 M&A Integration Leaders (in 2019 and 2020), the insight they shared was functional integration approaches are not scaling to deals focused on new business models. M&A integration has traditionally had two ways of creating value:
§ Functional Integration: Enhance an organization’s ability to compete by aligning and integrating functional assets and capabilities into bundles of competitive advantage through lowering costs and increasing efficiency.
§ Structural Integration: Enhance an organization’s structural advantage (offensive play) or shield organization (defensive play) from industry structural forces that would kill profit.
Modern-day M&A Integration drives structural transformation that could affect competitor behavior or industry dynamics.
Traditionally companies have thought of synergies as cost or revenue only and approached it that way. Given there are typically no cost synergies (probably negative synergies due to underinvestment in back-office etc.) when acquiring smaller disruptive companies/technologies/business models, one needs to think about this differently. An approach I have frequently used is to look at synergies in three ways.
- Sequential synergies: If the acquirer (or target) does activity A, then the target (or acquirer) is now enabled to do activity B (sequential to A) previously impossible on the value chain.
- Reciprocal synergies: Acquirer brings X enabling Y for target and vice versa i.e., what can they both add to each other.
One other place to pay attention to is BETA synergies i.e., the collection of those reciprocal and sequential synergies that directly affect the equity profile or stock price. Isolate these value drivers upfront and track/measure/monitor/report them with more rigor while building them into the investor messaging.
With this framework cost and revenue synergies are a byproduct not a starting point, unlike traditional M&A integrations.
IMO is the center of gravity during an M&A Integration and the way it is configured matters on how value is captured. In the era where cost synergies were front and center of value creation, a functional approach was adopted for good reasons i.e., costs come from specific functions with a few well-defined drivers like headcount, assets, contracts, etc. and can be executed quickly — hence it made sense to have functional workstreams. Today, it is all about revenue synergies and a single function is not capable of delivering complete value. The machinery between sales, marketing, service, product, pricing, customer experience, etc. need to fire in unison for creating value — hence IMO needs to be configured by value driver, not by function. Rigid proponents of functional integration do not create value!
M&A Integration Talent
During the era of classic consolidation mergers, the focus was on eliminating redundant people, assets, processes, etc. to create cost synergies by stretching economies of scale. These synergies largely came from the back office or G&A functions like Finance, IT, HR, Real Estate, etc. mostly, these skills from these functions were portable across industries and sectors hence the market spawned a lot of generalists. In the modern era, the focus has shifted to acquiring products and capabilities to enable new business models which need a specific understanding of the economic logic within the industry and sector. A lot of M&A integration generalists now need to reorient themselves to this new world order. Many M&A professionals both in the corporate and the consulting world have grown up managing the integration process i.e., IMO, day one checklists, tools, templates, and reporting with limited focus on value creation. The process is still important, but the real magic is in creating value not managing the integration processes. Only about 2 in 10 professionals I speak with even appreciate this shift.
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There are industries and sectors still consolidating with conventional approaches aimed at cost take out still relevant and applicable. This article is focused on the new deal types and the industries and sectors at the forefront of change.