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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Make your next merger or acquisition one for the ages Meant to create value potentially fueled by synergies, the reality is that most mergers and acquisitions fail. It's estimated that 83% of mergers and acquisitions do not hit their desired results. The Merger & Acquisition Leader's Playbook tells you why most mergers fail. More importantly, it tells you how to make your next one a sweeping success. In the book, a team of private equity experts deliver a masterful walkthrough of how to integrate organizations by driving commercial success, instead of focusing purely on cutting costs. Readers will find: * Concrete strategies for increasing the odds of success and reducing the risk of failure - of a new merger or acquisition * A comprehensive, easily deployed and implemented plan to realize synergies * Proven tools, techniques, and tricks of the trade to help leaders stay on top of their latest merger and keep everything on track A must-read resource for business leaders considering a fresh merger or acquisition, The Merger & Acquisition Leader's Playbook: A Practical Guide to Integrating Organizations, Executing Strategy, and Driving New Growth after M&A or Private Equity Deals will also earn a place in the libraries of investors, agents, corporate service providers, and consultants trying to get two or more businesses to pull in the same direction.
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Table of Contents
COVER
TITLE PAGE
COPYRIGHT
ACKNOWLEDGMENTS
EXECUTIVE SUMMARY
The Strategic Playbook
The Commercial Playbook
The Operational Playbook
The Financial Playbook
The Governance Playbook
The Organizational Playbook
The Change Management Playbook
Prototypical Order
Notes
PART I: The Strategic Playbook
CHAPTER 1: The Investment Case: The Heart of the Merger and Acquisition Leader's Playbook
What You Want
What You Are Willing to Give Up
Which Opportunities to Pursue
The Path to Value Creation
Core Focus
Fundamental Investment Case Model for a Merger or Acquisition
Notes
CHAPTER 2: Focus: It Drives Everything Else
Design-Focused
Production Focused
Delivery Focused
Service Focused
Note
CHAPTER 3: Plans: Strategy Precedes Execution
365-Day Plan Elements
Financial Reporting Systems
Note
CHAPTER 4: Innovation: A Fundamental Strategic Choice
Innovation Tips
Innovation Strategies
Creativity
Systems
Notes
PART II: The Commercial Playbook
CHAPTER 5: Organic Revenue Growth: So Valuable
Marketing, Communications, and Customer Interface
Sales Model and Organization
Customer Profitability
End Market Analysis and Go-to-Market Strategy
Note
CHAPTER 6: Customers: From Which All New Value Flows
Purchasers
Strategic Sales
CHAPTER 7: Marketing and Sales: Which Every Organization Must Do
Tool 7.1: Purchase and Sales Funnel Management
Tool 7.2: Marketing Planning
Why It's Crucial to Align Brand Positioning with the Essence of Your Organization
Aligning Brand Positioning
Aspirations
Tool 7.3: Creative Brief
Tool 7.4: Strategic Selling
Notes
PART III: The Operational Playbook
CHAPTER 8: Cost Optimization: To Free Up Resources to Fuel Commercial Growth
Resource Allocation
Marketing and Sales
Design
Production
Delivery
Service
CHAPTER 9: Operational Excellence: Supply Chain, Distribution, Continual Improvement
Action Plans
Performance Management
Notes
CHAPTER 10: Technology: Because All Companies Are Technology Companies Today
Machine Strategy
Machine Posture
Machine Culture
BRAVE Technology
Note
PART IV: The Financial Playbook
CHAPTER 11: The Deal and Due Diligence: Iteratively
The Deal to Be Done
Due Diligence
Notes
CHAPTER 12: Financing the Deal: The Different Options
Cash
Equity
Seller Funding or Earnout
Debt
CHAPTER 13: Further M&A: Enabling Commercial and Operational Success
PART V: The Governance Playbook
CHAPTER 14: Regulatory: And the License to Play
CHAPTER 15: Financial Governance: Always Necessary
Financial
Business Structure and Operations
Material Contracts
Product and Intellectual Property
Customer Information
Employee Information
Infrastructure, Physical Assets, and Real Estate
CHAPTER 16: The Board: And Its Multiple Roles
The Right Way to Divide Responsibilities Between Chair and CEO
How to Build Mutual Respect, Trust, and Support Between CEOs and Boards per Deloitte
Notes
PART VI: The Organizational Playbook
CHAPTER 17: Culture: The Underlying Root Cause of Nearly Every Merger's Success or Failure
Brave Cultures Are Sustainable
Design: Independence
Produce: Stability
Deliver: Interdependence
Service: Flexibility
Making It Real
Attitude Is the Pivot Point
Evolving Aspirations
Post-Pandemic Changes
Identify the Dimensions to Evolve and Choose the Order
Full Spectrum Creativity
Implications
How to Get More Positive Deviance
Notes
CHAPTER 18: Incentives: Show Me How They're Paid and I'll Tell You What They Do
Note
CHAPTER 19: Leadership: Starting with the Core Leadership Team
Strengths
Implications for You
General Atlantic's Talent Playbook
Team Synergies over Individual Strengths
Fit
Decision-Enabling
Executive Onboarding
Notes
CHAPTER 20: People: Acquire, Develop, Encourage, Plan, Transition
Align Everything Around Your Core Focus and Burning Imperative
Implement ADEPT Talent Management
When Things
Aren't
Working, Don't Wait
Three Types of Leaders
Strategic Priorities
Bosch and Seeo
Summaries of Related Efforts
Strong Performers and the Three Goods
Position Profiles and Potential
Keeping Your Head
Notes
CHAPTER 21: Politics: What Current and New Leaders Need to Know Organizationally and Personally
A Different Approach
Hygiene
Working Through the Politics
Acquired Company Leaders
Working for a Boss Who Didn't Want You
Notes
PART VII: The Change Management Playbook
CHAPTER 22: Integration Leadership: Start Here
Stand Up Your Transition, Transformation, or Project Management Offices
Chief of Staff
Project Management Office (PMO)
Transformation Officers
Note
CHAPTER 23: Change Management: Leading Through the Point of Inflection
Platform for Change
Picture of Success
Call to Action
Message
Change Management at Albertsons
Generate Early Wins
Manage Through the Dips
Notes
CHAPTER 24: Communication: Everything Communicates
Use Your Communication to Drive Engagement
Consider What Drives Happiness
Maslow's Needs
Satisfaction
Maslow Hygiene and Motivating Factors
Implications for You as a Transformational Leader
Become the Narrator-in-Chief
Touch Points
Monitor and Adjust
Repeat the Message Repeat the Message
Celebrate Early Wins
Reinforce
Next-Level BRAVE Questions
Bias
Communication and Presentation Planning
Notes
CHAPTER 25: Announcement Cascade: Emotional, Direct, Indirect
Internal and External Stakeholders
Message
Pre-Announcement Timeline
Formal Announcement
Post-Announcement Timeline
Managing Your Reaction and Response to Announcements
David and Goliath
CHAPTER 26: Adjustments: Because You'll Need Them
Strategic Process
Operational Process
Governance Process
Adjust and Advance Your Leadership
Develop Your Team
Enhance Practices: Milestone Management, Program Management, and Long-Term Planning
Evolve Your Culture
Adjust to the Inevitable Surprises
Major and Enduring
Major but Temporary
After-Action Review
Notes
PART VIII: Prototypical Order
CHAPTER 27: Prototypical Order
Prototypical Chronology: An Example
Next Normal
ABOUT THE AUTHORS
GUEST CONTRIBUTORS
BIBLIOGRAPHY
INDEX
END USER LICENSE AGREEMENT
List of Tables
Chapter 11
Table 11.1 The Purchase Price Components
Chapter 17
Table 17.1 The BRAVE Framework
Chapter 20
Table 20.1 ADEPT Framework for Talent Management
Table 20.2 Artistic, Scientific, and Interpersonal Leadership Characteristi...
Table 20.3 Appropriateness Versus Performance Grid
Table 20.4 Nine-Box Talent Management
Chapter 24
Table 24.1 Communication Engagement Levels
Chapter 25
Table 25.1 Messaging
Table 25.2
Chapter 26
Table 26.1 Strategic Organizational Planning Processes
Table 26.1 Prototypical Quarterly Meeting Flow
Table 26.2 Change Map
List of Illustrations
Executive Summary
FIGURE I.1 The Core Focus
Chapter 1
FIGURE 1.1 Core Focus
Chapter 2
FIGURE 2.1 Core Focus
Chapter 3
FIGURE 3.1 The Value Chain
Chapter 9
FIGURE 9.1 Milestone Tracking
Chapter 16
FIGURE 16.1 Board Roles and Management
Chapter 17
FIGURE 17.1 Core Focus
FIGURE 17.2 Design-Focused Culture of Independence
FIGURE 17.3 Production-Focused Culture of Stability
FIGURE 17.4 Delivery-Focused Culture of Interdependence
FIGURE 17.5 Service-Focused Culture of Flexibility
FIGURE 17.6 Blue Men
Chapter 19
FIGURE 19.1 Core Focus
Chapter 20
FIGURE 20.1 Core Focus
Chapter 24
FIGURE 24.1
Guide
Cover
Title Page
Copyright
Acknowledgments
Executive Summary
Table of Contents
Begin Reading
About the Authors
Guest Contributors
Bibliography
Index
End User License Agreement
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THE MERGER & ACQUISITION LEADER'S PLAYBOOK
A PRACTICAL GUIDE TO INTEGRATING ORGANIZATIONS, EXECUTING STRATEGY, AND DRIVING NEW GROWTH AFTER M&A OR PRIVATE EQUITY DEALS
GEORGE B. BRADT
JEFFREY P. PRITCHETT
Copyright © 2022 by George Bradt and Jeffrey Pritchett. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data
Names: Bradt, George B., author. | Pritchett, Jeffrey, author.
Title: The merger & acquisition leader’s playbook : a practical guide to integrating organizations, executing strategy, and driving new growth after M&A or private equity deals / George B. Bradt, Jeffrey Pritchett.
Other titles: Merger and acquisition leader’s playbook
Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2022] | Includes index.
Identifiers: LCCN 2022019976 (print) | LCCN 2022019977 (ebook) | ISBN 9781119899846 (cloth) | ISBN 9781119899877 (adobe pdf) | ISBN 9781119899860 (epub)
Subjects: LCSH: Consolidation and merger of corporations.
Classification: LCC HG4028.M4 .B68 2022 (print) | LCC HG4028.M4 (ebook) | DDC 658.1/62—dc23/eng/20220603
LC record available at https://lccn.loc.gov/2022019976
LC ebook record available at https://lccn.loc.gov/2022019977
Cover Design: Wiley
ACKNOWLEDGMENTS
The number of people who have had an impact on this book is enormous. It ranges from those like Wiley's Richard Narramore, who had the idea for the book and invited us to bring his idea to life, to all those who taught us lessons throughout our careers.
Somewhere in that continuum fall all of George's partners, colleagues, allies, supporters, and clients at PrimeGenesis and Jeff's colleagues, allies, and supporters at Cerberus Capital Management L.P. and its portfolio companies, as well as all those involved with CEO Connection in any way.
We're grateful to the editing teams at Wiley and Forbes who have sharpened our thinking through the years, all the guest contributors, and friends and family members who support us in their own ways.
Jeffrey P. Pritchett:
To the countless mentors, family members and friends who have pushed, supported, advised, guided, and cheered for me throughout my life and career—thank you.
To my parents, Dr. Judy and Mr. Terry Pritchett who have been and continue to be my closest advisors and biggest supporters, I’m forever grateful for all you have done, and continue to do, for me and our family. To the Chambers family: my sister Jennifer, brother-in-law Dennis, nieces Alyssa and Addison, for our tight, enduring and ever-strengthening bond.
To Chan Galbato, my friend and mentor who has been and continues to be instrumental in my personal and professional development.
To my dear friends, George and Meg Bradt for everything we have done and will do together.
I would not be at this point without all of your influences.
EXECUTIVE SUMMARY
Those leading through a merger, acquisition, or the like do so to create more value faster. They look for revenues to double or more on the way to returning many times their initial investments. Maybe you're driving or leading the investment. Maybe you're leading the business itself or playing a supporting role. In any case, you need a leadership playbook for the merger or acquisition.
This is that playbook, the one we've used as investors, leaders, and supporters. It gives you the frameworks, tools, and sub-playbooks you need to create that value faster. Our overarching approach is to work through customers, capabilities, and costs—in that order. First, figure out how you're going to win with customers. Then build the leadership, team, and capabilities required for that. Fund those efforts by cutting less valuable efforts and their associated costs.
This is how we've created value faster against a backdrop of others failing to deliver the desired results 83 percent of the time. In a Harvard Business Review article, Kenny Graham noted that “between 70 and 90 percent of acquisitions fail.”1 A KPMG M&A study found that 17 percent of deals added value, whereas 30 percent produced no discernible difference and 53 percent destroyed value.2
This book lays out the seven sub-playbooks and a prototypical order that comprise the M&A leader's complete playbook. We also include summaries of tools to help along the way, each of which has an editable download available at www.primegenesis.com/tools.
The seven sub-playbooks are:
The Strategic Playbook
The Commercial Playbook
The Operational Playbook
The Financial Playbook
The Governance Playbook
The Organizational Playbook
The Change Management Playbook
As this is inherently a non-linear process, parts of each of these playbooks need to be deployed at different times in different mergers or acquisitions. With that in mind, adapt this prototypical order for your particular situation.
Concept => Research => Investment Case => Negotiation => Deal/Due Diligence => Contract => Close => Integration => Acceleration => The Next Normal => The Next Chapter
The Strategic Playbook
Be clear on what you want out of an acquisition or merger, how it would fit with what you've already got, and what you're willing to give up to get it. Then broaden your perspective to look at different possibilities before narrowing on the few best candidates and putting together investment cases for them.
Before you attempt to acquire and integrate another entity, it's best to know your own entity first. When leaders have in-depth knowledge of their own core focus and strategic, organizational, and operational processes as well as their culture, they are far better positioned to leverage and blend the combined strengths of their own and other entities.
Align on the core focus of the new organization: design, production, delivery, or service (see Figure I.1). That choice dictates the nature of your culture, organization, and ways of working.
FIGURE I.1 The Core Focus
Similarly, understand the business context in which you're operating. Your strategy revolves around a set of choices about the markets, segments, and customers you'll serve. Know and understand them better than anyone else.
The fundamental U-shaped profit curve for almost every industry is that the vast majority of profits accrue to the most innovative who sell fewer “units” at higher prices and margins at the top and to the low-cost producers who make higher than average margins at the “market” price.
Choose whether your innovation will drive higher prices—most likely in design or service-focused organizations—or drive down your production or delivery costs.
If you can't define the value you are seeking to create, it doesn't exist. Get clear on the desired outcomes for your markets, segments, customers, organization, shareholders, and people—as well as how new value is going to be created with choices around where you will:
Win
by being predominant/top 1 percent, superior/top 10 percent, strong/top 25 percent
Not lose
by being above average/competitive, good enough/scaled, or
Not do
by outsourcing or not doing at all
Play this out through the investment case fundamentals:
Pay fair value for what company is currently worth.
Grow top-line (organically and inorganically) innovating with customers through people.
Make operational–operational engineering improvements, cutting costs.
Invest in top-line and bottom-line enablers including technology to accelerate progress.
Improve cash flows and pay down debt.
Exit or recapitalize when this round of value creation is done.
We look at this in the four chapters of the strategic playbook:
Chapter 1
:
The Investment Case:
The Heart of the M&A Leader's Playbook
Chapter 2
:
Focus:
It Drives Everything Else
Chapter 3
:
Plans:
Strategy Precedes Execution
Chapter 4
:
Innovation:
A Fundamental Strategic Choice
The Commercial Playbook
One private equity firm looked at its 25 years of deals across its eight separate funds. They calculated that 30 percent of their portfolio companies' revenue growth over time had been organically fueled by their own innovation, marketing, and sales while 70 percent came from further acquisitions. In most cases you'll need both. Organic revenue growth is harder and riskier, but you keep all of it.
There's an important difference between value creation and value capture. Value is created when a customer pays someone for a product or service that costs the supplier less than the price paid. This is why you have to think customer-back to create value by innovating to provide more valuable products and services than your competitors do.
Don't read this wrong. There's nothing wrong with capturing value from competitors—generally by undercutting their price to take market share. This is why the price of everything gets competed down to its marginal cost over time. You don't want to be the ultimate winner of the race to the bottom. But you can make a lot of money winning some of the stages along the way.
We didn't include marketing and sales in the core focus chart shown in Figure I.1. That chart is derived from Michael Porter's value chain work in which he suggests every company designs, produces, sells, delivers, and services.3 It turns out the most successful companies focus on one of design, production, delivery, or service in addition to marketing and selling.
We look at this in the three chapters of the commercial playbook:
Chapter 5
:
Organic Revenue Growth
: So Valuable
Chapter 6
:
Customers
: From Which All New Value Flows
Chapter 7
:
Marketing and Sales
: Which Every Organization Must Do
The Operational Playbook
The operational processes that worked before your merger or acquisition may not be adequate to deliver your future ambitions. Maintain and evolve the best of your current processes while leveraging innovation and technology to layer in the new processes required to deliver the needed cost reductions and fuel revenue growth.
Essentially, you're going to need to craft, implement, and manage four plans concurrently:
Resource allocation and plan (requirements, sources, application): Human, financial, technical, operational
Rules of engagement across critical business drivers
Action plan (near-term and long-term): Actions, measures, milestones/timing, accountabilities, linkages
Performance management plan: Operating and financial performance standards and measures
We look at these in the three chapters of the operational playbook:
Chapter 8
:
Cost Optimization:
To Free Up Resources to Fuel Commercial Growth
Chapter 9
:
Operational Excellence:
Supply Chain, Distribution, Continual Improvement
Chapter 10
:
Technology:
Because All Companies Are Technology Companies Today
The Financial Playbook
Do the deal in a way that reduces your risk of being part of the 83 percent of mergers and acquisitions that fail to deliver the desired results. The first of the many investments you need to get a return on is the purchase price. It is better not to pay enough and lose a deal than to over pay and “win” one of the 30 percent that take a lot of work for no gain, or, even worse, one of the 53 percent that actually destroy value.
The starting point for your deal should be a fair value for what the company is currently worth based on current cash flows. This would reward the seller for what they've built and give you all future value creation. Of course, in the real world, others may be willing to give the seller a portion of the estimated future value. Couple that with some overestimation of possible future value and ego, and it's easy to see how people bid more than they should to “win” bidding contests.
Your real investment is different depending on how you finance the deal. Consider options for funding beyond cash, including equity, seller funding or earnout, and debt in the form of loans, bonds, credit lines, bridge financing, mezzanine, or subordinated debt.
Due diligence is your chance to check your assumptions. If you put a breakup fee in the deal, you did that to allow you to walk away if appropriate. Historically, 83 percent of the time others should have done that. Do due diligence in multiple phases to manage resource allocations (e.g., time, costs, opportunity). Do some before negotiating, some while negotiating, and some between contract and close to avoid wasting much time and resources on low probability or low-impact deals.
Learn as much as you can about the strategic, organizational, and operational processes and culture of the entity you're acquiring. Don't just take third parties' opinions; be active in learning as much as you can—as soon as you can.
Check your assumptions about the value creators that can enhance competitive advantages, increase impact, and enable top-line growth with
customers
.
Check your assumptions about cultural compatibility. Because if you can't make the
people
work, nothing else matters.
Check your assumptions about synergistic
cost
reductions that can fuel investment in the value creators.
Look for other
investments
that will be new and needed for the combined company and need to be planned for and part of the strategy.
Then make a go or no-go
decision
being clear on the advantage of cutting your losses before they become material.
We look at this in the three chapters of the financial playbook:
Chapter 11
:
The Deal/Due Diligence:
Iteratively
Chapter 12
:
Financing the Deal:
The Different Options
Chapter 13
:
Further M&A:
Enabling Commercial and Operational Success
The Governance Playbook
You need a license to drive a car. And you need licenses to do mergers and acquisitions. Those licenses come from government regulators, banks, and other investors and get translated and managed by your board.
We look at this across the three chapters of the governance playbook:
Chapter 14
:
Regulatory:
And the License to Play
Chapter 15
:
Financial Governance:
Always Necessary
Chapter 16
:
The Board:
And Its Multiple Roles
The Organizational Playbook
The root cause of many mergers' success or failure is culture. Choose the behaviors, relationships, attitudes, values, and environment (BRAVE) that will make up your new culture. Make sure you are encouraging helpful things and discouraging unhelpful things with your incentives and other tools. Also, as you're choosing key leaders and the broader team, keep in mind that you are inviting people into the new culture, noting who really accepts your invitation in what they say, do, and are.
Take a hard look at the combined organization's skills and capabilities through the lens of the new core focus and strategy to determine if any critical capability sets are missing or misaligned. Not only look at the people, plans, and practices, but also pay particular attention to how well you are performing in the markets, segments, and customers you've decided to pursue. Quickly move to bridge any gaps that exist.
Start by defining the right structure and roles to execute on your mission. Be specific about talent, knowledge, skill, experience, and craft requirements for success in each key role, and then match them with the right people.
Innate talent
: Either born with or not
Learned knowledge
: From books, classes, or training
Practiced skills
: From deliberate repetition
Hard-won experience
: Digested from real-world mistakes
Apprenticed craft
: Absorbed over time from masters with artistic care and sensibilities
We look at this across the five chapters of the organization playbook:
Chapter 17
:
Culture:
The Underlying Root Cause of Nearly Every Merger's Success or Failure
Chapter 18
:
Incentives:
Show Me How They're Paid and I'll Tell You What They Do
Chapter 19
:
Leadership:
Starting with the Core Leadership Team
Chapter 20
:
People:
Acquire, Develop, Encourage, Plan, Transition
Chapter 21
:
Politics:
What Current and New Leaders Need to Know Organizationally and Personally
The Change Management Playbook
We've all seen organizations acquire other organizations and then run them as wholly owned, separate entities. You can't possibly realize synergies out of separate organizations. Synergies must be created together by teams looking beyond themselves to new problems they can solve for others. This is why a deliberate and detailed integration plan that spans across organizational, operational, strategic, and cultural issues is essential.
All lasting change is cultural change in attitudes, relationships, and behaviors following a point of inflection change in environment or situation and ambition and objectives. Manage that cultural transformation purposefully, deliberately, actively, and in detail. Have a cultural transformation plan in place. When you merge cultures well, value is created. When you don't, value is destroyed.
Implement systems to track, assess, and adjust daily, weekly, monthly, quarterly, and annually: Don't confuse communication with operating cadences. Avoid the public company sprint to do things just ahead of quarterly earnings calls, instead staying ahead of the curve at all times.
Balanced scorecard (e.g., financial, customer, internal business processes, learning and growth)
Finance (e.g., revenue, cash flow and cash conversion cycle, earnings before interest, taxes, depreciation, and amortization [EBITDA], return on investment)
Customer (e.g., sales from new products, on-time delivery, share, customer concentration)
Internal business processes (e.g., cycle time, unit cost, yield, new product development)
Learning and growth (e.g., time to market, product life cycle)
We look at this across the five chapters of the change management playbook:
Chapter 22
:
Integration Leadership:
Start Here
Chapter 23
:
Change Management:
Leading Through the Point of Inflection
Chapter 24
:
Communication:
Everything Communicates
Chapter 25
:
Announcement Cascade:
Emotional, Direct, Indirect
Chapter 26
:
Adjustments:
Because You’ll Need Them
Prototypical Order
Chapter 27, “Prototypical Order,” covers the last step: preparing for further growth and transformation like the next exit or other “event” as a platform company or bait for strategic buyer. When preparing for an exit, get the story right:
Strategically: Organic revenue growth; Other M&A
Organizationally: Buyable management team; Capabilities valuable to others
Operationally: Buyable infrastructure (Assets, data, IT systems, financial reporting;) Processes; New product development capabilities
Personally: Making yourself invaluable to the next owners
What really matters is how you influence others and the impact you all make together. Do start with the context and industry landscape. Do align people, plans, and practices around a shared purpose to create commercial and other value. Do the cost-cutting required to free up the resources you need to strengthen the combined entity's culture and strategic, organizational, and operational processes. Do that, thinking customers, then capabilities, then cash, and the merger and acquisitions you lead will go well.
Notes
1
Graham, Kenny, 2020, “Don't Make This Common M&A Mistake.”
Harvard Business Review
(March 16).
2
KPMG Mergers and Acquisitions: Global Research Report 1999.
3
Porter, Michael E., 1985,
Competitive Advantage: Creating and Sustaining Superior Performance
(New York: Simon and Schuster).
PART IThe Strategic Playbook
CHAPTER 1The Investment Case: The Heart of the Merger and Acquisition Leader's Playbook
The first component of the strategic playbook is the investment case. It guides every other part of the investment playbook and every other playbook. The first, fundamental questions go to what you want out of an acquisition or merger, how it would fit with what you've already got, and what you're willing to give up to get it.
What You Want
Synergy happens when two or more people or businesses work together to create new value, capture existing value, or prevent or slow the destruction of value. That leads to some of the different types of mergers and acquisitions and the different reasons to do them:
Merging organizations with complementary capabilities and strengths to create something that no one else can do, like Stanley merging its hand tool and construction strengths with BLACK+DECKER's power tool strengths.
Adding innovation or technology capabilities, like Disney buying Pixar to leverage its technology across all animation.
Gaining access to a new market with a new business model or new Internet protocol, like Google buying Android to give it an operating system.
Expanding product and service offerings, like executive search firm, Korn Ferry's string of acquisitions to add other human capital consulting offerings.
Shoring up a weakness to stop destroying value, like Philip Morris buying Kraft foods and merging it with General Foods so the Kraft management team could provide needed leadership to General Foods or the second reason Disney bought Pixar, which was to acquire new leadership for Disney Animation.
Repositioning a company in a new category (with higher multiples) like Delux's move from being a printing company focused on printing paper checks to merging into payment technology companies.
Leveraging costs across the platform, like Coca-Cola's master bottlers swallowing up smaller bottlers to further increase their economies of scale.
Creating critical mass for a platform company to enable future value creation, like regional companies merging to create a national or international footprint so they can expand geographically and serve national or international customers.
Scaling the platform, where there are economies of scale, perhaps in an industry consolidation like Disney buying Marvel and then Lucas Films/Star Wars and then Fox after buying Pixar.
What You Are Willing to Give Up
You have to give up something to make any merger or acquisition work, whether it's cash or just a dilution of your control. You'd never do this if you didn't believe there would be a positive return on your investment (ROI) in an appropriate time frame.
If you're a public company, you'll need to manage that ROI in your quarterly and annual earnings announcements. Many public company investors will want to see accretion to earnings per share (EPS) every quarter. You will need to think about this aspect and ensure messaging and expectations are clear on when the merger will add to EPS. If you're a private equity firm, you'll need to manage that ROI within the time frame of the appropriate fund. If you're a family or family office, the ROI may be associated with generational wealth creation. Your ROI can be positive if you pay or contribute less or receive more for an asset than it's actually worth. In that case, there's a transfer of value between past and future owners with no need to chase synergies.
This book and this chapter focus on mergers and acquisitions (M&A) in which the combined parts are worth more together than they were separately—creating top-line and bottom-line growth through synergies.
Which Opportunities to Pursue
Knowing what you want and what you're willing to give up to get it points you in the right direction to consider all the alternatives, taking into account overall risks at a high level and how you might mitigate those risks.
British philosopher Carveth Read taught us “it is better to be vaguely right than precisely wrong.”1 Others encourage divergent thinking before converging on a solution. When it comes to looking at merger or acquisition targets, they are the same idea: Expand your thinking to look at vaguely right possibilities before narrowing in, getting more precise at each step.
In any case, make sure the opportunities tie directly into your strategic plan, building strategically important capabilities. Mergers and acquisitions are tactics, not strategies. Not thinking this way is one of the main reasons so many mergers fail.
There are four basic things private equity investors do to earn money:2
Raise money
from limited partners (LPs) like pension and retirement funds, endowments, insurance companies, sovereign wealth funds, and wealthy individuals as well as the private equity (PE) firms and their partners' contributions to the deal(s)
Source, due diligence, and close
deals to acquire companies
Improve
commercial, innovation, and technology strengths and operations, cut costs, manage risks, and tighten management in their portfolio companies
Sell or recapitalize
portfolio companies (i.e., exit them) at a profit
When PE firms analyze companies for potential acquisition, they will consider things like what the company does (their product or service and their strategy for it), the senior management team of the company, the industry the company is in, the company's financial performance in recent years, emerging technologies, industry trends, risks, opportunities, the regulatory environment, reputation, potential competitive response, products and services, customers, and the valuation and likely exit scenarios of the company.
The main sources of value capture at exit include market share growth, growing revenue (and therefore earnings before interest, taxes, depreciation, and amortization [EBITDA] and cash flow) substantially during the holding period, cutting costs and optimizing working capital (and therefore increasing EBITDA and cash flow), selling the company at a higher multiple than the original acquisition multiple, and paying down debt that was initially used to fund the transaction.
This leads to a framework for the investment case—simplified by design. Your actual investment case will include several layers of detail below this overarching framework.
The Path to Value Creation
As McKinsey's Andy West and Jeff Rudnicki laid out in their podcast on “A Winning Formula for Deal Synergies,”3 the highest synergy potential is found in industry consolidations, capability-led roll-ups, and geographic expansions. Small product tuck-ins, corporate transformations, corporate-led white-space acquisitions, new business models, and IP acquisitions may also be strategic fits.
Think through the core focus, overall strategy and posture, strategic priorities, enablers and capabilities, and organizational and operating priorities for the investment based on a fact-based assessment of the situation.
The 6Cs situation assessment is a framework for understanding the business environment by looking at:
Customers: first line, customer chain, end users, influencers
Collaborators: suppliers, allies, government and community leaders
Culture: behaviors, relationships, attitudes, values, environment
Capabilities: human, operational, financial, technical, key assets
Competitors: direct, indirect, potential
Conditions: social, demographic, and health; political, government, and regulatory; economic, technical, market, climate
Think:
What: Objective, scientific truths—facts
So what: Subjective, personal, cultural or political truths, opinions, assumptions, judgments, conclusions
Now what: Indicated actions
Customers
Customers include the people your organization sells to or serves. These comprise direct customers who actually give you money, as well as their customers, their customers' customers, and so on down the line. Eventually, there are end users or consumers of whatever the output of that chain is. Additionally, there are the people who influence your various customers' purchase decisions. Take all of these into account.
FedEx sells overnight delivery services to corporate purchasing departments that contract those services on behalf of business managers. But the real decision-makers have historically been those managers' executive assistants and office mangers. So FedEx targeted its marketing efforts not at the people who write the checks, not at the managers, but at the core influencers. It aims advertising and media at those influencers and has their drivers pick the packages up from the executive assistants personally instead of going through an impersonal mailroom. FedEx trains its frontline employees on customer service and how to interact to retain business and grow share.
Collaborators
Collaborators include your suppliers, business allies, and people delivering complementary products and services across your ecosystem. What links all these groups together is that they do better when you do better. So it's in their best interest, whether they know it or not, to help you succeed. Think Microsoft and Intel, or mustard and hot dogs, or ketchup and hamburgers—though never mustard and hamburgers, of course.
Just as these relationships are two-way, so must be your analysis. You need to understand the interdependencies and reciprocal commitments. Whenever these dependencies and commitments are out of balance, the nature of the relationships will inevitably change. Think through your customer's purchasing cycle. Who comes before you? Who comes after you? If you're in corporate real estate, a relocation expert you can vouch for and trust is an obvious ally. In the M&A advisory business, attorneys, bankers, and other professional services firms pull in complementary firms to create the best outcome for their clients. However, a printing business could be your ally as your customer will need new letterhead and business cards to reflect their new location.
Collaborators are strategic partnerships whether that's intended or not. So, think strategically. The less resources you control in-house, the more important this is.
Culture
Some define culture simply as “the way we do things around here.” Others conduct complex analyses to define it more scientifically. Instead, blend both schools of thought into an implementable approach that defines culture as an organization's behaviors, relationships, attitudes, values, and the environment (BRAVE). The BRAVE framework is relatively easy to apply yet offers a relatively robust way to identify, engage, and change a culture. It makes culture real, tangible, identifiable, and easy to talk about.
Capabilities
Capabilities are those abilities that can help you deliver a differentiated, better product or service to your customers. These abilities include everything from access to materials and capital to plants and equipment to people to patents. Pay particular attention to people, plans, and practices.
Competitors
Competitors are those to whom your customers could give their money or attention instead of to you. It is important to take a wide view of potential competitors. Amtrak's real competitors are other forms of transportation like automobiles and airplanes. The competition for consumer dollars may be as varied as a child's college education versus a Walt Disney World vacation. In analyzing these competitors, it is important to think through their objectives, strategies, and situation as well as strengths and weaknesses to better understand and predict what they might do next and over time.
Conditions
Conditions are a catchall for everything going on in the environment in which you do business. At the least, look at sociodemographic, political, economic, technology, and climate trends and determine how they might impact the organization over the short, mid-, and long term:
Social, demographic, health
Political, government, regulatory
Economic
Technology—emerging innovation and trends
Market—including consolidations and cross-vertical expansion
Climate, weather
Pull these together into a Porter's Five Forces4 or a strength, weakness, opportunity, and threat (SWOT) analysis or the like and use that to inform your choices, starting with your core focus. Michael Porter's Five Forces are:
Bargaining power of suppliers
Bargaining power of buyers
Threat of new entrants
Threat of substitute products or services
Rivalry among existing competitors
SWOT is a way of combining internal strengths and external opportunities into key leverage points and internal weaknesses and external threats into business issues. See Chapter 3 for more explanation and a SWOT tool.
For years, United Sporting Goods exploited its relatively strong bargaining power with suppliers and buyers to set market prices as the largest distributor of guns in the United States. It had no single supplier or buyer that accounted for more than 5 percent of their business. The threats of new entrants or substitutes was low, and its existing competitors were dramatically smaller than they were. Its Five Forces analysis was favorable. However, they completely missed the impact of Donald Trump's election on the gun market. United Sporting Goods expected Trump to relax constrictions on gun sales, leading to a market expansion, so it increased its inventory. Instead, it faced “slowing sales after Mr. Trump's election as worries about gun control ebbed among firearm enthusiasts.”5 This is why it needed to look at its SWOT.
FIGURE 1.1 Core Focus
Core Focus
The core focus of an enterprise depicted in Figure 1.1 informs its overarching strategy, culture, organization, and ways of working. Understand whether your new, combined organization's core focus is design, production, delivery, or serve. That choice dictates the nature of the culture, organization, and ways of working and flows into your overarching strategy and posture, strategic priorities, and enablers of those priorities, which then guide your organizational and operating priorities.
Overarching Strategy and Posture
Two things drive fundamental choices around the creation and allocation of resources to the right place in the right way at the right time over time in line with your strategic priorities:
Drive customer impact and profitable commercial growth through product/service development, new offerings, innovation and technology, pricing, marketing, business development (markets, partners, etc.), increase sales to existing and new customers
Enhance operational rigor and accountability through supply chain, production, distribution, service optimization
Strategic Enablers and Core Competency and Capabilities
These drive things directly increasing customer impact, revenue, and profitability (e.g., X-ray machines and radiologists to diagnose ankle surgical needs).
Win
by being: predominant/top 1 percent; superior/top 10 percent, strong/top 25 percent;
Not lose
by being: above average/competitive, good enough/scaled, or;
Not do
by: outsourcing or not doing at all.
Organizational and Operating Priorities
These help deliver the strategic enablers and competency and capabilities.
People
The board
Senior leadership (commercial, operations, tech and information technology, finance, human resources [HR], legal, research and development, M&A)
Middle management
Individual and team strengths including project management and transformation
Incentives
Infrastructure
Governance including board and systems
Brand positioning and marketing materials, collateral, tools (e.g., websites)
Financial reporting, tax, accounting, and compliance infrastructure
Data, technology, IT, and security infrastructure
Operational infrastructure including procurement and supply chain
Organizational and HR infrastructure
New product development infrastructure
Innovation and Technology
Revolutionary invention
Evolutionary steps
Next version of product or service with what the customer wanted or did not even know was possible
Systems and Processes
Enabling commercial growth and operational rigor
Balance Sheet and Cash Flows
Deferred maintenance and modernization investments
Growth-oriented capital spending
Technology investments
Back office: finance, tax, HR
Mergers and Acquisitions
Bolting on to foundational platform for:
Industry consolidation
Capability-led roll-up
Geographic expansion
Product tuck-in
Corporate transformation
Corporate-led white-space acquisition
New business model
Intellectual property acquisition
Taking into account competitive landscape and potential reactions
Fundamental Investment Case Model for a Merger or Acquisition
Step 1: Pay or Contribute Fair Value for What the Company Is Currently Worth.
Begin with the current value of the enterprise you're considering acquiring or merging with based on its current cash flows, when there is current cash flow. There are early-stage growth businesses and businesses in need or restructuring and transformation that are not producing cash flow today. In these cases, you need to think about the future value of the business, based on the current commercial success, once scale is obtained or the value the PE firm or acquirer can bring to these businesses and derive a fair value for these businesses. A couple of things that do not go directly into this calculation are:
Their claimed
EBITDA
: Different organizations do different things with financing and interest, taxes, depreciation, and amortization. Get to the current ground truth with cash flows.
Their future
projections
—current, not future value
Possible
synergies
—current, not future
Improvements to the commercial or operations of the business
This is, of course, not what you're going to end up paying or contributing. But it's important input. The number you do care about is what you think you'll have to pay or contribute.
If you did pay or contribute fair value for what the company is currently worth based on current cash flows, you would reward the seller for what they've built and keep all future value creation. Of course, in the real world, others may be willing to give the seller a portion of the estimated future value. Couple that with some overestimation of future value creation and ego, and it's easy to see how people bid more than they should to “win” bidding contests.
You'll need an expected transaction price for your investment case. Pick a most likely number somewhere between “fair value” and “must have at any price.” Then bracket it with best-case and worst-case scenarios. Add in some financing assumptions for leverage and you're ready to go to the next step.
The next steps get at future state value creators: top-line growth, operational efficiencies, technology innovation, and the investments required to enable them.
Step 2: Grow Top-Line (Organically and Inorganically).
Project the organic growth that can come from synergies between the two enterprises. In general, these come from getting new customers or getting current customers to buy or pay more. But, for this exercise, take into account only increases that would not happen without the merger or acquisition.
Of course, you're going to consider opportunities and risks like general market growth or market consolidation and the competitive landscape that will impact everyone—including the value of your enterprise.
It is critical to think through what emerging technologies are possible during your expected hold period that could benefit or materially harm the future value of the firm. Amazon's growth has been a major benefit for a number of players in the value stream, including corrugate manufactures and shippers. On the other end of the spectrum, auto suppliers with key components tied to the combustion engines have seen valuations fall as electrification continues to grow, even a decade before the conversion happens. But they impact buyers and sellers whether or not they merge.
Classic synergistic revenue enhancers include:
Cross-selling existing products or services to the formerly separate entities' customers either in the same or new markets.
Getting existing customers to use current products or services in new ways—thereby purchasing more.
Creating and then selling new products or services (that could not have been created without the merger or acquisition).
Then, separately, project the inorganic growth enabled by the merger or acquisition. These might include acquisitions, mergers, or joint ventures with other companies, brands, technologies, systems, and the like layered on to the new, combined platform—especially in a relatively fragmented market.
Step 3: Make Operational Improvements and Operational Engineering.
As we've said, this is what most people think of when they think “synergy.” While there is often the opportunity for some quick wins falling out of eliminating redundancies, the really valuable operational improvements don't “fall out” of anything. They require real work by people with real strengths.
Look at these in five buckets across the operating flow from procurement to intake to processing to inventory management to distribution:
Operations strategy, which starts by asking where to play and then (1) doing the most important value-creating operations yourself and (2) outsourcing the less important and less efficient operations.
Operational jump-shifts to improve quality and reduce waste and costs, perhaps fueled by new technologies, digitization, tools, systems, processes, footprint realignment, unlocking stranded capital, or scale. Scope is a function of resources (including levers) and time.
Elimination of redundancies: They will be there. Take them.
Cash and working capital management, especially the lag between money out (accounts payable) and money in (accounts receivables) and also opportunities to generate cash like contracting out unused production capacity.
Lean, continuous, and incremental improvements, which may take longer to realize but create real value over time.
Step 4: Invest in Top-Line and Bottom-Line Enablers.
What you pay for an acquisition or merger is your first investment, but not your last. Step-changes in top-line growth and operating efficiencies won't happen without investing to realize them. Some of the enablers are more general, and some are more specific.
Think in terms of putting in place a full management team capable of managing another doubling of revenue for the next owner.
Governance engineering can also make a big difference. Think in terms of management equity, debt or leverage, board participation, all securing the license to operate legally, ethically, socially.
Strengthening brand differentiation with prospective and current employees, customers, suppliers, allies, influencers, and the communities in which you operate is always important.
Strengthening go-to-market capabilities through the sales pipeline: generating awareness, fueling interest, and then activating desire helps drive topline growth.
Financial engineering, arbitrage, or balance sheet and cash management including foreign exchange opportunities and risks all directly impact profitability and enable other growth drivers.
At the same time, make sure you're establishing the required infrastructure. For organizations focused on design, this might look like a new product development factory—like Michael Eisner and Frank Wells’s reboot of Disney's animation studio when they took over because they decided the core of the company was in animated film design; or efficient procurement and production machines—like Disney's development company because Eisner and Wells wanted to capture more of the share of wallets from theme park visitors; or a distribution network or ecosystem—like Disney stores to sell Disney character-driven merchandise; or service-delivery differentiators—like Disney hotels as part of capturing more of the guests' wallet share and better controlling their overall experience; all supported by:
IT systems including enterprise management and business intelligence, customer relationship management
Financial reporting systems
HR management systems
Step 5: Improve Cash Flows and Pay Down Debt.
While this may fall out of successfully implementing steps 2-4, do calculate this and cash flow sensitivities into your investment case. Some deals will involve some creative financing approaches as well, generating their own synergies and value. And yes, you will need to do a bridge from current revenue, EBITDA, and cash flows to those in your future case, taking into account all the things that help and hurt.
Step 6: Realize Value in Increased Earnings or by Exiting or Recapitalizing When This Round of Value Creation Is Done.
You make investments to earn returns—the “R” in ROI. Sometimes the return is realized in increased earnings. Sometimes it's realized in an exit or recapitalization. Calculate that value one way or another. Bonus points for writing the investment case for the organization eventually buying your new, combined entity—whether or not you think you'd ever want to sell. Write their future investment case, and then make it happen.
Note the most up-to-date, full, editable versions of all tools are downloadable at primegenesis.com/tools.
TOOL 1.1Investment Case
Core focus of enterprise:
Overarching strategy and posture:
Strategic priorities:
Strategic enablers and core competency/capabilities:
Organizational and operating priorities to help deliver the strategic enablers, competency, and capabilities:
People:
Infrastructure:
Systems and processes:
Balance sheet and cash flows:
Mergers and acquisitions:
Fair value of target company:
Target company's perception of its fair value:
Possible acquisition prices:
Organic growth drivers:
Inorganic growth drivers:
Operation improvements and operational engineering:
Investments in top-line and bottom-line enablers:
Projected improvements in cash flows to pay down debt:
Projected realized value in increased earnings or exit or recapitalization:
Notes
1
Read, Carveth, 1989, “Logic: Deductive and Inductive,” Grant Richards, London, June.
2
Chen, Andrew, “What Do Private Equity Investors Actually Do?”
InterviewPrivateEquity.com
.
3
West, Andy, and Rudnicki, Jeff, 2020, “A Winning Formula for Deal Synergies,” Inside the Strategy Room Podcast (May 8).
4
Porter, Michael E., 1985,
Competitive Advantage: Creating and Sustaining Superior Performance
(New York: Simon and Schuster).
5
Gibson, Kate, 2019, “Gun Seller United Sporting Goes Bust, Partly Blaming Trump's Election,” CBS News MoneyWatch (June 11).
CHAPTER 2Focus: It Drives Everything Else
The second component of the strategic playbook is focus. It guides plans and innovation choices.
There are four primary areas of core focus: design, produce, deliver, or service (Figure 2.1
