Questions to consider
- To what degree does your due diligence focus on future asset performance and go-forward synergies?
- To what extent are operating managers involved in deal planning processes?
- How do you distribute accountability for the various phases of the transaction process?
- At what point, if any, is there a handoff of responsibility for transaction integration?
When due diligence is aligned with opportunity analysis, satisfaction with the transaction outcome is significantly higher.
Summary: Focus on key value drivers throughout the pre-deal work. Pay attention to future value. Look closely at synergies. Develop a detailed plan. Assign resources and accountability and promote collaboration.
Getting more value from acquisitions starts with up front rigor
Involving key business functions early will set the stage for greater continuity of the entire deal process. It is not enough to identify synergies and then simply hand over the integration process to the business to deliver them.
Each industry, each company and each deal will present its own unique integration challenges and opportunities. Focusing on the key value drivers of the transaction helps target integration efforts on the right elements of business - after all, not everything may need to be integrated.
Some of the most critical pre-deal steps include:
Focus on future value
Traditional due diligence approaches often place inordinate weighting on the past performance of assets. Instead, deal teams need to shift their mindset toward a forward-looking view.
This is particularly important in an era of rapidly changing economic conditions, vast shifts in technology and society and rapidly developing tax regimes around the world that are continuously creating new opportunities and risks.
Historical views are becoming less reliable as an indicator of future performance. This is not to say history should be ignored. However, the real focus should be placed on how the acquired assets will perform within a new entity.
The valuation team should look closely at the nature of the acquired assets and make a realistic assessment of their expected performance.
Look closely at synergies
A key component of deal value and subsequent integration is a focus on synergies.
All too often, effort is focused on obvious cost synergies rather than taking a holistic approach to determine untapped hidden upsides from all sources, including tax. Successful companies are now adopting this approach to create greater value.
However, this requires experience of understanding and identifying where value can be created, what is proven to work and where the risks lie. To give a competitive advantage, value needs to be identified early, often with limited information.
Revenue and balance sheet synergies may also exist where the assets might lead or assist the buyer in new markets, new geographies or entirely new business lines - creating products or services that existing customers will welcome.
This is critical to business valuations in emerging markets, where the deal is often predicated on revenue synergies.
In any deal, acquirers need to move rapidly to assess synergies as early on in the process as possible.
Deal-focused executives should work in close partnership with operating managers and functional leaders to identify such synergies and determine not only their nominal value, but also the likely timing of reaping benefits.
Do not overlook dis-synergies
In viewing the deal’s overall impact on the new, consolidated business, buyers must look at potential drains on value. Transactions can trigger dis-synergies.
For example, the assets can create potential competition with existing business units. New products may in fact "cannibalize" existing offerings or for a variety of reasons turn away existing customers.
Deals can also pose a potential drain on management focus, particularly if the transaction is in addition to their normal roles. This can create a loss of value in existing businesses and markets.
Without careful consideration, deals can also introduce tax inefficiencies, for example, through tax leakage from cross-border funds flows.
Develop a detailed plan
Well before close, the company should develop a comprehensive plan to achieve both synergies and fundamental value propositions. Such a plan should be closely aligned with the most critical components of deal value and synergy realization.
In general, the plan should devote the most attention and prioritization to the most critical drivers of deal value, whether positive or negative.
Time within a deal situation is often compressed and the deal teams often operate without perfect information. As such, companies must focus diligence effectively and efficiently to prioritize synergy realization in the implementation plan.
It is especially important to cite specific milestones, metrics and clear accountability for results. Functional inter-dependencies should be identified that may impact integration timing or blur lines of accountability.
The plan will be a tool to help the deal managers assess how quickly and capably the company is moving to capitalize on essential elements of deal value.
To achieve some of the most critical synergies, the underlying work often needs to commence well before the deal is signed or closed. The commitment of planning resources should be commensurate with the probability of deal closure.
Assign resources and accountability (span of control)
To realize the fundamental deal value and synergies, a company must deploy the right resources: the right people need to be involved at the right time with the right focus, motivation and support.
When considering the right people, organizations need to be honest about the capacity and capability of their people. Often, new markets or business issues require individuals with specific experience that may not exist internally.
The deal team often quickly moves on to the next opportunity, handing over the integration phase to the business units. In too many cases, the loss of continuity and clear accountability leads to breakdowns in the achievement of synergies.
At a minimum, there needs to be a clear hand-over process, whereby deal fundamentals and value drivers are shared, along with assumptions that are underlying synergy benefits. Without such a handover, those responsible for synergy delivery will almost certainly fail.
Successful integration executives will often have the business unit teams and vital central support functions, such as tax, included into the deal teams at the right time, so that the transition is seamless.
No one is in a better position than business unit teams to determine whether the hoped-for benefits are attainable. Moreover, the early involvement of business unit managers helps secure buy-in and gets the company moving toward the achievement of the synergies.
Deal teams tend to "own" the investment model, that is, the deal managers will evaluate the cash flows, costs and other deal components to determine if a transaction meets the necessary financial returns.
However, a transaction requires input from a number of departments with relevant expertise such as tax, human resources (HR), information technology (IT) and the business units.
The Ernst & Young Corporate Development Officer (CDO) study identified functional areas where deal satisfaction increased significantly when there was a strong relationship with the deal team. These functions include finance, accounting and treasury, operations, strategic planning, tax, risk management, human resources, information technology and sales and marketing.
For corporate development officers and their teams, having strong working relationships across the whole business is essential to success.
View Case study: a good deal could have been better
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