Successful integration requires balancing strategic intent and capturing value, without negatively impacting the existing business.
M&A is heating up again. As businesses strive to adapt to disrupted markets, they are having to recalibrate their portfolio strategies almost constantly. Executives are evaluating a far greater range of deals than ever before as they look to both preserve current value and future-proof their businesses by making bets on future technology trends. Digital disruption has also become a gateway to industry convergence, breaking down old barriers and creating new paths for companies to add value and expand their customer base.
With M&A offering a potentially faster route to innovation and expansion and the cost of capital currently low, we’re seeing a significant increase in transactions — a trend that shows no sign of abating. The 17th edition of the EY Capital Confidence Barometer, which surveys 3,000 C-suite executives from around the world, showed that 56% of companies globally plan to make acquisitions in the next 12 months.
But with many of these potential deals being either a convergence play or focused on bringing in new technology, integrating acquisitions has never been more complicated. It requires careful planning from the start and flexibility in its execution.
Deal rationale in a converging world
Growth-seeking M&A in the digital age is increasingly driven by two distinct deal rationales:
- Future-growth convergence, where companies buy small, typically venture-backed technology-focused start-ups to strategically position themselves for anticipated future high-growth markets.
- Immediate-growth convergence, where firms make larger-scale, often transformational acquisitions in adjacent industries, such as US telco AT&T buying satellite television broadcaster DirecTV, to target more short-term growth.
By their very nature, these convergence deals start with a mismatch. Often, it’s a mismatch of scale, but almost always there are mismatches of culture, purpose, processes and customer attitudes.
Given these mismatches, the traditional deal rationales that shape most merger integration plans, whether it be cost-out synergies, a revenue combination play or gaining market share, may need to take a back seat to other strategic priorities.
Convergence deal success typically comes more from realizing an opportunity through either accelerating or carefully scaling that opportunity without ruining the standalone business, or through undertaking a “reverse integration.” This occurs when the target remains independent and the buyer moves an existing team into it in order to allow new business models and behaviors to grow and organically flow back into the parent.
Getting integration right from the start
Management is under huge pressure from shareholders and boards to get these acquisitions right from the start. They demand almost instant results and yet nearly two-thirds of companies lose market share in the first quarter after a merger and by the third quarter, the figure is 90%. The challenge therefore is how do you realize the strategic intent and capture value while integrating, without negatively impacting current business performance?
Inadequate integration planning and execution are cited as the most common points of failure. Ultimately, for an acquisition or merger to create value, the combination must become more than the sum of the parts. To achieve this, companies have to approach post-merger integration with the same level of commitment and strategic intent as the transaction itself.
“It is about tenureship. Most people think the deal is done when the deal is closed, I actually believe the deal starts when the deal closes. The deal is done when you have delivered the value that the deal is predicated on,” says Faizul Ali, Transaction Advisory Services, Technology, Media & Entertainment and Telecommunications.
One of the mistakes many companies make following deal closure is to not reassess the investment rationale and plan backwards, working out what they want to achieve and by when. If this is done, they can then set the tone and pace with which they will execute the integration and realize the synergies.