Creating value from mergers, acquisitions

Creating value from mergers and acquisitions (M&A) has become a real challenge. Value creation is now more important than ever and should be at the heart of any deal if it is to be a success.

In M&A, knowledge of the market and the asset are key, as is the knowledge of the value creation levers. The key is to identify a handful of value levers that are likely to create maximum impact.

Companies, including those in the financial services sector, can maximise success in deal-making by focusing on three key elements: staying true to the strategic intent, being clear on all elements of the value creation plan and putting culture at the heart of the deal.

Deals need to be strategic (as opposed to opportunistic) and carried out as part of a clear strategic vision of the business. Opportunistic deals, though they can create value, do not do so as often as strategic deals do.

Business leaders must take time to do a targeted search and carefully carry out due diligence (including an evaluation of projections) to determine what the acquired entity will look like on the other side of the deal.

Acquisitions help a company achieve something more quickly than it would do on its own e.g., access new markets/geographies, acquire new product offerings, digital expertise, top talent, etc.

However, it is critical to focus on the strategic thinking that underpins the acquisition and have a value creation plan covering such aspects as the strategic repositioning of the combined business (what will be the company’s market focus and business model?), optimising the operating model, balance sheet (working capital and other balance sheet items) and tax structure.

Firstly, plan for tax and legal issues. Buyers can create more value by assessing the most appropriate tax structure of the combined entity – an inappropriate tax structure will result in tax leakages post-deal.

Do you know the skeletons in the cupboard? Thorough due diligence upfront will identify any potential tax liabilities that could crystalise post-deal and hence erode value.

By thinking through the tax implications of different strategic and operational options, the full value creation potential can be understood.

Legal issues can also hinder value creation, hence it is important for a buyer to look at a target’s corporate structure through a legal lens, for instance considering the implication of different holding companies spread across different jurisdictions, assessing whether there are blocks that prevent capital from being extracted or moved around the group etc.

Secondly, consider the integration of technologies post-merger. For example, it may be challenging to bolt on a fintech business to a company that has very rudimentary systems – consider how this will be executed and plan for the costs upfront.

Thirdly, understand cost and revenue synergies that are to be derived from the merger. Cost synergies are typically a low-hanging fruit when compared to revenue synergies. However, revenue synergies are much more likely to deliver greater returns than cost synergies, hence worthwhile exploring.

Cost synergies are likely to focus on de-duplication of costs while revenue synergies will focus more on aligning customer and channel management, harmonising products and cross-selling. Thoroughly assess the pre-deal hypothesis to establish potential upsides and synergies to be made from the acquisition.

Fourthly, retain top employees. This is crucial to creating value. The acquirer needs to identify top talent in the target business before the acquisition occurs and have a plan on how to retain them post-acquisition e.g. by offering them incentives to stay, investing in them through upskilling, ensuring there is clear communication and effective messaging to lessen the confusion and uncertainty that is typically prevalent during the post-merger phase etc.

Failure to proactively plan for cultural integration is where most deals fail to realise their expected value. Buyers need to understand the culture of the target company then bring on board a mix of management from inside and outside the company to expand the culture into one that is inclusive.

For cross border deals, it is important to understand the local culture before the deal is closed. Beyond the geographical cultural differences, buyers also need to consider the different corporate mindsets such as challenges of blending a culture of innovation (such as seen in fintech) with one of risk aversion.

Culture needs to be well managed during and after the merger. Poor culture management leads to loss of value as well as top talent. Increasingly companies are walking away from deals if they are not confident of achieving cultural integration or overcoming cultural barriers.