M&A Promises vs. Reality
The Visionary Products shareholder meeting takes place with a unanimous approval of the NimbleBrands acquisition. This one is a no-brainer: clear alignment on vison, complementary product lines, and redundancy in internal organization and functions. Visionary’s leadership has promised synergistic growth to the board and shareholders. Despite these alignments, leaders have seen studies showing that between 70 and 90% of mergers and acquisitions do not achieve their promised value. This “M&A Leaky Bucket” concept creates sharp apprehension for Visionary’s leaders as they begin the integration.
Maximizing Integration Value
What Is the Leaky Bucket, and What Causes It?
The M&A Leaky Bucket is the unexpected and often unexplained erosion of promised sales and profits over the course of an integration. The leaks are caused by a variety of factors, but often center around the high-pressure rush to results. Some of the most common contributing factors include the following:
1. Inadequate Due Diligence
The due diligence phase is short, and because of confidentiality and resource scarcity, teams are typically very small and at a senior level. That means that the people who know the reality of the business are often not even consulted. In addition, due diligence on the target side is problematic unless you know the right questions to ask. The challenge is understanding if that 20% growth rate is real, or if it has been propped up by short-term decisions to increase attractiveness for acquisition.
2. Unrealistic Benefit Expectations
Pressure to get a deal done means the financials must work. Corporations typically have standard deal metrics that must be achieved to get board buy-off. These metrics can push the deal team to commit to financials that are a stretch at best. In addition, leaders can be overconfident in their own company’s capability and may underestimate the capability of a company being acquired, especially if that company is smaller and perceived as less sophisticated.
3. Technical Transition Not Mapped in Enough Detail
Technical transition is the most difficult part of the integration for executives to get their arms around, which often leads to underestimating costs. An IT leader recently provided a fitting example: “When both companies have the same enterprise software, leaders incorrectly assume that integration will be less complex and inexpensive… In reality, underlying deeper issues such as data and interfaces drive the cost and timeline.”
Technical transition applies to non-IT items as well. Aligning on business processes, compliance responsibilities, and even physical space is complex, time consuming, and expensive.
4. Focus on Integration Tasks, Not the Benefits
The integration program itself is where leadership often believes it can get a jump start: set up an integration team, develop plans, verify that risks and issues are mapped, and insist on a rapid escalation process. While it is important to ensure that execution is efficient, most companies intense focus on it is at the expense of attention on the M&A benefits. Value drivers are often not precisely identified or mapped to metrics, including KPIs that are lead indicators of success. Achieving full M&A value requires constant focus on the leading indicators, scenario planning, and quick reaction to ensure that sales and profits aren’t leaking.
5. Insufficient or Ineffective Change Management
Change management is the art and science of equipping the organization with what it needs to navigate from the current state to the ultimate vision. As leaders want to move rapidly from strategy to execution, the organization may not receive clear communication, knowledge, plans, and tools. The result is individuals are not completely bought into the change and engaged in producing the best results.
6. Insufficient Integration Resources
The biggest challenge of staffing an integration initiative is that the most important potential team members are critical to running the day-to-day business as well. Why? Because they best understand business operations and processes and know the informal communication networks that help get things done. In a resource constrained environment, employees with less capability than required are often staffed on integrations, or key employees are required to straddle both integration and operational roles. This choice creates strain and fails to set top employees up for success in either role.
7. Not Enough Attention on the Culture
One of the key missing elements in integration is culture alignment. Pre-deal analysis typically considers culture differences of both entities in a merger or acquisition. However, those cultural differences are often not adequately addressed. In addition, lack of clarity on which company’s strategies, processes, and systems will win the day can cause tremendous amounts of frustration and inefficiency. This is exacerbated as people feel the pressure of potential job loss or role changes.
Not surprisingly, the M&A Leaky Bucket is a challenge to corporations around the world. Proactively addressing these common causes can make a major impact on integration success.
Maximizing Value and Overcoming the Leaky Bucket
Given the challenges the that integrations often present, how do we overcome the leaky bucket? Said in a more positive way, how do we maximize the value of the deal, and not only meet what was promised to the board, but exceed it?
1. Get Everything on the Table from the Start
Executives should adopt a mindset of truly understanding what is under the covers of an integration immediately. This means getting in the mindset of 2nd due diligence phase. What are the risks that could derail value? What are the issues that must be addressed to keep integration on plan? What are the opportunities to increase value to a greater level? This upfront effort can create the perception of lack of speed. However, understanding the real scope and key areas of focus will increase execution speed.
2. Enable for Success
To enable success, of course, proper plans must be in place. However, just as important, the organization must be prepared and ready to engage in the change. It starts with transparent, realistic communication to the organization. People will not engage at their fullest level when they do not understand the impact that the change will have on them personally. In addition, do employees have the information, capabilities, and tools that they need for success?
3. Constant Focus on the Value
After finalizing overall metrics for an integration, leaders should elevate the visibility of those KPIs that are core to achieving or exceeding the promised deal value. The next step is determining what the key value drivers are and their associated KPIs. The next level of analysis lets leadership understand the leading indicators that will show whether the value will be achieved or not. Having these leading indicators be visible to leadership prevents surprises down the road when it is too late to react.
In this example, Visionary believes it can drive a $160 million growth above original projections due to new business in the club store channel where it is very strong and SmartTrade did not play. This is a clear potential, and something that can be clearly monitored through leading indicators.
Value Driver Example
A Year Later
After a year of tremendous growth, Visionary Consumer Products has become the rare example of a company that has exceeded M&A promises. Through 1) Clear expectation setting, 2) Comprehensive planning, and 3) Always keeping an eye on value creation, Visionary has solidified its role as an industry leader, and set the path to future success.
Aspirant has strong experience in M&A integrations and has a proven ability to maximize integration value. To get companies off to a fast start, we offer our “Value Maximization Workshop.” This workshop supports leaders in identifying the true value drivers of an integration and jump starts the planning process to ensure success. Sign up to receive Value Maximization Workshop overview or schedule a free discussion with our team to find out how you can plan your own Value Maximization Workshop.
Mike is Aspirant's president, and a proven strategic leader in creating corporate visions and achieving their full value. He has delivered results across a spectrum of corporate and consulting leadership roles, and understands what organizations truly need to expedite change and deliver value faster. Mike’s unique combination of business experience in Strategy, Marketing, Operations, Supply Chain, Business Transformation, Technology, Capability Building and Culture Change enables him to provide a broadly informed viewpoint when solving enterprise problems or striving to take advantage of market opportunities. He serves as a key leader to bring the vision of Aspirant to life for clients across North America and the globe.
March 25, 2020
March 18, 2020