Updated: Aug 24, 2019
In today’s highly competitive world, the playing field has levelled. This has opened a new world of possibilities for the medium sized companies but has also allowed larger companies to become real competition. Larger companies have internally, aided by available resources, have tweaked their business models to allow them to be more competitive to SME clientele. The easiest, and in many cases the fastest, way to stay competitive and maintain the speed of growth amid competition is to collaborate. But collaboration sometimes lacks the flexibility the time commands. Enter M&A.
So we thought of putting these thoughts together in an instructional bible to help SMBs ease up and look at making the most of coming together and working at building something larger.
Is this something I should be considering?
There is nothing more powerful than the coming together of like-minded minds working together on a common mission. This is the foundation on which all successful partnerships work. However, most organizations tend to only realize the importance of working together with their internal people and tend to forget the power of coming together with other businesses and look at long-term synergies.
Simplify the understanding and help create a foundation
Consider M&As as an important strategic move
Demystify and present options for consideration
Execute more well thought out M&As
Honestly though, is this a nut worth cracking for me?
Short answer: The whole is always greater than the sum of moving parts.
Long answer: Businesses, each in their unique way, develop strategies to be able to do more with less. This may make them unique and efficient in many ways in their use of talent and capital. Further, each unlocks value in its own ways and can boast of success stories at it. These success stories and their learning that are unique can be carried forward to the combined benefit of the merged enterprise.
What kind of benefits?
Is there something more than I am seeing?
From a function to function perspective, below is a simplified representation of how the coming together can benefit the collective unit.
Apart from this, myriad other leverages are also possible by combining the key strengths in one driver with a driver of another.
Identifying these leverages and synergies can be the first step in setting the internal expectations for pursuing a planned transaction in pursuit of a great portfolio strategy.
Interesting. Now, how do I do it?
Can it be less complex than I think it is?
Getting it right the first time around
M&A ‘on paper’ usually great value creation for all the people involved. Quick returns where organic growth options may be limited or the industry itself may be highly competitive. But the worrying truth of the matter is that over 80% of transactions fail to deliver shareholder return in the short term. A primary root cause analysis points towards a lack of sufficient planning, setting of wrong objectives for the transaction and spending the wrong (insufficient/ more than necessary) amount of time in making it work.
Set up the right M&A strategy
The first step to setting up the right strategy is to look inward. Some questions that can help in the process can be:
What does my business face as a key inhibitor of growth?
What are the key challenges & key differentiators as an organization?
What kind of a competitive environment exists?
Who are my largest competitors and what are our points of parity?
How are we staying relevant and what are my competitors doing to stay relevant?
Once you have been able to answer these questions, it may be easier to approach the next part of this document.
Pick a strategy that works
A simplified guide on how to pick the strategy to pursue is in the image below. The final decision needs to also factor in the availability of cash reserves, valuation expectations of both businesses and the requirement of growth capital for combined business pursuits.
Define a simple comprehensive single sentence objective statement
A single sentence goal statement allows all stakeholders to be on the same page as to why the proposed route is being taken. This ensures that future stakeholders are also in the know and aligned.
Identify your targets
Knowing what you want
Companies seldom spend enough time in setting up the objectives of the M&A. The objectives for an M&A should consider deep-dives on the post-transaction synergies expected and re-emphasize the opportunities for unlocking exponential value. This helps identify go/ no-go situations while profiling targets as well.
A reference to the Acquirer’s 5-year plan
A realistic look at synergies (sensitivity adjusted)
What inhibitors exist to achieve synergy gains, both short term & long-term
What Inhibitors exist to maximize enterprise value
A Risk mitigation plan for potential pitfalls
The acceptable margin of tolerance for deviation for each expected gain
Setup a target evaluation & compatibility scorecard
A scorecard allows for looking at things more objectively, allowing for a scan of a larger base of potential targets. This is custom created with the management views of the objective.
At this stage, some targets may already be in mind that could potentially be a great fit for the strategy selected. Advice from a practitioner: Don’t skip this step. This is the most important step in the process. This establishes the attributes of a business and outlines what you are comfortable to overlook and what is essential in a suitor. Without this ‘target profile’ well laid out, there are bound to be issues in getting a strong business integration road-map.
A sample scorecard could look something like this:
Golden Rule: Exceptions are tolerated but are not be the norm. If there are too many exceptions, start from setting up the right M&A strategy again.
You can access our template for this simple scorecard here: [ Download ]
Identify your targets
Scan for potential targets
While it is true that on paper, M&As boost shareholder value (especially on the bourses), it is also true that many M&As fail. Over 50% of these failures can be attributed to the strategy adopted and the process utilized for Target Identification & Selection.
This process can be broken down into 3 steps:
Scanning – scan the market the targets occupy across the geographies they operate in
Prioritization – prioritize the targets for selection based on the evaluation criteria and value accretion logic
Elimination – eliminate the ones who do not qualify for further assessment
Create detailed target profiles
One of the most critical aspects to consider is that the industry is large but doing a thorough job allows for you to be able to run through multiple targets judiciously, eliminate bias and avoid false negatives or false positives. This profile should be a mix of both qualitative and quantitative indicators.
You can download a detailed target definition template here: [ Download ]
I was able to pick my bet. Now?
How can you make this more efficient and less risky?
Engage with your target asset
Create internal infrastructure to assist on the deal
Negotiate with a win-win-win or Non-zero-sum approach
Commence a diligence to know what you don't already know
We agreed. Next?
Is there a right way to go about this process?
Post Merger Integration
The first 100 days post the merger are the most integral to any business. They can significantly impact the culture, the business and the relationship between both parties. Ensuring that this step is completely thought through allows for a smoother transition and better value exchange. This process should ideally commence before conclusion of the deal itself. That stage is the best time to secure the buy-in of the target and keep them rallying for the success of the integration. Acting in a structured way ensures rapid achievement of value accretion at both sides.
How about access to an [ exclusive ] whitepaper on this subject?
M&A, simplified and jargon free
[ Download ]
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Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating and not meant to be diagnostic or advisory. How these apply to your business can vary significantly based on the context, stage and nature of the business. The authors and the company expressly disclaim all and any liability to any person who has read this information, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance merely upon the contents of this article or post or document. You are requested to seek expert assistance for any implementation.