M&A is risky. Thomsett&Partners share 5 lessons to improve deal outcomes and maximise value.
M&A is inherently risky. More than 70% of mergers fail to deliver the anticipated shareholder value [PWC]. All too often we hear that integration will cost double and take twice as long to achieve as was planned, anticipated upsides prove challenging to realise, middle management is exhausted and disengaged.
And yet, there are ways to reduce the risk of deal failure and even to realise previously unplanned-for opportunities.
Thomsett&Partners champions the combination of business strategy, brand, and change management for deal success. These lessons might be deployed both before the deal is finalised, and as part of the post-merger integration process. This doesn’t just apply for multi-billion dollar FTSE/NYSE deals. The mid-market (£30m-£1bn) can probably extract proportionately greater value using the same techniques outlined in this article.
All too often, the issue of ‘brand’ is a downstream agenda item in the aftermath of M&A – something to ‘hand-over’ to Marketing once the deal is signed and the 100 day integration plan is underway. But to think of brand as a design matter - just window-dressing - is to leave money on the table.
Focusing instead on impact, pragmatism and the big strategic issues – ask yourself, how will your business deliver real value from the deal? Once you’ve done delivering cost synergies un year one – where next? And is it too late?
1. Ensure 1+1≥2
Many mergers are driven by buying Ebitda, or access to new market segments accompanied by cost synergies. But, in nearly every case, the opportunity for value creation is greater than this and allows the acquirer to continue to enhance value after the year one cost and market synergies are complete. Look for enhanced competitive advantage in the merged business.
All too often, M&A is simply about buying revenue. In 2015/16, Thomsett&Partners asked CEO offices undertaking M&A about their expectations for the future of the merged business. Less than a third felt that they had a clear medium or long-term rational for how the value of the combined entities could be more than the sum of its parts. In which case, why merge?
The agenda for CEOs was dominated by a drive for non-organic growth (i.e. acquired revenue rather than built revenue), for scale, cost synergies and a broader geographic market footprint. But almost none of the CEOs interviewed felt their business had properly set out how adding two or more businesses together could drive real value growth beyond this.
Despite this, it is nearly always possible to identify enhanced competitive advantage in the newly acquired or merged business, and the results can be dramatic,
And the results can be dramatic. When Nuffield Hospitals acquired Cannons Gyms plus multiple physiotherapy and corporate wellness and other health related businesses, it was able to make the brand leap from a fixed asset private healthcare business (affectionately known as “Stuffy Nuffy”) to become one of the UKs premier consumer and corporate wellness brands. Nuffield repositioned from an ‘only-when-you’re-ill’ market to a much broader illness-recuperation-wellness paradigm. This dramatically extended its client base and allowed access to new market segments many times larger than the restricted old private healthcare model. The new entity was larger and more valuable than the sum of the parts. 1+1>2.
The 1+1>2 question is too often the ‘elephant in the room’ that none dare mention after the vast capital outlay of M&A. But a strategic approach to brand can guide leadership to additional value that would not otherwise have been foreseen or realised.
2. Reposition to the highest value segment
Think creatively. Repositioning the business can be the fastest route to add as much as two or more multiples (of Ebitda). Sometimes a relatively straightforward strategic acquisition accompanied by a brand repositioning and change programme can unlock a successful repositioning of the business - it doesn’t even have to be a large acquisition.
Thomsett&Partners has successfully repositioned newly merged businesses towards a new, or adjacent, sector where valuations are higher, pricing is less sensitive, or even where the best talent is attracted.
In one example, the larger, acquiring firm was able to reposition itself from a traditional engineering segment into the much more highly valued cleantech segment of its acquisition. Recent precedent for the target segment added a 2-3 times multiple to the company’s overall valuation, despite the fact that the new acquisition was a relatively small proportion of overall revenue. The acquirer successfully rolled up a number of other entities and launched a new Asian sales office under a refreshed brand that emphasised the clean-tech position. Clients, employees, shareholders and analysts all welcomed the move and the M&A achieved its targets.
Likewise, a UK Microsoft systems integrator was able to increase its attractiveness to private equity and to command a three times higher multiple by repositioning a well-run business into an adjacent market segment that was simply much sexier to investors. EBITDA remained constant, but valuations were so much higher that the management team was able to recapitalise for further growth.
It’s worth not forgetting the basics here. The concept of repositioning a business starts with absolute clarity on identifying (and delivering) the optimum competitive advantage at any given moment in the market’s evolution. Without this, any organisation will struggle to deliver its strongest Ebitda growth.
The key skills is two fold:
The right skills to identify the optimum position for the business, both in isloation and as part of a merger or acquisition
The right skills to ensure that repositioning is delivered through operationalised culture via a pragmatic change management discipline.
3. Don’t let post-deal inertia take hold: unite around a clear Vision and Renewed Market Focus
Proactively plan and inspire, deploy both branding and change management to provide organisation-wide clarity and accelerate the programme of transformation and growth.
A merger is the perfect opportunity for a rebirth – a new beginning. But leadership can struggle to establish new conjoint management teams and to keep everybody happy.
The classic ‘what now?’ malaise experienced by senior and middle management is usually followed by an extended period of inertia, declining KPIs and ultimately, talent drain. It is not hard to see why 70% of mergers fail.
When sound, clear direction is lacking, time-wasting, bickering and blame is the result. As frustrating as these symptoms are, it’s important to examine the cause. At times like these, endlessly reviewing old decisions feels psychologically safer than the alternative.
The alternative is to proactively plan and inspire, with enormous time savings for leadership even in the mid-term.
Organisational Brand Alignment is the combination of change management and organisational branding disciplines. Beginning with a comprehensive visioning exercise, Organisational Brand Alignment defines and communicates the direction of travel and the values that underpin that journey. Secondly, clear goals are set to realign your organisational brand to the corporate strategy which it is there to serve. It is important to be clear not only on what good looks like, but why.
It’s intuitively understood that when Organisational Brand Alignment is deployed promptly, rapidly transforming businesses can avoid a directional vacuum, reduce risk and accelerate strategy execution. In quantitative terms, the 2010 Gallup Business Journal also found that:
Aligned brands (delivering the services customers expect, in the way they expect it) command double the market share of non-aligned brands
Aligned companies:
Are 2.2 times more likely to have an above-average EBITDA margin
Are 2.0 times more likely to have above-median growth in enterprise value
Are 1.5 times more likely to have above-median growth in net income to sales.
4. Actively manage culture to deliver strategy
Measure and manage culture as an asset, ideally pre- as well as post-deal, taking a vision-led approach to best serve the strategic ambition.
Culture is one of the main reasons that mergers fail [PWC et al]. With this is mind, bringing together two or more cultures should be considered at due diligence stage, if possible. It’s common to hear that this might be “impractical” or “inappropriate” – which in itself says a great deal about the culture of the acquiring leadership team.
Consider an example. If the newly merged organisation employs 5,000 staff across multiple countries at an average total cost of employment of $50,000 each, your wage bill is $250m per year (excluding recruitment and HR). If the culture has an entropy rating of 12% (which is conservative in M&A and can be as high as 25%), that means 12% of your human resource is non-effective and demotivated – it is creating its own myths and legends, believing its own truths and debating and re-debating decisions taken months ago. That has a direct cost of 12% of your total cost of employment i.e. $30m each and every year. By comparison, a good cultural evolution programme for this size of business that places the organisational brand at the centre of its thinking, can cost $200-$300k in year 1 and 2; less than 1% of the risk.
Cultural variants come in many forms: between firms, different leadership styles, different nationalities, varying organisational structures, differing vocational typologies (for example, an engineering culture versus sales-orientated culture) or residual antagonism, having merged with a former competitor. The pride and belief systems that contribute most to conflict post-merger can also, potentially, be a source of brand strength and competitive advantage.
Culture is an asset. As such, Thomsett&Partners highly recommends a pre-deal due diligence of that asset, but even post-deal, there is much you can do to drive value through culture.
Firstly, consider measurement, for example using tools such as those offered by the Values Centre. It’s often said that if you can’t measure it, you can’t manage it. However, it’s also important to overlay quantitative measures with qualitative research techniques: we are after all talking about human beings, not inanimate ‘resources.’
Secondly, the target culture should always be set in relation to the strategic goals. How will the culture serve the strategic ambition?
Beware over-promising (or indeed, threatening) ‘culture change’. Cultural evolution is a much better term as it reflects the reality. Break down the total journey down into achievable and identifiable goals, considering the different stages each division may be at and how fast they may be moving.
On the other hand, do not be afraid to be audacious. When Thomsett&Partners undertook the cultural merger of 40 organisation across 25 countries under one roll-up strategy, the solution was inevitably bold.
You may not always be able to take everyone with you. But if you can unite formerly disparate divisions behind a hard-hitting, compelling reason why change is essential (the burning platform), and a compelling Vision for where the organisation is headed and how the strategy will take you there, you have the best possible change of retaining, motivating and enabling your talent to realise the value opportunity sooner not later.
5. Re-architect your product offering
Take your time to map out the product offer versus the need, and stay alert for previously overlooked treasure in the merged business.
Mergers or acquisitions can create confused product portfolios. Over time, each of the organisations being united into one will have a long legacy of product and service introductions of varying degrees of relevance to today’s customer and of varying degrees of competitive advantage. The effective use of structural branding at this point in the merger provides a great opportunity to reassess what you have – and to re-architect the ideal solution to meet the future strategy of the organisation.
Resistance to this process is almost exclusively internal rather than external, but again look to the underlying cause: passion and belief in the product is an enormous positive. Holding onto power and territory, or a belief in outdated truths that serve to protect the status quo are less helpful, but very human.
Begin by mapping out what you have in your newly conjoint product and service portfolio – a task that sounds easier in theory than in practice. Also consider IP, some of it registered, some simply latent.
Due diligence should have provided something of a guide, but be prepared to go beyond this - due diligence is seeking big principles that could break or make the deal and can miss some valuable opportunities. Likewise, take your time before dismissing legacy products or a myriad of product variations created over the years for different purposes.
There will be buried treasures - ideas, products, services, technologies, even business units that have been developed or acquired over the years but that most have forgotten as the legacy strategies have evolved but which might be highly valuable going forward. On a number of occasions, Thomsett&Partners have been able to uncover business units or technologies (in financial services, cleantech, mining, professional services…) with million-dollar potential but which have been allowed to become peripheral as they fell out of favour with previous CEOs, or didn’t fit the strategy at the time.
Once the audit is complete, map out your accumulated portfolio clearly using only two factors as your North Star:
The customer, the marketplace trends and the competitors
The new growth strategy of the organisation
Everything else is sentimental.
Once the existing portfolio is plotted, and gaps identified, then a clear go-to-market strategy can be developed and a product development strategy implemented.
Tim Thorsteinson led the merger of Quantel and Snell in the global broadcast media industry. The merged entity, SAM then boasted a clear product portfolio, a clear go to market proposition and a compelling product development roadmap based upon what customers in the broadcast media space needed. As a result SAM performed well and produced a healthy profit, despite having previously lacked direction, epitomised by its confused technology portfolio, which had very nearly led to its collapse.
Business Strategy + Branding + Change Management = value creation
Creating value through convergence of three business disciplines: Strategy, Brand and Change Management.
The combination of business strategy, branding and change management improves deal success for M&A and unlocks additional value drivers.
Key lessons include:
Looking for enhanced competitive advantage in the combined business, not just buying revenue or delivering cost synergies – making 1+1>2
Repositioning the business for higher valuation multiple
Avoiding post-deal stagnation through brand and change management
Actively managing culture for integration success and to deliver explicit strategic goals
Re-architecting the combined product portfolio to capitalise on the market opportunity and define future product development goals.
For help delivering these in your business, and for more information on value creation strategies using branding as a business tool, contact Thomsett&Partners at +44 (0)20 20 7193 5138, or complete this form.