Building the right organization for mergers and
acquisitions
The internal organization that manages a company’s M&A processes has
always been a major contributor to the success of its deals. Today, as
companies increasingly choose to manage their M&A processes internally,
without the support of financial advisers, it’s all the more important to have
the right team in place. This team must not only be skilled at screening
acquisition targets, conducting due diligence, and integrating acquired businesses
but also have the size, structure, and credibility to influence the rest of the
company.
Admittedly, most of the best practices for designing an M&A organization are well
known. But, in our
experience, many companies fail to put them into practice. M&A teams include members with unnecessary skills as often as
they lack members with essential ones. Too little capacity is a common problem,
but inflated teams frequently create issues as well. The effect on a company’s
ability to capture value from its deals is
notable. According to our 2015 survey, high-performing companies
are significantly more likely than low-performing ones to report that
they have the necessary skills and capacity to support essential predeal
activities. Moreover, nearly two-thirds of underperforming companies lack the
capabilities to integrate their acquisitions .
What best determines the right size and
capabilities for your M&A team? We’d highlight three factors: the demands
of the M&A program you envision, the type of leadership role the team needs
to play, and the relationship it should have with both the corporate center and
with individual business units.
Meeting
the demands of strategy
An M&A team can best support a
company’s deal-making objectives when those objectives flow naturally from a
clearly defined corporate and M&A strategy. That strategy establishes the
type and number of deals that will need to be closed. That, in turn,
establishes a corresponding level of activity and skills needed for the
pipeline of potential deals being screened, valued, negotiated, and closed.
Companies in fragmented industries with high-volume M&A strategies, for
example, will need to screen more deals. In our experience, companies that seek
to close 5 to 15 deals a year may need to start out screening as many as 150.
What often happens, though, is that many
companies size their M&A teams based only on the capacity and capabilities
they expect to need for due diligence. That can lead to a team that is too
narrowly focused, that is too tightly staffed, or that lacks essential
capabilities to address all deal types or tasks. Because while due diligence is
a central piece of the M&A process, it’s not the whole story. Other pieces,
such as how large the scan needs to be, the types of companies that need to be
screened, and how those companies will be integrated, are equally important
when designing the M&A organization.
It’s just as
problematic to deploy a team that’s too large and that lacks
clear roles and responsibilities or an appropriate breadth of skills. Take, for
example, the experience of one global industrial company. When its executives
embarked on an ambitious growth program, they quickly agreed that they’d need a
bigger, more skilled M&A team to manage the number of deals they
envisioned. So they doubled the size of the team, adding employees with
experience in their core business areas, and tasked them with a target number
of transactions per year. What managers misjudged was the variety of
capabilities the team needed to source, evaluate, and integrate different types
of deals. Two years later, the company had closed on a fraction of the deals it
envisioned—largely due to problems exacerbated by the size of the team,
including mismanagement, a lack of strategic focus, and unclear priorities.
Many of the deals it had closed seemed to languish. And the M&A team had an
80 percent turnover rate.
A more holistic view of what’s needed to
execute an M&A program successfully can identify which skills a team needs,
which it already has, and which might be acquired along the way with future
deals. Much of this depends on the company’s strategic approach to M&A.
Consider the differences for companies using the main approaches to growth
through M&A.
Transformational deals3don’t
require much sourcing effort because they tend to be self-evident and start
from the top of the company. They do, however, require an experienced,
discreet, and centrally organized M&A team with enough clout to understand
and assume responsibility for the decisions it makes. These include, for
example, defending the deal rationale, war-gaming the strategy, or even
changing the fundamental financial structure of the company. Diligence, while
led by this team, requires significant involvement from key functions and
businesses. The team eventually grows considerably to handle postdeal
integration. At that point, a large deal may need dozens, even hundreds of
people from very different areas of the organization, including the M&A
team, business units, and support functions, with at least half a dozen fully
dedicated to the effort for a full year.
Acquiring adjacent businesses—in
new industries or geographies, for example—tends to include a laborious
sourcing process to identify appropriate candidates ahead of the due diligence.
That often demands a dedicated team with expertise in the adjacent areas to
define the attributes of a desirable acquisition target, whether by size,
business model, competitive position, economics, or footprint. Integration
efforts in this case can vary widely, depending on the degree of integration.
Some adjacent acquisitions require larger, more complex integration teams
because the value lies in the combination of the operations and activities of
both businesses, such as those around R&D. Others require smaller
integration teams, for example, when the only goal is to integrate support
functions.
At the other end of the spectrum, product
and geographic tuck-ins—small acquisitions that fit into a larger existing
business—require in-depth knowledge of the product or geographic business.
These are typically led by a business unit itself, often alongside the
company’s R&D or regional experts. In companies that do several tuck-ins a
year, candidates are often on the radar well before an acquisition, and most of
the predeal efforts are invested in maintaining valuable sources and developing
relationships with potential targets. These companies often have fully
dedicated integration managers to run an integration process that is more
consistent between deals.
Additional external factors, such as industry
fragmentation, major market shifts, and industry complexity, also affect the
M&A approach and, ultimately, the skill sets needed within the M&A
team. In more fragmented and diverse industries, more effort must be applied to
sourcing and initial screening, as candidates might be difficult to identify
and public information could be scarce. Team members will need broad experience
and a deep understanding of the industry, as well as an ability to quickly
review and evaluate opportunities. In turbulent industries where much deal
making is under way, teams also need a thorough understanding of the market and
the likely response of competitors. And in highly nuanced deals or complex
industries, M&A teams should emphasize substantial experience and industry
expertise over functional expertise.
In some cases, after considering these
factors, companies will realize that they would benefit from a larger standing
team to manage the complexity of their upcoming growth. In others, especially
in more consolidated industries, where there are fewer strategic M&A
opportunities, companies will realize that they’re well served by a small
M&A team that takes more of a project-driven approach.
Deciding who should lead
Strategic demands also affect who should
lead a company’s M&A program, depending on the nature of the business and
the broader industry. In some companies, a corporate M&A unit takes
responsibility for sourcing, evaluating, and executing deals connected with the
corporate strategy, and the business units are called in to provide
subject-matter expertise. This is especially true in financial institutions,
where business units have relatively consistent strategic needs. In other
companies, business units are responsible for sourcing, evaluating, and
executing deals linked to the business-unit strategy, while the corporate
M&A unit sets process and valuation standards. Highly diversified
industrial groups tend to favor this approach, since it better suits the
strategic needs of multiple groups.
Some, especially technology companies,
also divide responsibility for M&A between corporate and business-unit
leadership depending on the size and type of deal. The business units are
responsible for sourcing and integrating deals related to the business-unit
strategy, and they lead financial projections and synergy estimations. The
corporate M&A unit leads the screening process and valuation. It
pressure-tests business-unit assumptions—and also takes the lead on
cross-business-unit deals or those that would enter a new adjacent business.
The approach a company takes ultimately
depends on how it expects deal making to support specific strategic goals. One
technology company, for example, aspires to double in size with a combination
of larger deals in its relatively consolidated industry and significant M&A
in adjacent spaces. Its corporate M&A group reflects that goal with the two
main prongs of its organization: a team with fewer than five people, focused on
large opportunities within its industry, and a second team, initially with just
two individuals, focused on adjacent business opportunities. The business units
themselves do not lead any M&A, though they provide subject-matter
expertise during diligence and are heavily involved in and accountable for
integration.
Coordinating
internal working relationships
As companies confirm their strategy and
the role of the corporate M&A team, they must also consider how it will
interact with others needed to execute deals. In particular, managers must set
clear and consistent expectations of the different organizational groups
involved—including an explicit mandate for the M&A team, as well as roles
and responsibilities for the corporate-strategy group, interested business
units, and key support functions. In our experience, successful acquirers often
go even further. They specify how different groups should
interact, for example, by requiring quarterly meetings and by defining the
inputs and outputs of those meetings.
Without this clarity, a business unit
might, for instance, complain that the M&A team kills all its deals while
the M&A team complains that the business unit demands due diligence of
unviable targets. Such tension and ambiguity can hinder the success of an
M&A program. Consider the experience of one large healthcare company. Its highly
skilled M&A team suffered from poorly defined roles, tense relationships
with business units, and unclear strategic priorities, leading to frustration
that undermined the team’s effectiveness. The team lost nearly a third of its
members every year for five years—an unexpectedly high turnover rate. Only a
substantial push from the executive team to rework the mandate and redefine
roles, followed by several months of campaigning with the business units and
support teams, was able to reestablish relationships and reset expectations.
The underlying organization did not change, but the effort substantially
improved the team’s performance and satisfaction.
The working relationship between the
strategy group and the M&A team is especially important. High-performing
strategy and M&A leaders work together to define how strategic priorities
translate into a few targeted M&A themes. The M&A team then ensures
that all deals are explicitly linked to those themes—confirming that link
during the sourcing, evaluation, and diligence phases to make sure they’re
spending time on the right deals as more information becomes available. But
given that only 38 percent of high performers in our survey (and 13 percent of
low performers) strongly agree that the two groups work well together, it’s
clearly an area where most companies could improve.
Often, companies combine the two functions
or link them within their reporting lines to encourage continual communication.
This is particularly common in fast-moving industries, such as high tech or
pharmaceuticals. If they are not combined, it is important to orchestrate how
the work of each group feeds into the other, such as how the M&A team’s
knowledge of what competitors are acquiring informs thinking on competitive
strategy.
As companies look to improve how their M&A teams are
organized, they must articulate their corporate and M&A strategy, determine
how they want the projects to be managed, and enable productive and efficient
relationships across the organization.
By Rebecca Doherty, Cristina Ferrer, and Eileen Kelly Rinaudo
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/building-the-right-organization-for-mergers-and-acquisitions?cid=other-eml-alt-mip-mck-oth-1609
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