The
artful synergist, or how to get more value from mergers and acquisitions
Keeping
your deal team small ensures confidentiality, but pinpointing synergies
requires bringing more people on board. Here’s how to strike the right balance.
Making sure that large M&A deals create value is as much
about knowing whom to involve—and when—as it is about knowing how to capture
synergies.1The
larger the deal, the more critical the need to ensure confidentiality by
keeping the team small during the early stages of planning. Such teams may lack
breadth, but they’re sufficient to produce a rough valuation that allows
planning to move ahead.
As planning progresses, more people
eventually have to be involved. But many M&A practitioners make the mistake
of clinging to too small a team late into the due-diligence stages of a deal.SUBSCRIBE
This overly conservative mind-set creates
problems, leaving deal planners
to perform their roles in isolation. Without others to challenge assumptions and cognitive biases, the planners’ synergy estimates, performance
benchmarks, and cost and revenue targets can be off the mark. High-priority
issues and complex integration challenges can
get lumped together indiscriminately with lower-priority and simply managed
ones—creating an adversarial, political, and highly emotional working
environment. Business managers complain that their synergy targets are too
high—when in fact, they often prove to be too low. And companies lose precious
time as those tasked with implementing a deal try to reconstruct the
expectations of those who planned it. That often squanders internal goodwill,
organizational buy-in, and even hard cash.
A more inclusive approach to estimating
synergies can create more value and promote a culture of shared accountability
and buy-in. But pulling more people into the process requires an artful balance
of often-contradictory objectives. Managers must promote both transparency and
confidentiality, as well as embrace both skepticism and a shared vision, all
while keeping a ruthless focus on efficiency.
A more
inclusive approach to estimating synergies
As smart as many executives are about
keeping their M&A teams small in the beginning, they make the wrong trade-off as they get deeper into
the diligence process. As a result, they lay
out a framework for integration and develop synergy estimates based on the
insight of a small, isolated team—without the buy-in they need from critical
stakeholders. These include not just the executives who will carry the heaviest
burden of integration execution but also the full complement of a CEO’s direct
reports.
In our experience, the diligence process
can’t happen in a vacuum. Synergies vary from deal to deal. Even a
straightforward synergy target for general and administrative costs can vary
significantly depending on the current state, the assumptions, and the appetite
for change. Some functions, such as IT systems or human resources, can enable,
delay, or completely prevent other functions from integrating, which renders
synergy estimates meaningless. And functional leaders are often wary of
committing to performance and budget targets they haven’t seen before. Imagine
the pushback from a manager at one acquirer when he learned he’d be expected to
absorb a 40 percent cut in staffing—instead of adding people, as he had
expected, given the complexity of the transaction.
Involving functional-group managers on a
deal-specific basis can help, especially when framing the cost and revenue
assumptions behind the valuation model for due diligence. These managers can
help articulate the risks of cutting too deeply or too quickly, for example, or
identify opportunities to build on an existing transformation program. And
getting their input early on can create a shared understanding of the final
synergy targets—even setting a higher cognitive anchor for them.
Such dialogue needn’t take a lot of time.
A few targeted conversations and a straightforward information request made
over the course of a few short days can dramatically increase the level of
insight. That was the case for one acquirer when it sought to buy a business in
a deal that included transitional service agreements with its former parent.
The acquiring company’s CIO helped the M&A diligence team review the
transition timelines, which shed important light on the associated costs and
risks of the service agreements. Bringing the CIO into the process allowed her
to get a head start on integration planning, which is critical for systems that
enable synergies elsewhere. It also helped her accept the final synergy
targets, even though they were higher than for other functions. Moreover, the
dialogue between the CIO and the team revealed that the baseline costs of the
transitional service agreements were unreasonably high—and the synergies could
be higher if the business quickly transitioned to the acquirer’s systems.
Many managers we’ve talked with find such
dialogue to be so successful that they use it for all large deals, bringing
most, if not all, top leaders into parts of the diligence discussion. Even for
smaller deals, the company typically includes some subset of top leadership to
validate costs and deal assumptions and to pressure-test risks.
Balancing
competing objectives
The advantages of a more inclusive team
doesn’t mean extending an invitation to a cast of thousands. But it does come
with risks—especially for larger deals. Not only is maintaining confidentiality
more difficult, but larger teams also tend to move more slowly and are more
likely to include skeptics who challenge a deal’s strategic rationale.
Balancing these interests tests managers’ cleverness in finding the overlap
between seemingly exclusive objectives.
Transparency
and confidentiality
We have found it is possible to be both transparent
and confidential. For example, the CEO of one serial acquirer balanced the two
interests this way. First, she expressed a very clear perspective on the
importance of large deals and the appropriate role of executives in evaluating
those deals—creating a time and place for open dialogue and promoting explicit
challenges to a deal’s rationale. But then she made it clear that once a
decision was made, everyone was expected to champion it.
As a result, the members of the executive
team understood and respected their roles. They knew they would be engaged, and
when, and they didn’t second-guess the process. This engendered a sense of
trust that they would be aware of all important M&A efforts and would have
a chance to react to potential deals before any became final.
Their trust was affirmed over time, with
each potential deal forming the basis for confidential discourse. Finally, the
CEO herself stressed confidentiality. She chose a core M&A team she
trusted. But she also established explicit repercussions for leaking. In one
instance, a senior executive was let go after it became clear he was disclosing
information about potential deals in the works to people throughout the
organization.
Skepticism
within a shared vision
In our experience, few deals ever achieve
a shared vision among the executive team. But proceeding without one can be
destructive. Three months after the close of one recent deal, one senior
executive launched an attack of his synergy target while explaining a shortfall
in planned savings. Such exchanges were commonplace across the executive team.
Later, the executive explained that the deal should never have been done in the
first place and that he was worried about his career prospects after being
involved in such a bungled deal.
For large deals, it is the CEO’s job alone
to ensure that his or her executive team has a shared vision for the deal. This
sounds simple, but in most deals, we have observed at least several direct
reports to the CEO remaining skeptical throughout. The CEO must sell his or her
direct reports on the strategic merits of a deal, through conversation—often
one-on-one—and through participation. There is no other way to form a
productive team that will capture all the value possible from a deal. For
smaller deals, similar obligations fall to division and business-unit heads.
Productive teams will challenge aspects of
the deal, such as strategic fit and synergies. But they do so with a mind-set
of trying to make the deal work and creating the best possible outcome. With
that mind-set, even the most stubborn skeptics can actually help bring about a
better outcome. We have observed a sort of peer pressure at play in these sorts
of situations, in which dedicated leaders help reinforce commitment among each
other and among lower layers in the organization. CEOs can encourage this
mind-set by surrounding themselves with diverse backgrounds and promoting
contrarian thinking and risk taking, often leading by example.
Building
efficient M&A processes
The best acquisitions aren’t the ones that
close the fastest, but rather those in which the leadership team comes together
to create the greatest amount of value. That takes time. To allow that time, a
company must have ruthlessly efficient M&A processes.
To be efficient, companies must have a
robust finance function with a transparent view into its own cost structure,
the better to quickly interpret and categorize a target’s costs. In one recent
merger, for example, financial planning was led by two capable and respected
executives, who in only three weeks managed to build a comprehensive and
detailed combined baseline of performance across the two companies. Because
they worked with executives across both companies to make sure they agreed with
the baseline, the acquiring CFO was able to present synergy and financial
targets for a dozen or so areas of the company less than a month into
integration planning, three months before the deal closed.
This proactive approach allowed the leaders
of each organization to apply their energies toward creating the leanest and
most efficient organization they could, rather than iterating and debating the
fact base and targets. The result was a process that was among the most
efficient we have ever seen and that encouraged collaborative work across both
organizations. We ultimately credit the acquiring CFO, who decided to invest in
the right finance professionals to lead this effort.
Efficient M&A teams should also be
able to learn from each deal. No set of best practices will ever replace the
feel that great executives have for getting a deal done and getting value from
it. This means an executive team must come together and review how past
deals were done, not just how much they earned. And they must
learn a bit of what others involved in the deal did, once that information can
be shared freely in the light of day.
Taking a more inclusive approach to deal making won’t
eliminate tension from your company’s large M&A deals, and it won’t turn a
bad acquisition into a good one. What it will do is create the conditions in
which your management team can artfully build a good deal into a great one.
By Jeff Rudnicki, Ryan Thorpe, and Andy West
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-artful-synergist-or-how-to-get-more-value-from-mergers-and-acquisitions?cid=other-eml-alt-mip-mck-oth-1702
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