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Creating Deal Value By Focusing on Growth Capabilities

Creating Deal Value By Focusing on Growth Capabilities

Show Notes Of Podcast

Common Pitfalls Related to Cost Synergies:

  • Pitfall 1: Projecting cost synergies is more complex than most realize.
  • Pitfall 2: Buyers focus too much on headcount.
  • Pitfall 3: Capability mismatches are traditionally overlooked.

One of the aspects of M&A still missing in many companies is the lack of focus on growth capabilities.

Failure to craft deals around capabilities is often a failure to generate true, lasting value. Furthermore, when companies hone in too heavily on realizing cost synergies versus post-merger integration, a capability that took years to create can be killed overnight.

How?

Well, when the the center of attention lies solely on synergies, the following pattern tends to take place:

  • the estimation of synergies happens behind closed doors by a small group of people;
  • this information is held fairly close by this group;
  • when integration activity begins, because the estimations were kept so tight-lipped, the operational team’s work is out of context and becomes more like blindly following a checklist and ticking off tasks because the team doesn’t have in mind the initiatives and cost synergy numbers.

This pattern equates to lost value.

To combat this less than ideal practice, here we discuss the common pitfalls of focusing solely on synergies, and industry’s best practices for operational growth and creating deal value by focusing on growth capabilities. 

One of the aspects of M&A still missing in many companies is the lack of focus on growth capabilities.

Failure to craft deals around capabilities is often a failure to generate true, lasting value. Furthermore, when companies hone in too heavily on realizing cost synergies versus post-merger integration, a capability that took years to create can be killed overnight.

How?

Well, when the the center of attention lies solely on synergies, the following pattern tends to take place:

  • the estimation of synergies happens behind closed doors by a small group of people;
  • this information is held fairly close by this group;
  • when integration activity begins, because the estimations were kept so tight-lipped, the operational team’s work is out of context and becomes more like blindly following a checklist and ticking off tasks because the team doesn’t have in mind the initiatives and cost synergy numbers.

This pattern equates to lost value.

To combat this less than ideal practice, here we discuss the common pitfalls of focusing solely on synergies, and industry’s best practices for operational growth and creating deal value by focusing on growth capabilities. 

Common Pitfalls Related to Cost Synergies:

  • Pitfall 1: Projecting cost synergies is more complex than most realize.
  • Pitfall 2: Buyers focus too much on headcount.
  • Pitfall 3: Capability mismatches are traditionally overlooked.

Some of the most seasoned practitioners in the industry, working on truly disruptive deals for Fortune 500 companies, know the secret related to cost synergies: they cannot be the prime reason why companies acquire others. Rather, the deal should be hinged on growth and capabilities.

In fact, these experienced practitioners subscribe to the philosophy that synergies are a result, not an end destination.

Understanding why putting cost synergies on a pedestal is not best practice is key to maximizing deal value.

Pitfall 1: Projecting cost synergies is more complex than most realize.

Buyers can try to project cost synergies, but, in reality, things are more redundant and/or different than you thought they would be. 

Remedy: Look to capacities and long term growth rather than focusing on synergies. 

Pitfall 2: Buyers focus too much on headcount.

Eliminating cost by laying off employees often backfires; buyers may fire employees that are actually essential to the company and neglect to see other ways to save cost.

Remedy: Early on, the buy side must find out who the influencers are - who are the people actually getting the work done? Generally, these employees are not the C-suite executives, but more second in command types of individuals. They may be seen by buyers to be in “weak” jobs, but in actuality, they are essential because they do the actual work, are trusted by leadership, and have been with the company for a long time.

Laying off these employees can hurt the deal's value and capabilities; there are other strategies, such as process improvement (which we will discuss below), related to cost synergies that can be leveraged. 

Pitfall 3: Capability mismatches are traditionally overlooked.

The Greiner Core Organization Majority Model highlights this pitfall quite well. The model is based on 6 pillars, and the 6th pillar focuses on how decision-making is done and emphasizes the notion that companies have to collaborate with each other.

The mismatch comes into play when we look at the companies the buyers are acquiring; usually companies $250 million or greater buy companies less than $250 million. Looking back at the Greiner Curve, this means a pillar 4 or 5 company buys a pillar 1 company - these two companies have drastically different lenses, so now from the start of integration, there is a capability mismatch. 

Remedy: During the early stages of the deal’s lifecycle, as information is collected, the focus must remain on the strategy - why this deal is taking place and which capabilities the buyer is hoping to maximize. Additionally, early integration planning and communication with the employees of the target is essential to combat this mismatch.

Common Pitfalls Related to Revenue Synergies:

  • Pitfall 1:Failure to keep the customer journey in mind.
  • Pitfall 2: Lack of a clear, go-to-market strategy.
  • Pitfall 3: Poor incentives for sales teams.

Furthermore, revenue synergies are difficult and tend to fall through - why?

Well, some companies look at revenue synergies just as a way to get people, such as stakeholders, to buy into a deal - they make the deal look appealing on paper. Then when Day 1 rolls around, the sales team is just expected to go out and sell the reported revenue, which does not work.

Worse yet, companies might say to their sales agents,  “alright,  go try to start selling,” which equates to “it is okay if you cannot sell right now.” Ultimately, three core missteps tend to lead to the inability to capture revenue synergies. 

Pitfall 1: Failure to keep the customer journey in mind.

Close examination and focus on the customer journey, or better yet the key customer journey, will provide valuable information. In this case, the key customer journey will tell you what and where to sell, giving you your “go-to-market” strategy. 

Remedy: Align teams around the customer journey and use this as the lighthouse guiding the deal. More on how to do this can be found below. 

Pitfall 2: Lack of a clear, go-to-market strategy.

Piggy-backing off the previous pitfall, many deals struggle when it comes to revenue synergies because they do not have a clear go-to-market strategy. Specifically, what channels to use, how territories will be divided, and  how marketing segments and customer segments will be defined.

Remedy: Again, this goes back to the analysis of the key customer journey and building a very well-defined strategy from it. How to execute and deliver on these revenue synergies should also be written into the integration plan. 

Pitfall 3: Poor incentives for sales teams.

As previously mentioned, sales teams are not often ready to sell and capture synergies based on the poor planning for revenue synergies

Remedy: HR, Sales, and company leadership must work in tandem here. Namely, they must generate a clearly defined compensation plan for the salespeople; the sales team will need solid incentives and processes to move it to do things such as cross-selling and up-selling. 

Strategies for Creating Deal Value Through Process Improvement Initiatives

So with all of these pitfalls, what are some larger, more robust strategies deal makers can leverage to create value? One overlooked opportunity is creating value through process improvement initiatives.

When it comes to cost synergies, operational excellence, or lean management, should be used to identify efficiency opportunities for processes and procedures. Hidden opportunities can be harnessed using operational excellence instead of letting people go. This notion is quite powerful and a bit untraditional, but it definitely works.

Rather than firing people, look for improvements in the process framework. The money earned/saved from taking this operational excellence approach tends to outweigh the money earned/saved from headcount reduction.

Using the Key Customer Journey to Capture Operational Excellence

A tried and true way to create value by harnessing operational excellence is to rally around a unified voice when it comes to tactical steps. The best way to do this is through a customer journey. This is because when a company identifies and defines a key customer journey, it provides a point of focus for all employees and work streams.

When examining the key customer journey, it is important to identify high impact customer requests and how each function contributes to the flow of that customer’s journey. An obvious benefit right off the bat is breaking organizations out of silos, establishing the goal and process of starting the process of becoming more inter-functional.

How does this all tie back to operational excellence or lean management?

The key customer journey makes operational efficiency for teams easier because they now have a unified purpose. 

The Best Process for Practitioners Interested in Growth Capabilities

1. Start with strategy. The genesis of the M&A journey begins with strategy - as do value creation and growth capabilities. The organization must be able to answer the questions: 

  • what are we trying to do?
  • what kind of customers are we looking for?
  • what services/products do we want to offer?

Too many companies overlook a thoughtful strategy discussion; however, ideally this strategic planning begins before M&A activities are even considered. 

2. Focus on multiple types of diligence. When it comes to the act of assessment and due diligence, organizations should hone in on tech due diligence, operational due diligence, and people due diligence (leadership). 

3. Identify and analyze target companies. Based on the strategy and the information collected in the aforementioned types of diligence, begin to identify a few companies that fit the established profile. Then, take a deeper dive into these companies to truly understand them and their capabilities. At this stage, practitioners warn there will be risk takers (which can result in choices that do not fully fit the strategy) and those who are risk averse (which can lead to too many rejected deals and missed opportunities). Risk should be carefully calculated so individuals on the diligence teams can fully assess its impact on the deal.

4. Procedure a blueprint for value creation and leadership. Between signing an agreement and closing the deal, a blueprint for value creation and leadership must be created. Most importantly, here the buyer must clearly articulate the capability it wants to build. The blueprint itself should not be a checklist (this brings employees back to one of the achilles heels of deals - checking off tasks without focusing on the larger strategy and capability). 

5. Keep the priority on value creation. On Day 1, the priority must be on value creation. Sounds simple, but most companies miss this. 

Deals that Focus on Optimizing Growth Vs. Cost

Many successful private equity deals can be found, because private equities tend to focus on capabilities more than strategic buyers. A good example from a few years back is that of an American media company that expanded into the UK. It was able to do so because it realized it could build a larger capability by focusing on a certain type of customer.

Consequently, it set up a back office in the UK, which in turn gave it significantly more growth in the European market. It also allowed them to tap into the Asian market. 

Tips for Early Deal Validation 

  1. Leverage consultants and advisors. Outside parties can bring a new perspective. Furthermore, consultants and advisors have workable business models that can provide companies with a basic foundation of what they should be looking for. 
  2. Embrace efficiency tools. Operational excellence comes back around here. Working efficiently saves time and money. 
  3. Keep the 6% rule in mind. When the value put into integration is  6% or greater, the better the results. Greater levels of synergies are realized and greater value is produced (private equities know and use this tip quite well).

Final Thoughts

There is no simple answer for how M&A practitioners can optimize value and growth capabilities. Practices must begin at the strategic level before everyone rushes to diligence - and all work streams must rally around the strategy. Leadership and financial goals should also be thoughtfully established.

The true race of M&A starts when you buy the company - this is where the opportunities are. Preparing for this race through a well-defined strategy, operational excellence, and a focus on capabilities yields increased value in the long run.

agile m&a book


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One of the aspects of M&A still missing in many companies is the lack of focus on growth capabilities.

Failure to craft deals around capabilities is often a failure to generate true, lasting value. Furthermore, when companies hone in too heavily on realizing cost synergies versus post-merger integration, a capability that took years to create can be killed overnight.

How?

Well, when the the center of attention lies solely on synergies, the following pattern tends to take place:

  • the estimation of synergies happens behind closed doors by a small group of people;
  • this information is held fairly close by this group;
  • when integration activity begins, because the estimations were kept so tight-lipped, the operational team’s work is out of context and becomes more like blindly following a checklist and ticking off tasks because the team doesn’t have in mind the initiatives and cost synergy numbers.

This pattern equates to lost value.

To combat this less than ideal practice, here we discuss the common pitfalls of focusing solely on synergies, and industry’s best practices for operational growth and creating deal value by focusing on growth capabilities. 

Common Pitfalls Related to Cost Synergies:

  • Pitfall 1: Projecting cost synergies is more complex than most realize.
  • Pitfall 2: Buyers focus too much on headcount.
  • Pitfall 3: Capability mismatches are traditionally overlooked.

Some of the most seasoned practitioners in the industry, working on truly disruptive deals for Fortune 500 companies, know the secret related to cost synergies: they cannot be the prime reason why companies acquire others. Rather, the deal should be hinged on growth and capabilities.

In fact, these experienced practitioners subscribe to the philosophy that synergies are a result, not an end destination.

Understanding why putting cost synergies on a pedestal is not best practice is key to maximizing deal value.

Pitfall 1: Projecting cost synergies is more complex than most realize.

Buyers can try to project cost synergies, but, in reality, things are more redundant and/or different than you thought they would be. 

Remedy: Look to capacities and long term growth rather than focusing on synergies. 

Pitfall 2: Buyers focus too much on headcount.

Eliminating cost by laying off employees often backfires; buyers may fire employees that are actually essential to the company and neglect to see other ways to save cost.

Remedy: Early on, the buy side must find out who the influencers are - who are the people actually getting the work done? Generally, these employees are not the C-suite executives, but more second in command types of individuals. They may be seen by buyers to be in “weak” jobs, but in actuality, they are essential because they do the actual work, are trusted by leadership, and have been with the company for a long time.

Laying off these employees can hurt the deal's value and capabilities; there are other strategies, such as process improvement (which we will discuss below), related to cost synergies that can be leveraged. 

Pitfall 3: Capability mismatches are traditionally overlooked.

The Greiner Core Organization Majority Model highlights this pitfall quite well. The model is based on 6 pillars, and the 6th pillar focuses on how decision-making is done and emphasizes the notion that companies have to collaborate with each other.

The mismatch comes into play when we look at the companies the buyers are acquiring; usually companies $250 million or greater buy companies less than $250 million. Looking back at the Greiner Curve, this means a pillar 4 or 5 company buys a pillar 1 company - these two companies have drastically different lenses, so now from the start of integration, there is a capability mismatch. 

Remedy: During the early stages of the deal’s lifecycle, as information is collected, the focus must remain on the strategy - why this deal is taking place and which capabilities the buyer is hoping to maximize. Additionally, early integration planning and communication with the employees of the target is essential to combat this mismatch.

Common Pitfalls Related to Revenue Synergies:

  • Pitfall 1:Failure to keep the customer journey in mind.
  • Pitfall 2: Lack of a clear, go-to-market strategy.
  • Pitfall 3: Poor incentives for sales teams.

Furthermore, revenue synergies are difficult and tend to fall through - why?

Well, some companies look at revenue synergies just as a way to get people, such as stakeholders, to buy into a deal - they make the deal look appealing on paper. Then when Day 1 rolls around, the sales team is just expected to go out and sell the reported revenue, which does not work.

Worse yet, companies might say to their sales agents,  “alright,  go try to start selling,” which equates to “it is okay if you cannot sell right now.” Ultimately, three core missteps tend to lead to the inability to capture revenue synergies. 

Pitfall 1: Failure to keep the customer journey in mind.

Close examination and focus on the customer journey, or better yet the key customer journey, will provide valuable information. In this case, the key customer journey will tell you what and where to sell, giving you your “go-to-market” strategy. 

Remedy: Align teams around the customer journey and use this as the lighthouse guiding the deal. More on how to do this can be found below. 

Pitfall 2: Lack of a clear, go-to-market strategy.

Piggy-backing off the previous pitfall, many deals struggle when it comes to revenue synergies because they do not have a clear go-to-market strategy. Specifically, what channels to use, how territories will be divided, and  how marketing segments and customer segments will be defined.

Remedy: Again, this goes back to the analysis of the key customer journey and building a very well-defined strategy from it. How to execute and deliver on these revenue synergies should also be written into the integration plan. 

Pitfall 3: Poor incentives for sales teams.

As previously mentioned, sales teams are not often ready to sell and capture synergies based on the poor planning for revenue synergies

Remedy: HR, Sales, and company leadership must work in tandem here. Namely, they must generate a clearly defined compensation plan for the salespeople; the sales team will need solid incentives and processes to move it to do things such as cross-selling and up-selling. 

Strategies for Creating Deal Value Through Process Improvement Initiatives

So with all of these pitfalls, what are some larger, more robust strategies deal makers can leverage to create value? One overlooked opportunity is creating value through process improvement initiatives.

When it comes to cost synergies, operational excellence, or lean management, should be used to identify efficiency opportunities for processes and procedures. Hidden opportunities can be harnessed using operational excellence instead of letting people go. This notion is quite powerful and a bit untraditional, but it definitely works.

Rather than firing people, look for improvements in the process framework. The money earned/saved from taking this operational excellence approach tends to outweigh the money earned/saved from headcount reduction.

Using the Key Customer Journey to Capture Operational Excellence

A tried and true way to create value by harnessing operational excellence is to rally around a unified voice when it comes to tactical steps. The best way to do this is through a customer journey. This is because when a company identifies and defines a key customer journey, it provides a point of focus for all employees and work streams.

When examining the key customer journey, it is important to identify high impact customer requests and how each function contributes to the flow of that customer’s journey. An obvious benefit right off the bat is breaking organizations out of silos, establishing the goal and process of starting the process of becoming more inter-functional.

How does this all tie back to operational excellence or lean management?

The key customer journey makes operational efficiency for teams easier because they now have a unified purpose. 

The Best Process for Practitioners Interested in Growth Capabilities

1. Start with strategy. The genesis of the M&A journey begins with strategy - as do value creation and growth capabilities. The organization must be able to answer the questions: 

  • what are we trying to do?
  • what kind of customers are we looking for?
  • what services/products do we want to offer?

Too many companies overlook a thoughtful strategy discussion; however, ideally this strategic planning begins before M&A activities are even considered. 

2. Focus on multiple types of diligence. When it comes to the act of assessment and due diligence, organizations should hone in on tech due diligence, operational due diligence, and people due diligence (leadership). 

3. Identify and analyze target companies. Based on the strategy and the information collected in the aforementioned types of diligence, begin to identify a few companies that fit the established profile. Then, take a deeper dive into these companies to truly understand them and their capabilities. At this stage, practitioners warn there will be risk takers (which can result in choices that do not fully fit the strategy) and those who are risk averse (which can lead to too many rejected deals and missed opportunities). Risk should be carefully calculated so individuals on the diligence teams can fully assess its impact on the deal.

4. Procedure a blueprint for value creation and leadership. Between signing an agreement and closing the deal, a blueprint for value creation and leadership must be created. Most importantly, here the buyer must clearly articulate the capability it wants to build. The blueprint itself should not be a checklist (this brings employees back to one of the achilles heels of deals - checking off tasks without focusing on the larger strategy and capability). 

5. Keep the priority on value creation. On Day 1, the priority must be on value creation. Sounds simple, but most companies miss this. 

Deals that Focus on Optimizing Growth Vs. Cost

Many successful private equity deals can be found, because private equities tend to focus on capabilities more than strategic buyers. A good example from a few years back is that of an American media company that expanded into the UK. It was able to do so because it realized it could build a larger capability by focusing on a certain type of customer.

Consequently, it set up a back office in the UK, which in turn gave it significantly more growth in the European market. It also allowed them to tap into the Asian market. 

Tips for Early Deal Validation 

  1. Leverage consultants and advisors. Outside parties can bring a new perspective. Furthermore, consultants and advisors have workable business models that can provide companies with a basic foundation of what they should be looking for. 
  2. Embrace efficiency tools. Operational excellence comes back around here. Working efficiently saves time and money. 
  3. Keep the 6% rule in mind. When the value put into integration is  6% or greater, the better the results. Greater levels of synergies are realized and greater value is produced (private equities know and use this tip quite well).

Final Thoughts

There is no simple answer for how M&A practitioners can optimize value and growth capabilities. Practices must begin at the strategic level before everyone rushes to diligence - and all work streams must rally around the strategy. Leadership and financial goals should also be thoughtfully established.

The true race of M&A starts when you buy the company - this is where the opportunities are. Preparing for this race through a well-defined strategy, operational excellence, and a focus on capabilities yields increased value in the long run.

agile m&a book


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