M&A deals are all good, but follow these steps to make it easier to integrate the business
As the GCC recovers from the impact of COVID-19, we are seeing growth in economic activity. This is driven by continued diversification, a shift towards more sustainable energy sources, accelerated adoption of advanced technologies and an increased flow of in / out investment.
Mergers and acquisitions, divestitures and joint ventures (JVs) can be catalysts for accelerated transformation, allowing companies to gain a technological advantage, capture market share and reallocate capital. In the first six months of 2021, more than $ 40 billion in deals were announced where the acquirer or seller is located in the GCC.
We know from past data that nearly two-thirds of acquirers are not capturing optimal value due to ineffective pre-deal integration planning and / or post-deal execution. During disposals, many sellers fail to meet their target price due to inefficient estimation of carve-out costs and the resulting impact on finances.
Early planning and effective execution of integration and separation can be essential to unlock the full value of the transaction. It requires a combination of skills, including managing financial, operational, technological, program and cultural change.
Maximize the value of disposals
Conduct pre-deal planning and carve-out design
Increase bidder confidence with a clear articulation of the operational scope, including the impact on people, processes, assets, contracts, systems and data. A well-thought-out carve-out approach provides adequate articulation of dependencies with the remaining group, a disentanglement approach while minimizing disruption to the BAU (business as usual) and operating models with a clear articulation of the scope of the business. ‘Transitional Services Agreement (TSA) and Fresh Proposals.
Control cost narration
It is crucial to identify how to separate finances, including income statement (P&L), balance sheet and cash flow adjustments. The seller must control the cost story and maximize valuation profits before interest, taxes, depreciation and amortization (EBITDA) through robust calculations of the impact of exclusion on financial data, as well as the calculation of one-time costs.
Efficient completion planning
It is essential to have a clear focus on the path to completion. Organizations should appoint competent experts to prepare the business operationally for the closing of the transaction, including the establishment of transitional services and compliance with conditional precedents (CPs).
Aim to reduce stranded costs
A TSA service charge must be calculated to compensate the seller for the services provided. TSA extension and termination clauses and notice periods should be carefully designed to minimize stranded costs.
Early negotiations with suppliers can be vital to adjust contract spending based on the consumption of the remaining business and obtain consent for the provision of TSA services. Finally, the divestiture should serve as a catalyst for the transformation of the remaining activities.
Maximize the value of integrations
Conduct pre-transaction integration due diligence: have an early vision of the integration approach, as well as the main risks and opportunities to create synergy. Include such opportunities or integration risks in the offer price and be able to negotiate the responsibilities of the buyer and their financial impact.
Align the integration approach with the logic of the transaction: develop a clear vision of the operating model combined with a level of detail to enable buy-in. Have a clear vision of the integration team structure, resources and governance and gain buy-in from top management.
Take effective control from the start: Keeping core business and resources focused is critical to protecting day-to-day performance. Organizations would be well advised to take immediate financial control (cash, reports, authorizations, first month audit). A detailed action list would include all of the key activities required in the first month for all key business functions.
Focus on value creation: value creation is a priority, as is a bottom-up synergy analysis, an estimate of the cost to be achieved and a prioritization based on the cost / benefit ratio, with a robust approach for monitoring synergies. Use integration as a catalyst for a larger change / transformation in the business.
Establish strong leadership: The acquirer would do well to appoint a senior executive with sufficient decision-making power to lead the integration management office (IMO). It is essential that there is a clear cultural vision for the combined organization and that the senior management reward structure is aligned with successful onboarding. Finally, a clear and strong communication strategy is crucial for the success of the integration.
Mergers and acquisitions are a crucial catalyst for rapid and strategic change. However, it is easy to lose the value of a deal due to a misalignment of operational and business levers to the logic of the deal, lack of planning, or inefficient execution. A clear and compelling articulation of the onboarding and separating approach – which maximizes financial value, combined with value-driven execution – will enable a positive outcome.