– By Nick Perdikis, CEO and Chief Revenue Officer, Devensoft
Like just about everything else, mergers and acquisitions activity has been in flux over the past several months. Earlier this year, M&A activity dropped significantly, with one research firm reporting a 40% drop in the number of deals with transaction values of $50 million or more between Q2 2019 and Q2 2020. Since then, things have been picking up, with a big rebound in M&A in the third quarter of 2020.
While things appear to be on the upswing, this is still a precarious time for M&A. Many companies are continuing to be cautious, even as they consider future deals. I recently caught up with M&A experts Wendy Selley and Dwight Fontilla to talk about M&A challenges in today’s extraordinary environment as we move into 2021.
Wendy has executed deals in 11 different countries throughout her career at Allegion, PLC, where she was manager of global business development, and Delphi, where she was a senior financial analyst and manager of venture development. Dwight is a senior manager in charge of M&A at Accenture, where he focuses on developing digital and analytical assets for use with clients’ M&A activities. Dwight has more than 24 years of experience in M&A strategy with Cognizant, Microsoft, McKinsey & Company, and Ernst & Young.
Our discussion covered a wide range of topics, from integration challenges, to navigating the remote work environment, to how the right tools can help companies overcome these obstacles and more. The conversation coalesced around two key topics: M&A strategy and technologies to support the M&A process. Here are some of the highlights from our conversation.
The Strategy Behind a Successful Merger or Acquisition
Organizations need to think beyond the tactical “nuts and bolts” and focus on the purpose behind the deal
According to Wendy, one of the biggest obstacles to a successful merger or acquisition is companies’ tendency to focus on the “nuts and bolts” of their deals at the expense of why they’re doing the deals in the first place. While managing the tactical aspects of integration is important, Wendy noted that organizations must manage those activities without losing sight of the deal’s strategic rationale and the actions required to achieve it.
“For example, if the target was purchased to be an entry point into a new geography, is the business building on that opportunity as planned?” she offered. “Or are they just letting it run as-is and, therefore, losing precious time and momentum because they’re focused on the tactical nuts and bolts? When some people hear the word ‘integration’ they only visualize the myriad of functional steps needed to bring the business into the fold. We’re more successful if we see the purpose of integration as the active enabler of the deal strategy and value creation.”
Dwight concurred, adding that a strategic focus can help organizations identify which components of the businesses to focus on as the merger or acquisition begins to take shape. “That strategic rationale can really change the focus of which of these areas is going to have the major attention and challenges,” he said. He provided an example of a company acquiring another organization for their talent, stating that such a case would necessitate a focus on HR to make sure the company retains the talent it’s seeking. “In those weekly status meetings that you jump on, always have the strategic rationale for the deal as the first slide. Make sure you’re focused on it. If not, raise a flag.”
Indeed, Dwight listed four key points for a successful merger or acquisition:
- Focus on a strategic rationale
- A relentless focus on value capture
- The importance of curating a high-quality integration team
- Caring for the people from both companies that are impacted by the impending deal.
To this last point, he said, “Employees are working remotely, and their connectivity to the company is weakened. Don’t overload them. Keep them engaged.”
Successful global integrations depend on teamwork and planning
Wendy pointed out the integration team should be involved in the effort as soon as possible. “It’s really important because then you don’t lose time and information in the transfer of knowledge from the people who investigated [the deal] to those who have to execute,” she said. “Bringing them in early, and having them participate in, coordinate, and be part of the planning, can carry over well into the integration.”
Wendy volunteered additional tips from her years of experience working with international deals. In particular, she said having a local presence is critical. “You need people on the ground with local knowledge on legal regulations or with local language capabilities. You have to have regular check-ins early on—daily—and keep connected.”
In keeping with a strategic focus, Dwight counseled management to think about the future operating model of the combined company, including considerations around how the organization will be run globally. Key things to consider include whether the organization will be managed from a central location, regional hubs, or country-specific operations teams. He provided one potential model involving an organization that normally runs its business through three regions globally with a central head office. During an M&A situation, that central office can serve as the access point for the integration leader to connect with the C-suite and for the regional hubs to coordinate the integration locally. “That’s the easiest way to operate,” he said, “so that people stay as comfortable as possible as they’re going through this major change event.”
Performing due diligence on leadership teams is essential
Wendy talked about the importance of performing detailed due diligence into the leadership teams of M&A targets as part of the strategic planning phase. “We need to carefully evaluate the leadership and key talent for ourselves, and not take the seller’s word for who is key and where they should fit in the organization.”
Wendy called this “designing the new organization.” Here, organizations define the roles and responsibilities of the new leadership team before the merger or acquisition for a smooth transition. It’s also the time for organizations to ensure they garner support for the combined company’s strategy and deliverables and identify any compliance safeguards that need to be issued for individuals, such as authority limits. Plans should also be made to backfill positions in case one or more leaders opt to depart.
Pre-planned organizational design and frequent communication to the combined workforce is key to keeping employees happy, according to Wendy. “Instability in leadership and the random filling of leadership positions leave the workforce with a really bad taste in their mouth as to the direction of the business. It can heighten their anxiety.”
The Role of Technology in the M&A Process
Remote work has amplified technology’s importance in M&A
A recent Devensoft poll of webinar attendees showed that 35% of them were using some form of M&A specific tool to help facilitate deals. Indeed, the current remote work environment has amplified technology’s importance in the M&A process.
Wendy provided her thoughts on how to best use technology to enhance M&A, pointing specifically to how tools can help organizations keep their efforts focused without creating additional headaches. “We’ve all experienced integrations that were less effective and infinitely more painful because leaders were distracted by either the challenges of homegrown project tracking or one-off reporting. They weren’t focused on providing the necessary leadership to the business or integration. Rather than their tools supporting them, the tools became something else that had to be managed.”
“Now, more than ever, we need a belt and suspenders approach, especially when there are limitations to having resources on-site,” Wendy continued. “Enterprise tools [built for M&A management] help ensure that the teams can keep moving, stay connected, and be effective. They give cloud-based capabilities, so teams aren’t dependent on having connectivity to their servers or having to circulate files via email. They provide live or online support. And they are configured to support the needs of a deal flow and provide automated reporting and status updates, so teams are free to focus on what they need to do.”
Data-driven insights will be M&A game changers
One of the core benefits M&A technology brings to the process is the provision of greater value, insights, and faster execution through data and analytics. Intelligence derived from data can be used to not only expedite the process when it’s in motion, but help companies identify their next targets.
That was the area that Dwight said excites him the most. “With the amount of data in the market and on the web, we can do very detailed, automated searches for companies based on criteria. We can then monitor target companies on an ongoing basis. With an environment like today’s, where companies’ fortunes are shifting based on the economy, [data-driven intelligence] can shape and shift the value of the company on a very short-term basis.”
Organizations can use M&A technology to proactively monitor the fortunes of these organizations, and gain greater intelligence into both who to target, and when.
Lack of standardization is an inhibitor
While technology can be a propellant for M&A activity, lack of standardization among the various tools companies use can stymie this effort. Wendy noted many companies use a combination of different solutions – some are developed in house, while others are general-purpose project management tools used successfully on other types of projects. As such, there’s no consistency across the enterprise.
Wendy said this is particularly problematic in organizations without a dedicated integration team. In these situations, companies tend to use “as-needed talent to drive some of these activities, and they’re bringing the tools they have a level of comfort” in using, rather than the best tool for the overall M&A strategy.
This exacerbates the challenge. Instead, both experts agreed that organizations should standardize on a single tool or set of tools and get everyone on the same page. Train employees on how to use them, benefit from a single source of support and achieve greater consistency.
Fear of technological change is also a challenge
Many employees also fear technological change because they don’t understand it, or they’re simply comfortable working with the legacy tools they’ve always used. Overcoming this fear necessitates a cultural shift and commitment to change management, which Dwight said involves just about everyone—including top executives.
“Once you get your core team comfortable with the tool, you’ve got to get the buy-in of your broader teams,” he said. “Early on, when you’re selecting tools, bring the other members of your integration teams in. Get them engaged. Get them bought into the tool and help them understand what it can do for them.”
This type of preparation should go a long way to assuaging fears about new technologies. It also allows organizations to better understand their employees’ concerns and address them proactively. “Recognize there is a hesitancy many times for companies to put their pipeline in the cloud,” said Dwight. “The cloud is still scary to some organizations. Understand, the security aspects that have been put in place to support these cloud-based tools are world-class. You’re as safe as can be.”
Dwight also emphasized the need for executive support when implementing new technologies. “Executive leadership has to be saying, ‘We are going to use these tools. You guys have got to get on board. You’ve got to get trained. You’ve got to know what’s going on so you can be efficient.’ People will line up. You’ll get people utilizing, and they’ll catch the value.”
Parting thoughts: focus on value creation, fundamentals, and the right technology to support M&A efforts
In closing, Wendy reminded us that, even though the M&A world has swung widely over the past six months, the fundamentals of M&A in integrations have not changed even though challenges have increased in complexity. “As always, we need to plan early. We should be considering how we’ll integrate and run the business at the onset of the deal. Integration planning needs to start in diligence. Lastly, we need to make sure we’re balancing the tactical requirements and running of the business. At the end of the day, the deal is only a win for us if we’re successful in the running of the company and in achieving the long-term strategy of the deal.
Dwight echoed those thoughts and reiterated the importance of focusing on the value capture of a deal and technology’s role in the process. “That’s what you’re there to do—bring value to the combined company. Don’t be afraid to leverage cutting-edge tools and assets that will allow you to get better insight and a real-time look at what’s going on.”
Dwight and Wendy echoed the fears that I hear from companies every day. M&A is a journey that starts with a strategy and travels through many stages before reaching a successful conclusion. It is not simply about the art of the deal, but the art of turning the deal into a high functioning integrated company that adds to shareholder and customer value at the end of the process. The combination of the right strategy, the right companies, and the technology that supports their union can overcome many common hurdles to M&A success.