A blueprint for M&A success

Programmatic M&A can help businesses build resilience, but it requires a solid game plan to guide proactive deal sourcing and opportunistic deal evaluation.

Large mergers and acquisitions (M&A) tend to get the most attention, but according to McKinsey research, executives should pay attention to all small deals as well. When pursued as part of a deliberate and systematic M&A program, these smaller transactions tend to yield strong long-term returns with comparatively low risk. And, according to our findings, a company's ability to successfully manage these transactions can be a critical factor in its ability to withstand economic shocks.

However, putting such a programmatic M&A strategy into action is not easy. Consider the situation at one of the world's largest cosmetics companies (a hypothetical case based on real-world experiences). Enthusiastic executives all had different ideas about which M&A opportunities the company should pursue (exhibit).

The M&A blueprint encourages business leaders to conduct a thorough self-assessment as well as a thorough market assessment.

As this example shows, success in programmatic M&A necessitates far more than simply closing a long string of deals. Acquirers must explain why and where they require M&A to deliver on specific themes and objectives underlying their overarching corporate strategies. Furthermore, they must carefully consider how they intend to pursue programmatic M&A, including developing a high-level business case and preliminary integration plans for each area in which they intend to pursue M&A.

When all of these factors are considered together, they form what is known as an M&A blueprint. In this article, we will look at how it can be used to help organizations stay laser-focused on their investment thesis throughout the deal process. Having a clear M&A blueprint becomes even more important as companies consider how to recover from COVID-19. Companies will find it more difficult to distinguish between through-cycle opportunities that are consistent with their corporate strategy and "low hanging, distressed asset" deals that are not if they do not have an M&A blueprint.

The Building Blocks of Mergers and Acquisitions

The M&A blueprint can assist executives in answering three primary questions: Why and where should we use programmatic M&A to achieve our corporate strategy? And how should we employ programmatic M&A to achieve our corporate goals? Answering these questions will necessitate asking additional clarifying questions about specific organizational strengths and capabilities, available resources, and other factors influencing effective deal making.

Understanding the 'why' and the 'where'

The M&A blueprint encourages business leaders to conduct a thorough self-assessment as well as a thorough market assessment. The self-evaluation establishes a baseline from which to identify gaps in corporate ambitions as well as opportunities for M&A to fill these gaps. It entails examining a company's key sources of competitive advantage and testing their scalability to see if they would still benefit the company after a transaction. The market assessment, for its part, serves as a "sense check" for business leaders, ensuring that the company's M&A strategy capitalizes on the most recent and relevant trends, accounts for potential disruptions, and recognizes competitors' likely actions and reactions.

An M&A blueprint should also include any boundary conditions or limitations to the company's use of M&A. These conditions, which are typically imposed by the CFO or the board's investment committee, serve as an important wake-up call: they define the constraints on certain types or sizes of deals, narrowing the scope of potential targets even further. Business leaders should account for pre-existing financial hurdles when establishing these conditions; for example, a rule that "deals must be accretive in the first year" is unlikely to apply to deals aimed at growth and may thus overly constrain M&A activity. Setting these boundary conditions up front, with explicit agreement from the CFO and the board, can help put teeth into investment commitments and align everyone on negotiable and non-negotiable terms.

Taken together, the self-assessment, market assessment, and review of boundary conditions can assist executives in understanding the circumstances under which M&A makes the most sense, as well as the markets in which they are best positioned to enter. Indeed, the outcome of business leaders' discussions about "why and where" will be a set of M&A themes reflecting the company's best value-creation opportunities—those for which the company has the capabilities and resources to achieve intended strategic goals.

What constitutes a good M&A theme? Senior leaders should identify important deal criteria for each theme (categorizing potential targets by geography, sales channel, product type, and so on) as well as standard screening metrics like company size, number of employees, revenue growth, product port­folio, ownership, and so on. With this detailed information, organizations and M&A deal teams can continually cultivate potential targets within focused M&A themes while still being opportunistic about deals that present themselves.

Once these themes have been identified, business leaders should put them to the test to ensure that they can be implemented—for example, are there enough targets available, and are the right targets available to fill gaps in the company's capabilities? In target-rich environments, the M&A blueprint will be especially important in helping to narrow the list of potentials.

A "gold standard" merger and acquisition strategy is detailed and focused on critical competitive information (value-creation levers, company capabilities, and so on). Business leaders should consider whether they would be comfortable broadcasting their companies' M&A themes to competitors to determine whether their companies' M&A themes are detailed enough.

The correct answer is "no." If the answer is "yes," more work on the blueprint will be required, as it and the related themes are likely insufficiently specific to be useful to M&A teams.

Understanding the "how"

An M&A blueprint also prompts senior leaders to develop a strategy for "how" they will use M&A to advance their overarching corporate strategies. The M&A blueprint should specifically outline the high-level business case and preliminary integration plans associated with each M&A theme.

The business case should explain how the acquiring company intends to add value to the target or targets within a specific M&A theme, such as the capital and operating expenditures required (beyond the acquisition price) to integrate and scale the asset or assets. It should also outline the operational changes and capabilities that will be required to integrate the new assets, such as the formation of a new business unit or the implementation of a new set of business processes to manage an acquired digital platform.

One large US healthcare company had committed to a scale-building strategy in its services businesses through M&A. First, it merged previously disparate service businesses under a new brand and organized them into three distinct units: pharmacy-care services, diverse health and wellness services, and data analytics and technology services. These three M&A themes became their three M&A themes. The programmatic acquirer then closed more than 60 deals over a ten-year period, spending well over $20 billion to fill out its portfolio along these three themes. The organization knew exactly where and how it wanted to play.

Of course, the business case should include a preliminary integration plan for the acquired asset or assets that is consistent with the deal's value-creation thesis—for example, the acquirer will absorb all shared services and the target company's product portfolio will be cross-sold to the acquirer's existing customers.

M&A blueprint: Putting it all together

An M&A blueprint cannot and should not be developed based on a single executive's "gut instinct" or defined post hoc to validate the theory behind an exciting deal. An executive or business-unit leader should lead its development, but should be supported by executives in charge of corporate strategy and corporate development. The blueprint itself can be a regularly updated and disseminated written report, or it can be a standing agenda item in every M&A and corporate-strategy meeting. It can help decision makers assess critical factors related to deal sourcing, due diligence, and integration planning before making any moves or taking steps to identify targets, regardless of format.

In the case of the cosmetics company, it is clear how an M&A blueprint could have assisted the organization in prioritizing a slew of scattered ideas into a comprehensive programmatic M&A strategy.

For example, based on its market analysis, it may have discovered that the market for digital cosmetics is expected to grow five times faster than the market for non digital cosmetics. Furthermore, market data may have revealed that customers prefer and expect to purchase cosmetics via digital channels, and that there is no clear leader in the space. In its self-evaluation, the M&A team may have identified a gap in the company's product portfolio when compared to peers. Furthermore, a look at boundary conditions may have revealed the time and latitude required to pay off initial acquisition investments, allowing the team to look beyond "base hit" deals with lower acquisition costs.

The M&A strategy would have resulted in a different outcome for the cosmetics company, perhaps a laser focus on acquiring the assets and capabilities required to build a digital platform for selling cosmetics.

Spending time creating an M&A blueprint upfront will pay off in the long run, especially given the volume of deals associated with a programmatic M&A strategy. Companies can be more proactive and opportunistic if M&A themes and criteria are well defined and understood by all. Prior to reaching out to potential targets, the top team will be aligned on strategy and focused on deal must-haves. The business case can be used to ground negotiations with potential targets. Due diligence processes can be sped up and narrowed down to only the most critical sources of value. Integration planning can begin early, with a focus on achieving the deal's strategic intent rather than simply stabilizing companies, people, and processes in the aftermath of change. Most importantly, the M&A strategy can assist executives in telling a compelling story (inside and outside the company) about its deal-making strategy and its vision for the future.

Source: mckinsey.com