8 M&A Trends and Practices for the Decade

The rules of business continue to be redefined by disruptive technologies, and at a global scale altering business models, value propositions, customer needs, interaction models, the economic logic for underlying profits, and the evolution of new, interconnected ecosystems.

The changes are more profound in the last two years. There is disruption everywhere with technologies like Cloud, Software Defined Everything, Open Source, Artificial Intelligence, IoT, Blockchain and Augmented/Virtual Reality, etc. going mainstream and creating new business models across many industries and sectors. Older and more established players must reinvent themselves through M&A or be displaced into oblivion.

All this has changed the thinking behind how M&A strategy is conceptualized and executed i.e. integration. The very questions around the definition of value and how to maximize it have undergone a big shift e.g., what are key focus areas during due diligence? Which synergies are most important? How does one create value? etc.

Here are some of the emerging trends I have observed lately in the M&A space, few of these will emerge quickly while others will scale and become mainstream in 2021/22. But change continues at a rapid pace and the need to adapt becomes higher than ever.

“The pace of change has never been this fast, yet it will never be this slow again.” Justin Trudeau, Canadian Prime Minister

Separation of Integration Process and Value Creation

M&A Integration was centered on getting the planning right, sizing the cost synergies, smooth execution of day one, and ensuring the infrastructure, process, and execution rigor were in place. This created the need for playbooks and standardized practices turning the average M&A integration professional into a glorified PMO with the task of "managing the integration" process rather than creating value. In the new world order, this will no longer work, the process, structure, IMO, work plans, checklists, etc. are mere table stakes. While IMO purists can keep the lights on and turn the cranks, M&A professionals with a strategy and operations skillset will be the value creators. Corporate and consulting professionals need to justify their worth by creating tangible and meaningful deal outcomes.

Changing IMO Configuration

IMO is the center of gravity during an M&A integration and its design, configuration, and ability to adapt can make or break deal value. In the pre-digital era where cost synergies were front and center of value creation, a functional approach was adopted for good reasons i.e., costs come from specific functions with a few well-defined drivers like headcount, assets, contracts, etc. and can be executed quickly - hence it made sense to configure functional workstreams. Today, many deals are about revenue synergies and a single function is not capable of delivering complete value. The machinery between sales, marketing, service, product, pricing, customer experience, etc. needs to fire in unison for creating meaningful synergies. Hence IMO needs to be configured by value driver, not by function. Rigid proponents of functional integration will not create value in the future.

Death of Serial Acquirer

There are no serial acquirers defined like the first decade of this century, companies like GE, Cisco, IBM, HP, etc. used to be industry consolidators and hence called serial acquirers. Today there are many types of deals just beyond consolidation e.g., adjacencies, tech tuck in, acquihire, new business models and carve out integrations, etc. Companies execute on each type either occasionally, frequently, or serially. Given these shifts in M&A type and frequency, companies are serial acquirers for certain types of deals at a certain time. Therefore, rigid processes, playbooks, etc. are breaking down. A playbook is only a body of knowledge, integration is an execution skill. Creating value through integration requires skill, insight, functional depth/breadth, and analytics. See figure below.

“A company can be a serial acquirer of a certain deal type, within a given timeframe.”

Emerging Approaches and Disciplines

Best practice has revealed that having integration teams involved upfront in the deal cycle has created more value than deals thrown over the wall. Organizations are increasingly introducing "integration due diligence" alongside traditional financial, operational, commercial, and technical due diligence. To enable both strategy and integration teams to stress test their assumptions, uncover blind spots, develop foresight, and develop alternate scenarios, approaches such as Wargaming are increasingly being deployed.

Execution Under Uncertainty

How long do we wait until an acquisition returns value to acquiring shareholders? What is the right time to value? These plague an acquirer and newly acquired target when defining/building new technologies and new business models. Customers, competitors, and employees respond to both internal and external risks and opportunities. Running a traditional checklist (or even a playbook) takes away the ability to respond in real-time to changes and uncertainties. M&A integration teams must train to execute under uncertainty and ambiguity still creating value for shareholders.

From Full Integration to Time to Value

Today, it is less about synergies and more about shareholder value, some of the tech tuck-ins and acquihire deals do not even have synergies as conventionally defined, it is likely that their back offices are underinvested creating negative synergies. New business models and legacy businesses are like apples and oranges, they will just not fully integrate, hence targeting a full integration is meaningless. M&A integration teams will measure themselves on" time to value” rather than orienting themselves to a fully integrated state.

Leveraging Data and Technology

Leveraging data to make better decisions, model synergies, target customer acquisition/retention, etc. becomes easier leveraging big data analytics, adding AI capabilities can make value creation more predictive. Multiple technologies like cloud, SD-WANs, etc. can quickly migrate companies into an “asset lean” posture, I have also observed the use of drones to redefine supply chain efficiencies, and this is likely to grow manifold. RPA and OCR-based automation is already mainstream in many M&A deals and utilized from due diligence through integration and beyond. In the coming few years, one can expect several parts of the M&A value chain to be digitized, automated, and scaled efficiently with a less human touch.

Tighter Strategic and Operational Alignment

The modern-day M&A approach calls for tighter alignment between corporate strategy, corporate development, acquiring business units, and M&A integration with shared risk and linked rewards. A culture delinking the three will not create shareholder value. The modern-day integration success will be determined by shareholder value rather than just synergies.

Concluding Thoughts

The dual imperatives of seeking growth while riding the wave of disruption have created new M&A deal types. Adapting to this new operating reality requires new approaches, bodies of knowledge, new thinking, and reconfiguration of the older ways e.g., IMO design, etc. Disruption and growth challenges will continue to hit headlines throughout this decade. Older and rigid ways of creating value will no longer deliver value as M&A volumes continue to grow.