Disruptive M&A: Delivering On Expected Returns
Value creation in disruptive acquisitions is typically more complex and challenging than most M&A transactions, starting with an unconventional approach to integration.
The integration phase of a disruptive M&A deal requires a specialized set of considerations and decisions, often distinct from more traditional acquisitions that CFOs are accustomed to implementing. Disruptive M&A—which includes any acquisition, partnership, or joint venture that transforms the business of a non-tech company through innovation-led growth—is not just about acquiring products and technologies, but also involves an exchange of ideas and talent.
The deal rationale is often driven by the promise of revenue synergies, including growth and scalability, which are typically more difficult to capture than cost synergies. Differences in culture, process maturity, incentives, and the attitude toward innovation may mean that the corporate parent is not ready to fully integrate the acquired business into existing structures and still retain staff and preserve value.
For those reasons, instead of asking “how to integrate?” the central integration question in a disruptive M&A deal is “how much to integrate?” or “should we keep it separate?”
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Disruptive M&A integration Planning and Priorities
Integration planning for a disruptive target at the C-suite and board
levels starts by reframing the integration with the following questions:
- How ready is the parent company to undertake effective integration and
what investment is required to deliver growth and value?
- Is the parent willing to grant a degree of operational autonomy to the target company during its first year as part of the larger organization?
- What can the parent learn from the target to transform itself and avoid being disrupted in the future?
- Which integration activities will drive value and ought to be prioritized?
Disruptive M&A deals are typically either extensions into adjacent
markets or explorations into new categories and markets. The degree of
commonality between the acquirer and target—in terms of products and services, innovative culture, revenues and number of people, market and brand
positioning, and attitude to risk—determines when and how full integration
should begin. The challenge is to understand how these elements should be
integrated and when they should be brought into compliance with standard
industry processes for a large company.
The next step in planning the integration focuses on understanding and driving alignment with the target across the following aspects:
- Strategic blueprint: Where does the business expect to be in two to five years, and what will the acquirer actively support vs. leave as autonomous during this period?
- Degree of operational control/integration: What degree of operational autonomy and decision-making will be given to the target’s founders once acquired? The founders will be used to decision-making autonomy and will view quick decision-making as a key component of their success to date. Determining the degree of operational autonomy with aligned incentives will, therefore, be key to both management retention and delivering the right growth strategy.
- Talent and culture: What incentives and measures will be put in place to retain the founders and key staff, and how should cultural differences be addressed? Early decisions are required on the type of incentives that will be offered to retain and motivate key staff members of the target. Of critical importance is the incentives package that will effectively motivate the target company’s founders and key staff to align their objectives to the new corporate parent.
- Investment in product/service: What level of investment and cross-sell support is required to deliver the predicted revenue synergies for the deal? The acquirer may need to calibrate both the expected rate of return and overall risk appetite in years one to two to ensure the business is given sufficient license to both grow and adapt simultaneously.
- Operating model: What type of operating model design will best deliver the benefits and what degree of control is required from day one? For example, should finance and HR be fully integrated, while customer-facing functions are left alone for year one? The proposed operating model will need to be designed to support the growth priorities of the business, while retaining sufficient control and governance to enable management to track progress and decide how to develop the business over time.
Undertaking a disruptive acquisition—whether it is a defensive move or to gain competitive advantage—sends a signal of change in the market. At the same time, management also needs to signal change within the business. Commitment from the CEO and board is critical to effectively implement required changes and enable the acquirer to both support the target’s growth and become a more innovative and nimble business in the process.
A major consideration for acquirers is their organization’s willingness to tolerate different cultural norms within the business to retain the innovative spark that led to the success of the target. Commitment to retain the innovation culture within the target is crucial to achieving the targeted outcomes of a disruptive acquisition, as is assessing which aspects of the buyer’s culture will be brought to bear over time.
The target’s agile culture will typically feature autonomous, empowered, and loosely coupled teams that are willing to address ambiguity, change, and risk to drive expansion and innovation. The acquirer, therefore, needs to balance the degree of cultural integration against how doing so might impact the growth agenda.
Lessons Learned for Delivering Expected Returns
Lessons learned from previous disruptive deal integrations that can help drive value include:
- Don’t declare victory on day one. Follow through on the rationale regarding how and when to integrate and retain executive sponsorship throughout year one at a minimum.
- Track revenue synergy delivery and ensure regular interaction between the integration director and target management throughout year one to enable course adjustments in terms of investment, degree of autonomy, and support from the rest of the business.
- Learn from the target and adapt the business to take advantage of the target’s customer insights and intellectual property.
- Flex the risk appetite and associated investment approach in line with the strategic deal rationale and be prepared for a longer return timeline.
- Decide on the core cultural integration direction from day one and support the management team in the decision throughout the journey.
- Minimize the set of key performance indicators (KPIs) to focus on priority areas—including cross-sell revenues, product development costs/R&D, staff retention, and customer revenues.
As the rate of innovation and change continues to accelerate, the ability to successfully undertake disruptive M&A is expected to be a defining feature of corporate growth story. Integrating disruptive acquisitions challenges the leadership team to exercise flexibility and agility in order to capture the innovation-led growth and tap into new technologies. For CFOs, this means having the right leadership mind-set to scale disruptive opportunities and transform the core business, along with a greater appetite for risk and the ability to balance short- and long-term objectives.
—by Iain Macmillan, global leader for Global M&A and M&A Transaction Services; Larry Hitchcock, principal, M&A Consultative Services practice with Deloitte Consulting LLP; Sriram Prakash, global lead, Disruptive M&A; Paul Dunn, Integration specialist leader, Deloitte UK LLP, Steve Maddox, senior manager; and Shyam Ramdevkrishna, manager, Deloitte Consulting LLP’s M&A practice.
Editor’s note: This is the second article in a two-part series on Disruptive M&A. Part One focused on unlocking new sources of innovation-led growth by identifying and assessing the right deal.
Denne artikkelen ble først publisert i The Wall Street Journal