In the first part of an ongoing series, authors Tom Ewers and Roland Wilson of West Monroe Partners, indicate the dynamics of M&D merger. In this initial installment, they describe how success hinges on several key pre-close ingredients.
For manufacturers and distributors (M&D), pre-close homework is the most critical factor leading to successful acquisition or merger. Skipping this step can have a detrimental effect on transactions.
Successful private equity investors and strategic acquirers know that transaction costs incurred to perform adequate discovery and pre-close planning are minimal compared to the financial risk of a failed investment. So M&D companies considering acquisitions as part of their strategy should definitely study lessons learned from those that successfully execute mergers and acquisitions (M&A) year after year.
Taking on unforeseen business, operational, or technology costs and/or risk can hurt the acquirer’s ability to achieve the goal of their investment and consequently fail to generate the synergies and a return on the investment originally expected. West Monroe Partners recommends several pre-close best practices that M&D acquirers should follow to enable a successful integration.
The initial steps of such a large-scale project revolve around defining an overall strategy to carry you through both the acquisition and integration phases.
First: Define Acquisition Strategy
With increasingly competitive pressures on manufacturers and distributors, acquisitions are an accepted instrument for achieving an organization’s strategic objective(s). Growth through acquisition can be pursued for a variety of reasons: cross-selling to a combined customer base, geographic expansion into new markets, filling a product/service/price gap, or removing competition from the market.
Post-close, ROI has to be realized through operational integration, which may involve achieving cost reduction synergies in supply chain, manufacturing or service operations, back office, and distribution functions.
Frequently, there are synergies expected from increased revenue, due to cross-selling the new products or services. The acquirer needs to be clear on what strategic assets – whether it’s a core competency and expertise, customer base, or production capability – need to be protected and leveraged to generate ROI.
Defining this “investment thesis” is important – not only have a core reason for going through with the transaction, but also to create a shared vision for everyone involved. Once the acquisition’s intent is defined and communicated, acquirers can work to validate it during the various phases of diligence.
Next: Determine Integration Approach
Developing a point of view on the extent of the integration the acquired entity undergoes informs the evaluation lens during diligence. It will also help you understand the amount of effort that may be required to carry out the integration. When a sizeable or “merger of equals” transaction is being considered, a more collaborative approach can engage functional experts from both organizations, to combine the best habits of each firm. Conversely, a “tuck-in” or small add-on acquisition may benefit from a more direct approach or a command and control relationship.
Whether it’s a merger or an acquisition, it is important to keep in mind that the investment thesis is the foundation for the integration approach. For example, if the investment thesis points out that significant cost savings can be obtained by reducing direct expenses, then the approach needs to facilitate identifying and capturing synergies, regardless of the amount of collaboration or command and control that exists between the organizations.
Similarly, an operating hypothesis that pins the distribution network and cross-sales as primary sources of synergy demands an integration approach that enables relationships, cross-selling and the enhanced distribution network. It is also important to be cognizant of any anticipated earn-out clauses because the integration approach needs to be in alignment. In other words, an earn-out that emphasizes top-line revenue might conflict with an investment thesis driven by improving the sales margins.
Readied for the Next Phases
With overarching strategies in place, M&D companies can successfully shift into the pre-integration, operational and IT diligence phases.
(In the next installment, Tom Ewers will discuss how to establish a diligence team, as well as the importance of conducting targeted operational and IT diligence.)
About the Authors
Tom Ewers is a director with the Minnesota-based West Monroe Partners. He is responsible for expanding presence in key local industries – particularly healthcare, manufacturing and distribution, and private equity – throughout Minnesota and the upper Midwest and coordinating services for national and international clients with operations that region. Roland Wilson a director in the firm’s Manufacturing & Distribution practice. He has more than 20 years’ experience in industry and business consulting. He focuses on helping clients achieve post-merger integration synergies and/or business transformation objectives.