A survey by Mergermarket, in collaboration with EY, finds that M&A integration costs average 14% of total deal value. Obviously the amount to budget for any specific deal will vary according to a number of factors including complexity and strategic intent of a deal, but 14% is a good starting point for estimation. The survey doesn't give detail on what costs are included; the assumption here is that the costs are direct costs. Indirect costs like unpaid overtime, opportunity costs for frozen projects, and reduced productivity should also be factored into any decision around a transaction.
The linchpin of an effective strategy delivery system is the underlying strategy on which portfolio selection and project planning are based on. I embrace Richard Rumelt’s concept of strategy: identification of a few critical factors in a situation, a guiding policy to deal with those factors, and a set of coherent actions to support that policy (I highly recommend Rumelt’s book Good Strategy Bad Strategy: The Difference and Why It Matters). In Rumelts own words:
“Despite the roar of voices equating strategy with ambition, leadership, vision, or planning, strategy is none of these. Rather, it is coherent action backed by an argument. And the core of the strategist’s work is always the same: discover the crucial factors in a situation and design a way to coordinate and focus actions to deal with them.”
What Rumelt’s approach promises, and effective strategy delivery requires, is a clear set of principles on which to base your portfolio of initiatives. Those principles provide the foundation for planning a coherent set of actions. I have seen this work, but the more typical case is that no stated principles exist, or if they do they seldom get as far as the portfolio team and almost never to the level of a project manager.
Adjusting the Strategic Course
Even where principles exist and they are part of the planning process, it is important to recognize that strategy is a hypothesis or hypotheses that require testing (a point made Rumelt and many others). As key assumptions are validated or adjusted the expected returns or even viability of projects and portfolios will change. If having a clearly communicated set of strategic principles is rare, this kind of assumption tracking is even rarer; but doing so can be the difference between a firm producing average returns and above market returns. In rapidly evolving industries it is likely a prerequisite for survival.
The first competency required is the ability to ferret out the key uncertainties impacting strategy and projects and prioritize them based on their impact on projected returns. Sensitivity analysis is the most common tool for prioritization and will also give you a handle on the value of gathering further information. With assumptions and uncertainties identified and prioritized you then need to set up a system to monitor and/or test them.
An example would be the development of a nascent market a company wants to enter or create. The effort would likely include a set of projects with uncertain returns that would be tightly linked to key assumptions such as expected demand or emergence of competitors. Expected demand would be central to the business case so you would do some kind of testing (more to come on testing in future posts) to tighten up your estimates and use the improved information to update the range of projected project returns.
As your information is updated from your monitoring and testing activities, the next step is to revisit projects and subsequently portfolios based on changes in these key inputs and rebalance as needed. A key part of the rebalancing effort is killing projects where updated assumptions show the projects no longer offer adequate returns. This won’t happen unless the right governance is in place and likely requires tying some portion of executive bonuses to the success of the overall portfolio. Just as important as canceling projects is recognizing where opportunities are becoming clearer and then using the funding/resources from canceled projects to accelerate existing projects or create related projects in the opportunity space.
In future posts I will cover in more detail how to start using the approach above at a project level and what kind of projects to apply the approach to (not every project, to be certain).
M&A transactions present a number of challenges to firms, from successfully executing the transition of the acquisition or divestment to the longer term realignment and optimization post transfer of operations. Yet, despite information technology playing a nearly ubiquitous role as an enabler and sometimes direct contributor to value creation, IT is often not brought into M&A transactions until late in the deal process.
If we accept that IT plays a large role in M&A success (a McKinsey study of acquisitions found 50-60% of synergies were either directly tied to IT or IT-enabled) the question then becomes how can IT provide more value to M&A transactions? The single most important enabling factor is ensuring IT is properly engaged early in potential transactions, before deal terms are finalized. Early engagement in acquisitions allows IT to:
- Validate IT-related synergy estimates: as noted above IT will not only be a major provider of direct synergies but also an enabler of indirect synergies.
- Conduct due diligence on IT assets: The integration of the target’s IT systems and data is usually one of the largest areas of effort in an acquisition — IT due diligence is critical to get an initial understanding of the potential cost, effort and risks.
- Begin preparation for transition and integration of assets: speeding the time to realizing returns on investment is one of the greatest potential sources of value in a transaction and executing the IT component of M&As is often extremely complex. Getting the earliest possible start accelerates integration which in turn increases overall returns from the transaction.
IT also needs to be involved early in divestments and carve-outs to help the deal team understand options for preparing the asset for sale, validate what IT assets are included in the transaction, begin planning and provide IT-related separation costs and risks.
The responsibility for ensuring IT is engaged early falls jointly on the CIO and the deal lead. Failure to get early IT engagement right increases the risk of subpar returns from the transaction.
The world of mergers and acquisitions, like most specialties, has its own terminology that can be confusing for newcomers and sometimes even for experienced practitioners. One issue is simply volume — there is a lot of terminology. The other issue is that terms aren't always used consistently.
The M&A terminology issue is big enough that the American Bar Association has set up a task force to publish “a comprehensive glossary of terminology used in or relevant to M&A transactions, including examples of the use of many key terms in M&A practice”. While the Bar Association works on its glossary, two solid resources are available on the internet. One, Divestopedia, is focused on divestment terminology, but the content for the most part applies equally to acquisitions. A second, from law firm Latham and Watkins, is “The Book of Jargon-Global Mergers and Acquisitions” which is available not only on their website but also a phone app.
The references above will be of most interest to people dealing with sale purchase agreements. One area that is not covered fully however is the terminology used by transition teams to denote key milestones such as the handover of operations. Two key terms in this area are "Day 0" and "Day 1".
In normal cases Day 0 refers to the day the announcement of the transaction will take place, while Day 1 is the day that the buyer takes over operations of a company or an asset. Day 1 is usually the same day or the day following the closing (the date the buyer pays for the asset) but not always. To add further potential confusion, the closing date is not always the same as the effective date (the date the sale is recorded). Whatever terms you use it is a good idea to define them up front as different companies may use different terms and then be consistent in how you use them.
Perhaps the biggest opportunity for companies to improve their performance is to improve the ability to formulate and deliver on their strategic objectives. To do so requires an integrated strategy delivery system that includes:
- Clear definition of strategic objectives and their underlying assumptions
- A portfolio of initiatives optimized to achieve those objectives
- A project delivery system aligned with the needs of the portfolio and strategic intent
- A means for tracking the validity of key strategic assumptions and re-balancing the project portfolio as required
- Conscious appraisal of uncertainty and risk throughout the process
- Rewards and governance that support the system
Ensuring a robust strategy delivery system is in place should be a top priority for any CEO or board; in fact, such a system might be the most durable form of sustainable competitive advantage available to the firm. Developing a complete, integrated system is not done overnight but the good news is that near-term improvements are possible at every level. This is is the focus of a book I have started writing (which is at its earliest stages but has been in my head at least 10 years). I will explore key ideas in future posts but for now I will leave you with a preliminary picture that illustrates some key considerations.