36. Extracting value from M&A

[MUSIC PLAYING] So companies that are good at integrating the acquisitions typically have thought through their governance model really well. And we see, first of all, that they involve the C-suite in any decision making, where the steer hook kind of set up. But they also have a group of people that really kind of govern the whole kind of integration process. We call it the integration management office. And they cover the planning aspect. They also cover the value creation part of it. But they also look at the more softer sides. They think about the cultural integration, they think about the communication parts. They think about also the technology and how the IT systems will be the backbone of that future organization. From McKinsey's strategy and corporate finance practice, I'm Sean Brown and welcome to inside the strategy room. Successful mergers and acquisitions require more than just a strong M&A strategy and target list. They also demand well-planned execution, communication, and integration. In today's podcast, Kim McKellar, a McKinsey contributor, discusses driving value through M&A with two of our experts. Kenneth Boner, a senior partner based in Antwerp, leads our merger management work in Africa, Europe, and the Middle East. And senior partner Peter Kennevin, based in Tokyo, is the leader of our Asia-Pacific corporate finance practice. Their conversation was recorded at our 2019 Australia M&A conference recently held in Sydney. Kenneth, how would you advise a client who comes to and says, look, we're really good at sourcing deals, but something happens along the way and we tend to foreshort when it comes to integration? Yes. Well, the realization of execution is, of course, very important in an M&A context. And in essence, it's about three phases and about three objectives. There's a phase about the preparation, which is really before the announcement, even when you create the conditions for success. There's a phase where you plan for the integration, and there's a phase where you execute. And the real objective is threefold. One is to ensure business continuity. Both businesses keep performing and you have a seamless integration after legal close so that your customers, your employees keep working without the disruption. The second one is yet you deliver on the value by developing the real tangible value creation plans. And the third one is to think through your new operating model and how you will deploy your talent in that new kind of system. Peter, we've had a lot about programmatic M&A today, which is much more about M&A as a capability, as opposed to just doing a bunch of deals. What steps should companies take to develop that M&A muscle? The first step is still having the right M&A strategy and blueprint, which is obviously linked to your corporate strategy. Once you've understood what it is you're trying to achieve through M&A, then that's when you start to think about which capabilities that you need to put in place to build the pipeline and to execute on that pipeline. So if you have an M&A strategy that is predicated on a programmatic approach to many small acquisitions, you're going to need to have the pipeline to do that and you're going to need to have the governance model and the organizational capabilities to execute. And part of thinking about that is also what you build internally versus how you leverage third party providers. So you may need to have a certain amount of M&A talent internally organization, you certainly will in order to manage the overall pipeline and make sure that the overall M&A execution roadmap matches the strategy and also looks forward into the integration. But then you will also have to have the skill to manage a portfolio of advisors in the most efficient way. So yeah, so let's say company has a really good long list of potential targets. What do they do now? How do they move quickly? So assuming that long list of targets has been built on the basis of a relatively coherent M&A strategy link to the corporate strategy, then the important thing is that you have to think of the programmatic deal process as a pipeline. So typically, if you want to take a programmatic approach based on having a number of deals each year, let's say five, you need to look at a pipeline of deals that probably starts with 100 because you're going to have a number of screens that you'll work through. Obviously, you don't want to buy every company you look at. That's a whole point of diligence. And most of the deals, you want to screen-- if you're going to screen something out, you don't want to spend six weeks or eight weeks of expensive due diligence and precious time screening something out that is relatively clearly not a good fit. So you need a process where you manage a pipeline. You have an initial screen, quick and dirty, outside in. And actually, you take out, say, 50% of the deals you look at. Then you have a deeper diligence process that ends with an investment committee approving LLI then you move on and on until you get to the actual sort of confirmatory due diligence at the last stages. And the point is that you have to have aligned that pipeline with a governance model that enables you to have the right people making the right decisions at the right times so that you don't end up with either a deal fever or an endless loop of conversations. And that means who makes the decision of the initial screen, who makes the decision when you move closer and closer to the deal. So I guess the point is, you should take a very rigorous pipeline approach that you can screen deals through. And that has two benefits. One, at the end of the day, you end up with deals that you know have been properly vetted. But also, it allows you to look at enough deals without fear of wasting too much time that you actually can have a yield that makes sense. So it's about taking strategic intent, putting that into a pipeline of hundreds of deals, and then stagegating the governance process to sort of whittle it down. And is there a certain member of the C-suite who should take ownership into this? The entire C-suite needs to have some level of ownership. Obviously, you know, your head of M&A, your CFO, are your primary execution engines. Obviously, the CEO has to be aligned and on board for the strategy. And the whole C-suite has to be integrated into that, or into that and orchestrated into that process. Kenneth, can you give us some specific examples of companies that have actually done this really well? So companies that are good at integrating the acquisitions typically have thought through their governance model really well. And we see, first of all, the day involved the C-suite in any decision making, more in a steer code kind of setup. But they also look at the more softer side. They think about the cultural integration, they think about the communication part. And that group, in particular, steers every single functional team, whether that's HR or finance or commercial R&D to make up their plans. And again, those plans cover three topics, business continuity, value creation, and organizational model. And Peter, what about the flip side of the coin? Where do companies often struggle integrating? The biggest problem typically is that they lose sight of why they've done the deal in the first place. So I take you back to the origin of M&A strategy and execution has to be corporate strategy. And typically, what happens is a company will get so focused on doing the deal that they forgot why they were doing the deal. Or they'll do a transaction in a form that is not consistent with what they were trying to achieve in the strategic stage of the deal. And therefore, it's very difficult on the execution side because you're trying to integrate something that is structured to be difficult to integrate. So I think our view of this is that, you know, you have to have a sort of a through cycle, 360 degree perspective on the transaction. What is the strategic rationale? What does that mean for deal structure? And how does that deal structure need to be articulated in order to enable an integration that then facilitates the strategic objectives? And what we find is that, you know, that gets fragmented. And so companies will, because they get caught up in the need to get the deal done, they'll make a concession on some aspect of structure. They'll put constraints around their ability to go after certain synergies or something like that. But then later becomes a very big roadblock to realizing the value of the transactions. That would be the biggest single. Of course, there are always garden level, sort of garden variety execution challenges that everyone will face, but often the root cause of deals that go wrong is that they've somehow diverged from the strategic intent, either in, you know, the pricing or the structuring of the transaction. Yeah. So I fully agree with Peter. But I would add, the cultural dimension is usually one of the big pitfalls as well. And companies typically think, as we look at the values of both players, if we can just get that right, then we're fine. But let me give you an example. Two players that think respect for people is sort of a top value. But in one company, that means lifelong employment. And the other company means every six months you get evaluated, you're asked to leave if you don't perform. With the right kind of support and stuff like that, both have respect for people, but the way you live it is very different. So you have to go down into what we call the management practices. How do you make decisions? How does performance management work? How do you run a meeting? And it's those kind of day-to-day activities that make up the culture and understanding how that works and then deciding together how the new model would actually work going forward is really important to those work. Let's talk about what's the deal is done. What role does internal communication play here? So our experience is there's probably three functions that struggle in integration. One is HR, the other one is IT, the third one is communications. And why communications? They're often not involved in the content or too late. And then secondly, there's a lot of communication that happens at deal announcements. A lot of it happens at deal signing. But what do you communicate in between? Because you can't talk much about the decisions. We would still argue that you need to over-communicate also in that phase. You have to go out there, organize town hall meetings. You do meet and greet with a talent on the other side. Because just the fact that you're there, you listen to their concerns, creates a bond. And it's one of the main reasons why talent doesn't run away in an integration because they feel there's a connection with the new leadership. Absolutely agree with that. I would just say it as an example. I mean, we did a recent integration in Japan where there was very big uncertainty on the part of the acquired company. And actually, the head of R&D for the acquireer just made a trip to visit to do town halls at the R&D sites. And it completely changed the momentum in the transactions for him to go and do that. Even though the discussions were not so deep because we were still pretty closing, just the fact that this person had come to the various R&D sites and had met with the teams and had town halls, had dinners. It was a huge boost. And just one point to flag. In addition to the internal aspects of that, something that often gets under-resourced is communication with other stakeholders like customers, of course, but also distributors, channel partners. There's a whole universe of other kind of stakeholders in the company who are going to be quite concerned. And actually, competitors will take advantage of that. If you don't make sure that you get the messaging out in a consistent and coherent way that this is going to be better for everybody, you'll find that competitors are out there sort of taking advantage of the rumor mill, poaching your best talent, poaching your distributors. So it's really important to take a holistic view of who your stakeholder group is that you need to communicate with and then have, as Kenneth mentioned, very consistent messaging that's pushed out on a really proactive way. And let's talk about geographies. Are the particular sectors of geographies with deals with integration is more difficult? So I wouldn't necessarily take the angle of different geographies or sectors being more difficult or less difficult. I think we typically think about these deals as there's different types of deals. If you buy a company because you like the intellectual property that they have, you like the assets, you're going to have a very different situation than if you buy a similar-sized organization which has complementary products and offerings and you want to do the best of both worlds kind of integration. So it's more that kind of archetype of deal that makes for complexity or less complexity, not necessarily the geography of the sector. - I would echo that. And just I think of it in two dimensions. One is the archetype of the transaction. And the others with Kenneth was mentioning really about culture, right? How close is the cultural and by culture we mean how decisions get made? How what the company really value? So not the superficial idea of culture, but really deeply how does this company operate and how closely do these two companies align them? On that dimension, the more difference there is there, the more bridging needs to happen and different types of transactions will create more or less complexity. I think that's a much more constructive and practical way to think about this than some superficial view of geography or culture. - So once the deal is done, how do you then take an asset and fit it into the business case? How do you really engage the leadership? - So here's what typically happens. So you've announced a deal. There's a very small group of people that thinks about the preparation in all the planning and they discuss for months about what we do, what we're not gonna do, best practices that copy, yes or no. So there's a lot of rich discussion going on. Once you close, then that gets communicated to us. This is a new way of working. You just expect that the new leadership just picks it up and understands it right away. And obviously they don't, right? So it takes a lot more iteration, a lot more kind of onboarding of the leadership to not only understand what are the strategic priorities? How do we operate as a new kind of company, but also the clear management practices, the cultural aspects of that? Because ultimately that new leadership is the one that has to cascade that down to their leaders. And if they don't get it, then the rest of your organization will not follow it. And then you risk ending up several years after the integration and still talk about us versus them. - I think that's exactly right. The onboarding, the cascading onboarding is kind of the critical process. And that's actually typically sort of aligned with the actual kind of the articulation of the organization at lower level. So you don't want the CEO and a couple of people deciding what the L3L4L5 looks like under each of the BU heads. You need them to be onboarded for that. So you have to have a cascading process of not only onboarding the key people, but also building the organization as you go. So I think aligning that onboarding and cascading process with the articulation of the organization at a more granular level is best practice. Kenneth, Peter, thank you so much. - Thanks for joining us today inside the strategy room. 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