Merger and acquisition remains a fast but increasingly complex path to growth for many businesses. However, the M&A landscape is increasingly more complex and essential preparation can overcome the challenges.
Despite an ongoing climate of economic uncertainty, global deal activity has held up relatively well, with many businesses maintaining the view that merger and acquisition is an essential element in their growth strategy. However, transactions are taking longer to conclude, which could affect the deal’s overall contribution to growth. Successful leaders are, therefore, spending more attention on preparing their business and anticipating early on all potential obstacles to the negotiation and valuation process, financing the deal and ultimately integrating the two organisations.
According to Grant Thornton’s International Business Report (IBR), 25% of global business leaders conducted domestic deals in the past 12 months, while 17% were involved in international transactions. The global figures also show that 15% of businesses cite merging with another company as part of their strategy for the next two years.
While the appetite for domestic deals is strongest, 18% of emerging Asia-Pacific businesses aim to acquire internationally – a higher proportion than in any other region. Indonesia, Thailand and Vietnam have seen vigorous inbound activity and remain highly attractive to foreign investors. Around 16% of North American businesses are looking for international deals, while in Europe the figure was 12%. Despite Brexit uncertainty, the UK continued to lead on cross-border deals, while elsewhere Europe international deal activity was strong in Germany, the Netherlands and Italy.
This article explores the current M&A landscape, why businesses are choosing M&A as a strategy, and how to best approach such challenges as valuation, selecting acquisition targets, financing deals, and successfully integrating merged businesses.
Organic growth is getting more challenging
Of the global businesses surveyed, 42% said access to strategic markets was a key factor driving their M&A strategy, while 39% cited a desire to build scale quickly. A similar proportion (38%) said they wanted access to new technology, while in emerging Asia-Pacific this figure was 45%.
Sante Maiolica, CEO of Grant Thornton Financial Advisory Services declared that M&A "has become an essential strategy for all kind of businesses. Market dynamics are evolving so rapidly that it is unthinkable to keep up with them without making use of M&A operations. The need to quickly attain economies of scale is particularly important, before the market changes direction and opens to new competitors”.
Increased competition puts pressure on deal-makers
The M&A landscape has become more complex on a global scale for a number of reasons. Deal-making in developed Asia, for example, is currently subdued as a result of current global trade uncertainties. The focus of outbound M&A from China has shifted, with activity in 2019 at its weakest in a decade, as regulatory scrutiny of Chinese companies tightened.
The deals themselves are getting more complicated too, with the parties involved becoming more sophisticated as they try to acquire new capabilities – such as data and digital technology – that are often far removed from their traditional core business. Valuations, meanwhile, are challenging. Businesses have to feel confident that they can achieve what they want with the assets they are purchasing.
“In Italy” specifies Sante Maiolica “the trend of M&A did not register a slow-down in terms of numbers, on the contrary, there has been an increase compared to previous years; but rather it saw its volumes almost halved. This must certainly be considered as a negative datum, however it also an encouraging signal showing that small businesses, the main components in the Italian entrepreneurial landscape, started aggregating with each other, initiating that concentration process that is so important for our country.
Tackling pre-deal challenges upfront
Successful buyers think carefully about why they are taking the M&A route, and how to source the right targets in the first place. IBR data shows that identifying the right opportunities was a barrier for 17% of businesses not considering M&A activity.
If you are only reacting to inbound opportunities, by their nature they will probably be highly competitive, says Andy Morgan, global head of M&A and partner at Grant Thornton UK. Proactively building a strategic pipeline of potential acquisitions, and really working to unlock these, has benefits.
According to IBR data, 30% of leaders saw quantifying synergies as a challenge to concluding future deals. Charles Rousseau, financial advisory partner at Raymond Chabot Grant Thornton in Montreal, Canada says: “What you’re purchasing must align with your manufacturing or operating capabilities. Are you going to generate the synergies that you think you will? That’s part of the assessment upfront”.
When it came to international deals, leaders were more anxious about lacking the right professional support, with 27% citing this as a critical challenge compared with 21% for domestic M&A.
“You have to look at regulatory differences in different countries, so that’s another complexity” says Rousseau. “Beyond the legal due diligence, financial due diligence is more complicated because of the focus on earnings and, for example, tax optimisation, which is complicated by a cross-border transaction. The operational side has also become more challenging. You need to review management and teams, check the shape of any plant or machinery that capabilities and processes are working. All of that is crucial in assessing the scope and the quality of the asset”.
A compelling investment thesis helps to secure finance
While many businesses may perceive a shortage of finance as a significant constraint on organic growth, several markets have a healthy supply of capital for buyers. IBR data shows that 58% of businesses use existing funds to finance M&A, 43% use debt finance and 36% seek private equity investment. With the rise of debt funds, sources of debt finance are more varied than the traditional clearing bank leveraged finance operations.
The significant liquidity in the market led to a considerable evolution of financial operators, creating specialized funding solutions and diversifying their offer into all possible existing segments among debt and equity solutions, says Morgan. That creates plenty of available opportunities for businesses, which can structure funding so that it is perfectly consistent with their strategies. Leaders should not forget the public market either. Despite weaker capital flows, there is still institutional appetite for the right propositions.
Private equity houses are looking for longer-term investments
Private equity has become a significant driver of the M&A market, whether in financing the deal or selling a business in a portfolio.
Dinesh Anand, global head of private equity and partner at Grant Thornton India, says: “Private equity funds are sitting on huge amounts of dry powder – they have the money to invest. Meanwhile, in many markets today, the cost of financing through debt is becoming very expensive. Private equity businesses also want to do more value-driven business transformation. Everybody’s looking at a five- to five-and-a-half-year average investment period, and they’re looking at transformations to enable long-term growth and a better return rather than just doing a cost stake-out and quick exit.”
While there’s plenty of funding available, Rousseau says businesses should nonetheless be prepared for a more thorough due diligence process.
You need to build an investment thesis and a solid business plan. You also need a strong deal team and the right support. You must make sure your house is in order. You need to demonstrate your internal operations, and sound corporate governance. Resolutions should be updated, major corporate actions should be rectified, intellectual property well protected, you should have efficient tax and legal structures, and everything must be available in documents. Doing a vendor due diligence and your own internal review is often key to securing capital or selling your business.
Planning for post-deal integration is crucial
According to IBR global data, two thirds (66%) of leaders consider post-merger integration to be as vital to the financial success of the acquisition as pre-deal negotiations. In leaders’ experience, critical factors in successful outcomes include retaining key personnel (47%), technology integration (43%) and maintaining trust and communication (40%). While the pre-deal process can demand intense focus, the integration phase also requires attention early on in the process.
Of equal importance is communication with customers. A clear communications strategy, before and after the deal, can answer any questions about why the deal is happening and what customers can expect to see from it.
Amid the complexity, don’t lose sight of the purpose
Successful acquisitions come down to capturing the value of the asset and realising the synergy goal as soon as possible, but in the current environment, where complexity can protract the process, that requires a lot of work and clear thinking upfront.
The risks around M&A come down to the implementation, says Morgan. It is fundamentally about whether you have a clear and well-mapped rationale for why you are buying that business in the first place. And then, about defining your strategy for the implementation and integration of that acquisition into the broader business.
Keeping focused on the initial goals for growth and anticipating the friction points at every step of the deal and post-deal process will greatly enhance your opportunity for locking in gains and achieving transformative growth.
Top tips for achieving a deal that delivers growth
- Have a clear goal for why you are seeking M&A as a growth strategy and assess your acquisition target on its ability to deliver on that.
- Valuations are important, but a focus on successful execution is fundamental.
- Proactively manage and develop relationships with a pipeline of potential acquisition targets.
- Be sure that what you purchase will fit with your operations and that desired synergies will be achieved.
- Examine the diversity of finance options available, and consider how those types of finance may support your growth plan.
- Develop a compelling investment thesis and a healthy business plan to attract finance.
- Think about the potential post-deal challenges upfront and prepare to tackle them throughout the deal process.
- Identify key personnel to retain and incentivize them early on.
- Develop a communication strategy for employees and customers.