How to create lasting value from an acquisition

Anyone embarking on an acquisition has a better chance of creating lasting value if they make this a priority from the outset of the dealmaking process. This is according to a study carried out by PwC and Cass Business School, which involved talking to some 600 corporate executives about their approaches to M&A.

Here, we take a closer look at the challenges facing dealmakers and the ways in which, as a buyer, you can maximise your chances of creating lasting value from an acquisition opportunity no matter what size the deal.

Challenges to predictable value creation

There are a number of factors that are making it far less likely that value will be created organically as part of the natural dealmaking process. Economic uncertainty is an obvious area that leaves many dealmakers feeling their hands are somewhat tied. Making long-term financial plans has been made difficult and knowing where to invest and which areas to prioritise can be problematic.

Additionally, many industries are facing major disruption in the form of technological advances, and innovations that are requiring organisations to develop entirely new business models in order to grow and create value.

Although this has increased the pressure on dealmakers to deliver more value from their acquisitions or mergers and, it seems, many of them have their heads in the sand when it comes to the realities of creating value. Many of the 63 per cent of executives who told PwC that their past deal created value were actually found to be incorrect, once their deals were analysed.

How are so many dealmakers getting it wrong on value creation?

The Cass Business School’s statistics make fascinating reading. Some 53 per cent of the previous deals carried out by the executives failed to perform as well as their industry peers, based on average performance in the two years following the deal.

Among sellers, 42 per cent said their business generated more value following their sale than it would have done if not sold. However, this is also inaccurate in many situations, as the study revealed that 57 per cent of divestors underperformed in their industry in the two years following their last sale.

Although these statistics are based on public companies, the research can be applied to private buyers and sellers.

So what is required to maximise lasting value from a deal?

The best way to maximise your chances of creating lasting value is to have a very clear value creation strategy in place from the beginning. The statistics on this speak volumes. PwC found that a staggering 98 per cent of the businesses questioned, whose deals created value, have an official value creation methodology in place across all deals the company is involved in.

This is not to say that having a value creation methodology in place guarantees value creation of course, but it certainly helps. Some 74 per cent of deals that created value had a ‘comprehensive value planning’ strategy in place from the start.

Strategic buyers may feel that creating value is more difficult for them than for private equity buyers, and they may have a point. However, there is no reason why a strategic buyer can’t adopt some of the same methodologies as their PE counterparts in order to improve their chances of creating value.

What makes an effective value creation plan?

In Creating Value Through Transformation in Portfolio Companies, a recent feature in Worldwide Financier, a discussion among top PE executives at Deloitte uncovered the view that working closely with management teams and getting them fully on board with value creation strategies was a key factor. Alongside this, they also claimed that ‘prioritisation and timing’ was key. I.e. focusing on two or three ‘key value-driving initiatives’ gave the best results, instead of striving to change too much too soon after a deal.

The same point is made very clearly by PwC in their Creating Value Beyond the Deal report, which also underlines the importance of both company culture and prioritisation. Finding a cultural match as a target for your acquisition activity is a good start, as is investing significantly in integration. Almost 75 per cent of respondents to the PwC survey said they spent 10 per cent of the deal value on integration, while three quarters of those that spent between 11 per cent and 30 per cent created value from their deal.

From a prioritisation viewpoint, most of the dealmakers questioned who had success in creating value said they prioritised value creation from Day One. Whereas, of the 30 per cent who said rebranding was a priority from Day One, only 2 per cent thought this was the right approach with hindsight.

Case study

A recent example of a business that looks to be prioritising value creation from the outset is private equity buyer Elaghmore, the new owner of printing businesses, Gardners, Kesslers and SFD. The new group is now said to have combined turnover of over £60m and it has just announced the new umbrella brand Hexcite Group.

Elaghmore acquired Gardners in 2017 and Kesslers and SFD earlier in 2019. The new group will operate under the supervision of new CEO, Matthew Frost. Frost is working closely with the management and staff of the three companies to create a truly integrated team and a seamless customer proposition.

Creating value from the acquisitions is central to the strategic plan, as summarised in a statement from the company: “Bringing the businesses together into the Hexcite Group is part of Elaghmore’s plan to generate growth and increase the value of the three businesses.”

The business has a track record for generating growth from its acquisitions and explains that its “investment strategy is focused on businesses that present a significant opportunity for growth and value creation.”

From an integration viewpoint, Elaghmore even took a poll of 300 staff members to decide the new brand name, helping to make everyone feel a part of the new business and bring employees together.

It remains to be seen how much value can be created as a result of these acquisitions, but Elaghmore is clearly making value creation a priority, alongside integration - so it should continue its decade-long success story.

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