Companies eager to cut a profitable deal can't afford to take a "wait and see" approach. The rapid pace of dealing-making means companies must be nimble enough to act when a desirable target presents itself. Once an M&A Transaction is in progress, they can turn their attention to other issues — from ensuring a successful execution to managing post-merger integration. But first, they need a strategy to plot their next move.
In today's fast-paced global marketplace, it seems companies are always "in play," regardless of their size. To structure a merger or acquisition that will create value, it's essential for organizations to approach M&A as a strategic function — or risk being outmanoeuvred by better-prepared competitors.
"There's no such thing as a straightforward deal. Market dynamics, evolving regulations, operational issues and cultural issues all present the danger of a mismatch."
— Charles Knight
"The M&A market has changed, especially with the entrance of private equity players," confirms Charles Knight, national leader of Deloitte's M&A Transaction Services practice. "When facing well-backed and savvy competitors, it's increasingly critical for businesses to plan a response well in advance. Putting an M&A strategy into place is a critical first step."
Develop a detailed M&A strategy
By its very nature, strategic planning is a highly customized process. That said, there are certain best practices companies can adopt to enhance the value-creating potential of their M&A transactions.
- Understand your objectives: Your strategic analysis should start by exploring why you are considering a merger or acquisition. Are you developing a purely defensive plan or are you trying to reach specific growth objectives?
- Alignment is key: It is imperative for your M&A strategy to align with your overall business strategy. Ultimately, your growth plan is just one piece of your larger corporate objectives, which is why it must be approached holistically.
- Evaluate the potential universe of opportunities: Given the reality of limited capital resources, organizations cannot pursue every opportunity. To ensure you make the right acquisition, it helps to define the parameters of your "ideal" deal.
- Consider culture: Regardless of how good a transaction may look on paper, a cultural mismatch can severely hamper a deal. Before pursuing a deal, companies must ensure there is a cultural fit between the two organizations.
- Review structure and financing: To ensure your transaction lives up to expectations, it makes sense to determine the appropriate deal structure and identify financing vehicles at the outset.
With a considered strategy, organizations can position themselves to move faster than the competition when opportunities arise. With evaluation criteria in place, they can gain first-mover advantage by quickly screening the competitive landscape, the deal's value and their target's business.
Screen acquisition targets to find a strategic fit
"There's no such thing as a straightforward deal," asserts Knight. "Market dynamics, evolving regulations, operational issues and cultural issues all present the danger of a mismatch. To ensure a transaction maximizes investment returns and increases stakeholder value, organizations need to determine a good fit across the entire universe of potential challenges and opportunities."
Ultimately, a solid, well-articulated strategy can act as a guidepost as companies pursue mergers and acquisitions both locally and globally. By following this type of structured and disciplined approach, organizations are also better placed to integrate and operationalize their deals to deliver shareholder value over the long term.
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Components of an effective screening program
To enhance the probabilities of a successful deal, effective screening of a target company should include a review of its:
- Business strategy, including its primary geography, company size, product lines, market penetration, customer penetration and growth potential.
- Competitive strategy, including its competitive position and sustainability, revenue by product, business in targeted geographies, and customer and demographic trends.
- Financial value, including its balance sheet, earnings quality, tax structures, and cash flow to uncover any value or risk issues.
- Strategic and operational environment, including its product offering, industry risks, quality of its client portfolio, IT infrastructure, regulatory compliance, and any real property or environmental risk exposures.