M&A operations: a shared vision for a better integration
Written by Hélène Berthier
Value creation at the heart of the integration strategy
Value creation is always at the heart of Mergers & Acquisitions (M&A) strategies. The shareholders of the target outlined that two third of these operations ultimately destroy value. The most frequent causes of failure are:
- An estimation of unrealistic synergies, regarding both finance and operations;
- A timeline without clear priorities;
- An uncoordinated integration process.
Information asymmetry once the integration phase activated
There are multiple causes, including:
- An ineffective informational channel between the teams in charge of the preparation and the realization of the operation, and the teams handling the integration;
- A lack of relevance and precision in the transactional financial models prepared by merchant banks.
A change in the traditional M&A operations’ management: the trusted third-party
The study validated the following hypothesis: the creation of a transactional business plan and the follow-up of the integration elaborated upstream and in common by the buyer and the seller could be a solution to the common reasons for M&A transactions’ failure. The intervention of a trusted third party paid by both the buyer and the seller, whose mission is to build a reliable, transparent, secure and precise financial model is a way to accompany the stakeholders. His role is to lead the parties to agree on the best valuation methods and quantify negotiation elements. The model is built from a shared vision of an industrial or commercial project to define the joint roadmap. Placed at the heart of the process, it is built in collaboration with the buyer and the seller. This study analysed a transaction for which Deloitte, as trusted third party, counselled both the buyer and the seller. Deloitte aimed:
- to identify blocking elements,
- to determine the chosen multiples and the valuation aggregates of the companies,
- to co-construct the stand-alone business plans for the parties and assemble them into a shared business plan model, both of the transaction and the integration’s tracking.
This operation demonstrates that dissociating the strategic construction of the transaction and its representation in a financial model creates value. The financial modelling professional allows all involved parties to be familiar not only with the model’s result but also with the process that led to it. The deliverable is reliable, transparent, robust, adapted to needs and useful for all financial models: a decision-making, sustainable and shared tool.
A value creation source
Even though today, actual cases where a trusted third party can develop a business plan in collaboration with the buyer and the seller are rare, the modelling of both a transactional and integration tracking business plan, gathering all the hypothesis is qualified as useful by clients. It is especially useful for complex transactions to ease the negotiation process. The valuation, although still performed by the merchant bank, advisor either to the buyer or the seller, is based on the flows extracted from the built financial model. Hence, the knowledge gathering creates value.
Limits of the shared business plan’s preparation
However, this solution can’t be applied to a competitive process. The target’s advisors have to work on offers proposed by potential buyers to get the best price. As long as the edges of the transaction are not defined or the parties have decided not to work together, the trusted third party cannot be the advisor of both the buyer and the seller. Then, he should endorse the role of arbitrator and judge to decide some negotiation issues, mainly in regulated markets. Finally, medium size structures that do not have precise management of their activities tool, may be the most likely to benefit from this type of service but they will not have the financial means to seek advice from both M&A advisors and financial modelling advisors.
Recommendations
In that respect, it is recommended to build a business plan applicable to both the transaction and the follow up of the transaction in three settings:
- In the case of an operation between obvious partners or in an exclusivity context between the signing and the closing of the deal, whereby the stakeholders have agreed on all parameters and are more likely to give access to information;
- Next, the developed financial model can be a tool for monitoring synergies: to identify the share linked to the classic business and the share due to the synergies. Each month, the model identifies value elements that make it possible to distinguish synergies from the sectorial evolution of the business;
- Finally, this solution may be adapted: the common business plan can be turned into a tool box. The idea is to develop a long-term financial planning tool, prepared by the seller and his financial modelling advisors in which a synergy manager module is included. The potential buyer will be able to use this tool to calculate the potential value creation following the transaction. This will open discussions and allow the parties to have a realistic basis for negotiations that are representative of the future of the newly created entity.
Conclusion : it is a solution to improve M&A operations’ success rate
The transactional and follow-up financial model, built in collaboration with the buyer and the seller, becomes a solution to avoid classic causes of failure in mergers and acquisitions operations but it can only be used in a few precise and defined contexts. In a perfect world, the normalisation of the use of a trusted third party to co-construct the operation’s business plan would be likely to improve the success rate of M&A operations, but too many objectives and subjective indicators limit the use of such service.
