In today's M&A market, Advantaged Acquirers may have an edge

When it comes to assessing the outlook for the M&A market in 2024, there’s one word many in the thick of it would agree on: uncertainty.

Unpredictability has always been part of the dealmaking mix, but the shock and sometimes mixed signals of the last couple of years have resulted in a post-COVID “new normal” characterized by perpetual uncertainty and heightened complexity.

Dealmakers are facing higher inflation than target levels, higher interest rates, volatile valuations, and increased regulatory complexity. Despite these headwinds, M&A remains at the center of growth strategies for many companies due to the transformational impact executing on the right strategy can have.

It is no wonder, then, that to take on this current market environment, focus has shifted to preparedness. Deloitte’s recent 2024 M&A trends survey shows a new emphasis on deal preparation and strategy. When asked what factors drive the success of M&A deals, both corporate and private equity respondents ranked definition of a coherent and well-supported M&A strategy as the most important.

From experienced buyer to Advantaged Acquirer

What differentiates those with experience in running multiple deals from true advantaged acquirers?

Advantaged acquirers can be defined by an “always on” approach to opportunities. Screening targets opportunistically does not take full advantage of the market; instead, leaders should consider an active portfolio not only of targets but also of best-fit opportunities that are reviewed by the finance function and incorporated into the company’s five-year growth plan.

The finance function can and often should lead the effort to pull forward value capture and delivery. This means setting ambitious targets and exploring beyond workforce synergies to build a deliberate plan for revenue and cost interactions in advance of the transaction. It also means building transition service agreements (TSAs) into budgets that include cost and exit timing, and having line-of-sight to where those TSAs can be accelerated to help hit stretch targets or use as contingencies. What’s more, advantaged acquirers acknowledge working capital as an area of opportunity and quantify it during the diligence stages, finding ways to enhance free cash flow performance for the combined organization.

The acquisition of technology capabilities, including AI, is expected to be more prevalent in coming years. While experienced buyers have this in their playbooks to scope valuation appropriately and engage in purchase accounting efforts, advantaged acquirers would recognize when certain deals bring nuances throughout the valuation process and anticipate them. For example, consider a company that acquires technology that is still under development. While assessing revenue will likely be a challenge, elements such as the cost of resources and workforce that may support that technology could become part of goodwill.

Beyond getting ahead of funding the deal itself, advantaged acquirers look at the liquidity needs of the first 90 days post-close and push forecasting rigor around the new target organization. Finance and tax departments at experienced acquirers also tend to have a strong understanding of compliance and statutory obligations; advantaged acquirers take this one step further, bringing together tax, legal, finance, and other functions to collaborate cross-functionally, driving the deal structure to align with the business, and improve efficiency.

Taking the lead across functions

Finance plays a much broader role than just the execution of its own functional activities. The function is involved in driving transaction execution and legal entity restructuring, unlocking deal value and achieving synergy targets, and tracking and reporting on those targets. Finance is involved in estimating the budget for the entire company, which includes TSAs and one-time costs as well as any project-associated costs required to deliver on the synergy numbers. It is also required to guide all functions on creating budgets for any organizational design needed to make sure the new entity is fit-for-purpose and has the right structure and cost profile to be competitive in its market. This is in addition to supporting the ongoing operations of the core business.

Whether an organization is focusing on relatively large or small deals, the responsibilities of the finance function remain fairly consistent, as many of the same activities and planning steps still need to take place. Consistent finance involvement—from deal model to day one, and through subsequent transformations—is often critical to delivering on the value and deal thesis.

There are practical steps finance leaders can take to meet the demands of today’s increasingly complex integration environment. These include:

• Establish solid TSA pricing capabilities and framework, for example, fixed versus variable cost drivers.
• Adopt a tiered approach to risk assessment at the target company and remediation efforts related to technology and controls, and align priorities with regulators.
• Execute on functional improvements with visibility into cross-functional interdependencies to gain momentum and reduce roadblocks.
• Define and periodically report the top five metrics for the specific transaction tied to the deal thesis and the organization’s guiding principles. This can help to guide, plan, and reprioritize decisions to pivot to a fit-for-purpose environment faster, which can lead to greater value capture.
• Involve external auditors early to allow them to review proposed changes to accounting policies and procedures. Understanding their focus can help to avoid overinvesting in remediation—or falling short.
• Set the platform for growth with a finance integration strategy informed by the business’s strategic transformation aspirations.
• Drive transaction and transformation goals early in the transaction process to take advantage of the change momentum.

By taking a proactive approach, the finance function can help to equip their organization to navigate the challenges and new normal of today’s M&A market.

—by Clif Mathews, partner, and Maria Bunch, principal, both with Deloitte & Touche LLP, Ryan Castillo, partner, Deloitte Tax LLP, and Adam Whiting, principal, Deloitte Consulting LLP