Maximizing M&A Value, Minimizing Surprises

1 July, 2020

Although the M&A market continues to grow, the microeconomic environment is tightening, making the margin of error much narrower. Activist investors are increasingly advocating divesting underperforming assets and rationalizing the use of capital. To get an acquisition to go right, it is increasingly important to be aware of the common pain points and then address them. Despite the complexity of an acquisition, long-term success can increase if you plan and prepare in advance. Whether you're on the buy-side or the sell-side, it is important to engage early in the diligence process and the planning phase and take a structured approach to avoid surprises.


Issue No. 1: Developing Revenue Growth Projections

Growth projections can have implications on valuation. Understanding their effect on required resources, people, skills or capabilities can impact whether or not you're successful with your integration.

Sellers can build credibility with buyers by presenting a well-founded revenue projection. Revenue can often grow rapidly in the first three years, and this is commonly driven by the adoption of a new product, expansion into a new market or a combination of the two. In many cases, the seller assumes faster future revenue growth for products in the development pipeline, but the complication is that the historical track record may point to less rapid growth. So it's imperative to justify the growth projections that the seller puts forward.

  • What are the drivers behind the growth?
  • What operating assumptions are being made?
  • What about penetration rates?

Penetration rates for existing products can be higher than for new products. So the seller may need to focus on making a case supporting how those penetration rates were concluded. By achieving this, the seller is better prepared to justify a favorable valuation for the company. This could also have implications for resource requirements. Sellers can minimize surprises by conducting proper planning.

Even in a case where there's an actual breakthrough in revenue growth in the next two to three years, it is often the case that the level of resources required to support growth will not be completely captured in the resource plans. The questions then become:

  • Do the resource plans you have capture future growth?
  • Do you have a plan for how you're going to keep up with rapid growth?

By doing so, you will develop a highly credible business plan that a buyer can believe in.

Issue #2: Designing the Future Operation Model.

When companies seek to grow their product development capabilities via acquisitions, they are challenged to effectively integrate the product development and R&D divisions. Poor integration often results in delayed product launches and ballooning expenses after an acquisition. In many instances, this is a result of inflexible or incompatible operating models for the product development function between a buyer and the acquired company. For example:

  • The product's development process approach may be fundamentally different within the two companies.
  • The R&D footprint may be too spread out.
  • The collaboration model with partners, customers or vendors may be quite different.

When development teams operate with incompatible processes and structures they will inherently be less productive. You will lose key talent and create delays in product launches, all of which will negatively impact deal value. 

To address these issues, both companies should assess the compatibility of operating models early in the due diligence phase, identify gaps and develop integration plans.

  • Ensure that you map the current operating model, focusing on a few key items, such as progress.
  • Capture the critical processes to ensure continuity in the business and focus on integrating those first.
  • Look at the organization and capture the skills and needs necessary to align the two so you have the right talent at the right place and time. 
  • Examine business practices, be open to picking the best available practices from either company and adopt the one that has the best practices and capabilities. At times smaller companies have more modern and updated processes than larger, more established companies. 
  • Revisit and rationalize your approach on outsourcing and how you use third-party services.
  • Assess your IT infrastructure and ensure that teams are using a common set of tools.
  • Decide on a unified approach for how you're going to engage your customers. This will minimize customer confusion and reduce the chance that they feel there has been an interruption in business as a result of the acquisition. 
  • Put together a blueprint of the future operating model and how to achieve it, and have a crisp implementation roadmap charting a clear journey for achieving the ultimate goals of the acquisition. 

Issue #3: Managing the Combined Product Portfolio

A highly common challenge for acquired companies is how they will fit into the broader product portfolio. Most companies have particularly clearly articulated strategies, but their portfolios don't always reflect it. For example, a company may seek to grow, but at the same time, the company's portfolio is dominated by cash cows. Therefore, the majority of funding is funneled to established products at the expense of growth-oriented products. Companies also often allocate resources in ways that favor established products over products that are not yet proven, but that are likely to drive future growth. 

A third challenge is that serial acquirers often wind up with decidedly fragmented product portfolios that have overlaps or gaps. For the newly acquired company, that may mean that they find themselves within a silo in the larger company. They may have an optimized product portfolio inside their company, but their portfolio is not optimized or scaled within the larger company and it fails to achieve the scale that is needed. This is a missed opportunity to play in the larger league after the acquisition. 

Thus, as a newly acquired company, it's important to invest in innovative projects that support strategic objectives. Sometimes companies tend to allocate a certain amount of R&D funding to projects that don't have a clear ROI, yet they offer a significant growth potential in the future. From a buyer's perspective, look at your portfolio and ask if you're putting your assets to good use. It may be necessary to divest or wind down assets that don't get full attention or funding. 

Another area of consideration is allocation methodology. It is important to ensure that there is dedicated funding for exploratory projects. 

Finally, rationalize products and investment priorities on a corporate-wide scale. From a buyer's perspective, it's always a good idea to step back and look at portfolios across silos and business units, remove silos and then optimize portfolios on a company-wide basis. 


#1: With the macro environment tightening, deals will continue to go through, but the margins for error will be narrower.

#2: Despite the inherent complexities of an acquisition, long-term success can increase with preparation and planning by both the seller and the buyer.

#3: Buyers and sellers need to engage early in the integration-planning phase and take a structured approach regarding processes, people, and systems. Hence, the acquisition is less likely to impact business continuity—partners, customer, and employees feel that the transition has been smooth and effective, and investors realize maximum value from their investment. 

To learn more techniques for maximizing M&A value and minimizing surprises, download our whitepaper on the subject.

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