The Top 4 Levers That Drive 80% of Value Capture in Successful Acquisitions

The Top 4 Levers That Drive 80% of Value Capture in Successful Acquisitions process.st/acquisition-value-capture July 7, 2021

Leks Drakos July 7, 2021

Value capture is, in essence, the end-all, be-all of a company’s life-cycle. Yes, you likely have other motivations for starting your company, but without capturing any value, your company will have a very short lifespan.

When it comes to acquisitions, if you don’t have a good strategy to drive value capture, you’re not only wasting your time, but hobbling your future potential in the process. If you look at some notable examples like Daimler Chrysler and Sprint/Nextel, it’s pretty clear that a bad deal will stick to you for a long time.

You might even end up as a cautionary tale for future M&A executives. No one wants that.

Aspire to be the Apple of acquisitions. You can do that by focusing on four distinct levers that drive 80% of value capture.

Four things. They’re not even difficult things.

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So in this Process Street post, I give you the rundown of the four levers you need to prioritize during your acquisition, and exactly why they make such an impact: Let’s get to it!

Pursuing the ever-elusive value capture 60% of M&A transactions fail to deliver value. 1 in 4 actually results in diminished value.

The specific reasons for this are myriad, but they really come down to a single commonality: missing the trees for the forest.

That’s not how the saying goes, but it’s appropriate.

Executives often focus on the wrong things during acquisition deals. Either they only look at the balance sheets, they don’t conduct a proper risk assessment, or they simply romanticize the deal to the point they’re willing to close no matter what the cost.

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If you look at the graph above, there is a clear discrepancy between the expected value, the true value, and the actual value. According to Deloitte, there’s a rather lengthy list of contributing factors to both the transaction gap and the integration gap, but all of them can be traced back to a lack of attention to detail.

Without proper planning, accurate information, and detailed analysis, you’re going to have an uphill battle getting to closing, let alone handling the post-acquisition integration. With that in mind, let’s examine the four primary levers that will drive value capture during an acquisition.

Further reading on value: What is a Value Chain Analysis?

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Lever #1: Utilize your functional teams early in the acquisition process

A quick Google of “functional teams” gives you loads of information on cross-functional teams. Cross-functional teams definitely have a purpose and a place, but with a process as complex and detail-focused as acquisitions, functional teams are your greatest asset.

The primary advantage of functional teams is specialization. These people know their roles and fields inside and out, from the smallest detail to the biggest picture. If you need someone to develop an in-depth plan on how to onboard employees into the new organization, you want to ask the HR manager, not an engineer who shares an office with that HR manager.

This is the importance of functional teams. Only the HR department will know exactly what they need in terms of strategy, due diligence, and integration. Likewise, only the engineering team will know what they need. Acquisitions require experts to be successful, so you want to get those experts on the frontlines as soon as possible.

In tense, high-risk situations like an acquisition, it can be difficult to step back and take your hand off the wheel. When it comes to your functional teams, however, you need to do exactly that. Remember that your team leaders know their roles. They know what needs to be done, how it needs to be done, and by when. They even know who the best person to take on a particular task is. Micromanaging them is only going to prevent them from doing what they do best.

As my own manager, Adam Henshall, often says: “Most of the time, the people who do the work know how to do the work better, given the necessary support.”

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So give them the support, then get out of their way. When all is said and done, you’ll be glad you did.

Further reading on team communication: Why You Should Unleash Team Collaboration and How to Do It Communication Plan: How to Prepare for (and Prevent) Disaster

Lever #2: Complete your commercial & operational due diligence before closing

“You would hope these companies have done their due diligence, although that isn’t always the case.” – Martin Sikora, editor of Mergers & Acquisitions: The Dealmaker’s Journal Proper due diligence seems like a no-brainer, right? There are at least three different points during and after the deal that some sort of due diligence needs to be done, so why am I here reminding you to complete it?

Because, often, people don’t. More than 40% of respondents to a McKinsey survey reported deals suffering due to inadequate due diligence.

The commercial due diligence is usually done and done fairly well; everyone wants to gain value from the deal, so it’s in their interests to make sure the financials line up. Operational due diligence, on the other hand, can easily get left by the wayside if the money side is attractive enough.

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“In my experience [on both sides of the acquisitions process], a disproportionate amount of time is spent on the financial planning, and not enough planning is spent on the technological and the human planning.” – Bryan Sise, VP of Marketing at Process Street Operational compatibility and sustainability are just as important as a solid financial plan, though. If you can’t meld your operations or don’t have the infrastructure to support them long term, you’re going to have a difficult integration. If the systems are too incompatible, and you don’t discover that until after closing, you’re likely to end up writing off millions of dollars spent on assets you can’t use.

Do your research. Know the facts. Be prepared.

Further reading for due diligence practices: What is an Enterprise Document Management (EDM) System? How to Implement Full Document Control Why You Need a Risk Management Process (+ Free Template)

⏩ Click here for a preview of the M&A Due Diligence Checklist ⏩ Click here for a preview of the Risk Management Process workflow

Lever #3: Assess your revenue & cost synergy potential of the deal

Depending on your motivation for making the deal, synergies may not be your highest priority in terms of benefits, but they are important to be aware of. Even in the case of acquihires, you need to be aware of the cost and revenue to expect post-deal.

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Sure, you’ve scooped up a particularly genius bit of talent, but if the cost of acquiring that talent isn’t offset by increased revenue down the road, is the acquisition really a good investment? If there’s tech you want to incorporate into your product, but the code won’t link up, is it going to reduce cost and increase efficiency, or just the reverse?

These are things that will naturally come up during your due diligence planning and research, but you need to consider them independently as well. What exactly are you going to gain from this acquisition? What are the long-term effects on both your products and your organization?

I know I just said the opposite of this in the previous section, but the bottom line is: Do the numbers add up?

I did mention that acquisition processes are complex.

Further reading on revenue and procurement:

⏩ Click here for a preview of the Financial Audit Checklist workflow ⏩ Click here for a preview of the Financial Planning Process workflow ⏩ Click here for a preview of the Annual Financial Report Template workflow

Lever #4: Develop a realistic strategic operating model design

The fear of change.

We all have it, from minor things like a new hairstyle to larger decisions like moving to a different city. The higher the stakes when it comes to that change, the more anxiety goes along with it. Let’s be honest: acquisitions have really high stakes.

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It’s not just a fear of change that trips executives up when it comes to designing operating models, though. We get used to doing things a certain way, and it can be difficult to imagine doing them any differently. Naturally, we feel like the methods and processes we’ve developed are the best possible option.

When it comes to acquisitions, though, you need to leave your ego at the door. It’s very possible that someone in the other organization is going to have more experience, more skill, or better ideas than you, and it’s worth hearing them.

The biggest mistake companies make when designing their new operating models is making the new model too similar to the old one. Regardless of how you’re merging the two companies – whether it’s into a single organization or subsidiaries – you no longer have the same company you did pre-deal. You have new people, new assets, a new culture, and new systems. You need to incorporate all of these things into your operating model, and you can’t do that if you aren’t willing to leave the old framework behind.

Acquisitions require true transformation, and that transformation requires conviction, determination, and discipline.

Further reading on developing operating procedures:

Value capture: White whale or golden fleece?

It’s no secret that acquisitions come with risk. So much risk. Entire companies (both acquiring and acquired) have collapsed as the result of a failed acquisition. While there aren’t any guarantees that your acquisition will generate value (there’s actually a 50/50 chance it won’t), there are steps you can take to mitigate that risk.

The four levers in this post account for 80% of value capture in an acquisition. That means that if you’re going to rush through or overlook anything in your acquisition process, do not overlook these four things.

Pro Tip: Don’t rush through anything in an acquisition.

If you treat your acquisition with a holistic approach and focus on value creation as well as integration, you may very well be among the elite one-third who goes home with the gold(en fleece).

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