Why Integration Planning and Value Capture Go Hand in Hand
After a frenzied 2021 in private equity M&A, 2022 saw a reset in the dealmaking environment. As we move into 2023, lingering uncertainty in the market, driven by continued geopolitical, supply chain, workforce, and inflation concerns, means we may see private equity funds pursuing bolt-ons to deploy capital – making integration planning a necessity.
According to PitchBook’s Q2 2022 US PE Breakdown, add-on acquisitions as a percentage of buyouts rose to close to 80%, accelerating a trend that spans the past decade.
With an increase in private equity bolt-on and rollup transactions and a more challenging environment for value creation, the need for better post-deal integration is greater than ever. A private equity fund’s potential to generate returns for its investors can be impacted by the ability of the fund’s portfolio companies to integrate a new merger or acquisition effectively.
When Deals Fail to Live Up to Their Potential
There is a widely reported estimate from the Harvard Business Review that 70-90% of acquisitions fail. This failure can be defined in many ways – most commonly referring to deals failing to live up to their full potential.
Expected integration value and benefits can often go uncaptured due to the lack of either a post-close focus or a structured merger integration program. This could include not allocating enough dedicated resources or not using a consistent methodology (e.g., tools, templates, planning processes) across all departments and functions.
Drivers of Middle-Market Deals
Middle market deals have a range of value drivers depending on the size and structure of the companies involved. TriVista surveyed nearly 200 C-level executives and private equity investors from various middle market businesses and found that with a merger of equals, cost synergies frequently land at the top of business leaders’ lists – in particular, those that reduce cost in the business model and capture back-office synergies. These can be captured relatively quickly when compared to revenue and other operational synergies.
While cost synergies may be of paramount importance, business leaders continue to expect benefits from revenue initiatives. These benefits – often derived from increased opportunities for cross-selling, better brand leverage, pricing gains and new market entry – are core to an investment thesis and are often driving factors in the deal. However, these revenue drivers are often those that are most at risk for failing to materialize due to a lack of a strong integration process. A robust post-merger integration plan and adequate resourcing for the deal can help mitigate some of this risk to increase the probability that merger potential is maximized, and value isn’t left on the table.
Capture Greater Benefits with Integration Planning
With record valuations, business leaders must work diligently to capture value from all integration initiatives. To do so requires a rigorous integration process and plan, with adequate resources and the capacity to execute. Integration planning and proper resourcing have a meaningful and direct impact on value creation.
Other common failure modes in realizing full potential involve disruption to business continuity. Without first aligning on issues such as corporate values, workforce integration, and business strategies, it is impossible to create a unified concept for the acquisition and businesses often suffer from disruption that spans from product development through distribution. For example, without investing in resources that assist in the integration of corporate culture across businesses, employees can often feel overwhelmed and undervalued, leading to resignations that further disrupt progress.
What Effective Integration Planning Looks Like
Effective integration planning must be built on a strong yet nimble process that is unique to your business and value drivers. Successful M&A prioritizes integration while also implementing the right controls, such as quality and safety standards, reporting mechanisms and performance management, that ensure sustainable benefits and value capture. Instituting such controls establishes a benchmark which aids in evaluating progress and allows for investors and business leaders to easily discern the value of the acquisition thereafter.
It is unclear how deal activity will be impacted by factors such as interest rate hikes, OPEC+ decisions, and other global turmoil. While business leaders continue to keep a close eye on external factors that are out of their control, they can implement the right steps to prepare for a merger. The bottom line is simple – to ensure maximum value capture in any M&A deal, a robust integration plan, adequate resources and appropriate budgeting is crucial in the middle market.
To discuss your next integration planning initiative, contact us today:
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