End-to-End M&A Process Design: Resilient Business Model Innovation

312 Pages·2020·9.828 MB·English

by  Thorsten Feix

Thorsten Feix
End-to-End M&A
Process Design
Resilient Business Model
Innovation
End-to-End M&A Process Design
Thorsten Feix
End-to-End M&A Process
Design
Resilient Business Model Innovation
Thorsten Feix
Hochschule Augsburg
Augsburg, Bayern, Germany
ISBN 978-3-658-30288-7 ISBN 978-3-658-30289-4 (eBook)
https://doi.org/10.1007/978-3-658-30289-4
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Introduction
The M&A market is with a global transaction volume of USD 3–5 trillion per year,
depending on the M&A cycle, an important segment of the global capital markets.
Between 5–6% of the global market capitalization finds a new ownership driven by those
M&A activities year by year. But more or less all recent studies and research focused on
the global M&A market highlight that between 50–70% of those deals fail (NBER 2004;
Kengelbach et al. 2005; Rudnicki et al. 2019). Failure rates within corporate finance-
based studies are typically defined as either destroying shareholder value in comparison
to a defined peer-group measured by the cumulative abnormal return or underachieving
on the intended and communicated synergy targets. Therefore, to find and understand the
root causes of those failed acquisitions and mergers is of paramount interest. Several rea-
sons, like the missing fit between the acquirer’s and the target’s business model, incon-
sistent due diligence, culture clashes, unsuccessful integration efforts or simply too high
purchase prices within contested bidding processes might contribute. But in the end, the
most severe drivers of M&A failures might be disruptions and missing links between the
different parts of the underlying M&A process.
Based on this assessment, this book, on the one side, develops an End-to-End (E2E)
M&A Process Design which tries to overcome those failures. On the other side, it will
challenge the robustness of such a design with the needs of twenty-first century digi-
tal business models and innovation strategies. The E2E M&A Process Design approach
is based on in-depth scientific research and co-operations with leading universities.
Besides, it was also stress-tested and verified in numerous international M&A consult-
ing projects, discussions with corporate development and M&A teams, as well as M&A
experts, like investment banks, Big 4 transaction managers and strategy consultants.
The target group of this M&A book is manifold. On the scientific side, courses and
lectures on advanced bachelor levels, intensive lectures focusing on corporate finance,
M&A and related fields, as well as master and MBA programs with a touchpoint on
M&A, corporate finance, corporate strategy or investment banking might find the book
useful. On the practitioner side, advisors in investment banking, strategy consulting and
M&A transaction management might be interested in the book. Last not least, corporate
v
vi Introduction
decision makers and in-house M&A, corporate strategy, corporate finance, controlling
and legal teams are typically highly interested groups.
This book will develop an innovative End-to-End (E2E) design for M&A processes
to address the following key questions, which are fundamental to improve M&A success
rates:
– How to invent a robust E2E M&A Process Design which avoids the typical pitfalls
of M&A projects? What should be the modules of such an integrated approach? How
to take care of the crucial linkages and feedback mechanisms between the different
parts of such a highly complex process model?
– How could twenty-first century digital tools and processes be applied within this
given M&A Process Design framework to increase efficiency, quality, speed and
robustness of M&A projects?
– How could transactions be designed to innovate business models, create or renew
competitive advantage and lever enterprise, or more precisely, equity value? How to
embed M&A in the wider toolset of corporate portfolio and business strategies?
– What are vice versa the challenges and impacts of digital business models for M&A
as a strategy tool and for the M&A Process Design?
These questions will lead us to a digital E2E M&A Process Design as a general frame-
work for M&A projects. Such a design has to be adjusted with respect to the specific
needs of a given corporate strategy, Business Design and M&A Strategy to provide a
tailor-made approach. The storyline and flow of thoughts, including the topics of each of
the following chapters of the M&A Process Design, are summarized in Fig. 1:
Se(cid:30)ng the stage: An digital End-to-End M&A Process Design
Chapter 1 • The seventh merger wave: The blended challenge of Innova(cid:31)on versus resilience
• A first overview of an End-to-End M&A Process Design
• The use of digital processes and tools to improve M&A processes and success
• The challenges of resilient digital business models and the role model of M&A
Part II: The modules of the digital End-to-End M&A Process Design
Chapter 2 Chapter 3 Chapter 4
Embedded Transac(cid:31)on Integra(cid:31)on
M&A Strategy Management Management
Chapter 5
Synergy
Management
Chapter 6
M&A-Project Management
& Governance
Fig. 1 Structure of the book and flow of thoughts
Introduction vii
– The first chapter of the book will start with the assessment of the long-term and the
most recent developments on the global M&A market. Distinct market indicators
highlight that we are in the later stage of the seventh global merger wave, which is
driven on the one side by business model innovations, digital disruptions and think-
ing in new ecosystems instead of linear competitive environments. On the other
side, the glut of liquidity on the global equity and debt markets supported in the
years before the covid-19 crises financially the flow of mergers and acquisitions. To
address the needs of this challenging environment a tailored M&A Process Design
will be introduced.
The E2E M&A Process Design is based upon five modules: the first three, the pri-
mary M&A process modules, are the Embedded M&A Strategy, the Transaction
Management and the Integration Management. These primary M&A process modules
will be supplemented by two support M&A processes, the Synergy Management and
the M&A Project Management & Governance.
Digital processes and tools, like artificial intelligence, analytics, big data, block-
chains and others offer significant potential to improve M&A processes. Given the M&A
Process Design, a whole new set of M&A tools are introduced to increase the effec-
tiveness and efficiency of M&A projects in the 20s. Further more, the role of M&A for
innovations in digital business models and, vice versa, how digital business models chal-
lenge M&A processes, will be assessed. Along the M&A Strategy digital business mod-
els demand a wider scan of potential targets within a given ecosystem. For example, an
Ecosystem-Scan as a tool for the necessary 360-degree, in-depth view on and assess-
ment of a company’s corporate environment might be applied. A second, more holistic
tool for corporate development and value creation is the Business Model Innovation
(BMI)-Matrix. By comparing and evaluating acquisitions, mergers, joint ventures, incu-
bators, accelerators and business model innovation approaches, the best option could
be chosen. Another digital business model challenge is the valuation of digital targets
and platform strategies within the Transaction Management. A Reversed Discounted
Cashflow Model (DCF) might offer here new insights.
Chapters two through six present the specific modules of the M&A Process Design
in detail and will highlight the importance of an integrated approach in the sense of an
E2E process. Especially at the interfaces of the different M&A modules, for example
at the hand-over between the modules Transaction and Integration Management, many
M&A projects fail. These interphase problems of M&A projects are also to be found
between individual processes within a given module, for example within the Transaction
Management between the Due Diligence, the valuation and the negotiation part. Besides,
a dedicated focus will be on selected, newer topics with lasting impact on the success of
viii Introduction
M&A projects, like the Due Diligence for digital targets and intangible assets, cultural
integration issues, the tracking and controlling of the integration progress, the manage-
ment of synergies or the design of a professional M&A project house and lasting tacit
M&A-capabilities:
– In Chap. 2 the Embedded M&A Strategy module sets the stage for a M&A pro-
ject: The first critical milestone is here the review of the corporate and the business
unit strategies. Any M&A project should pay in double-sided: On the one-side, M&A
projects have to contribute to the corporate and business strategy of the acquirer and,
on the other side, it has to be financially assured that any transaction will lever share-
holder value. Based on these guidelines the key pillars of such an Embedded M&A
Strategy will be defined. Besides, a special emphasis will be on the Frontloading
of Integration issues, like the Standalone Business Design Diagnostics of the target
company and the acquirer, the drafting of a Joint Business Design, as well as on the
Standalone Culture Diagnostics and the Joint Culture Design Blue Print. The E2E
M&A Process Design proposes that already within the M&A Strategy such a sketch
of the key pillars of a potential Integration Approach should be developed.
– T he second module, the Transactions Management, will be discussed in Chap. 3.
Core elements within the Transaction Management module are the Due Diligence,
the valuation of the target company or merger with and without synergies, the acqui-
sition financing, the negotiation as well as the drafting of a share purchase, asset pur -
chase or merger agreement and the Purchase Price Allocation (PPA). Last not least
the Blue Print of the Joint Business and Culture Design must be stress-tested along
the Transaction Management phase. This book will focus foremost on the latter
issues, as well as valuation and Due Diligence topics.1
– Chap. 4 provides a detailed framework for the Integration Management. The
Integration Approach Blue Print has to be detailed in an Integration Strategy.
Additionally, the freezing of the Joint Business and Culture Design has to be assured.
Thereafter, the dedicated Integration Masterplan will be designed and executed in
four waves, short-, mid- and long-term as well as post-transaction to lever strategic
and value upsides beyond the first-hand integration process. In parallel, the integra-
tion success has to be tracked and controlled, as well as learning-loops initiated.
– M&A projects only generate value, if the realised synergies overcompensate
the agreed upon and finally paid acquisition premium. Therefore, the Synergy
Management, which will be described in Chap. 5, is especially important for
the value creation of an M&A project. The M&A Process Design understands the
Synergy Management, in line with Michael Porter’s value chain idea, as a sup-
plementary process, which runs in parallel, meaning End-to-End, to the three
1The second edition intends to cover all parts of the Transaction Management.
Introduction ix
primary M&A processes, the M&A Strategy, the Transaction and the Integration
Management.
– In the end, any M&A process has project characteristics, having a defined starting—
latest at the signing of the nondisclosure agreement—and end point—the closing of
the Integration or post-mortem report-. In this sense, a professional M&A Project
Management & Governance is, as a second supplementary process, mandatory
for a seamless E2E M&A Process Design. An M&A and Integration Project House
might serve as a capability and knowledge platform throughout the whole acquisition
process and might scale M&A Project Management and Governance tools, as well as
M&A specific, often tacit knowledge. This will be covered in Chap. 6.
The entire book stresses the idea that an M&A Process Design has to be tailored accord-
ing to the needs of a specific M&A Strategy, Business Design and ecosystem. The
chosen pattern will be defined as a tailor-made E2E M&A Process Design: A M&A
Process Design of a multiple acquirer, for example in the sense of a “pearls-of-string”
acquisition strategy, is obviously quite different as one for a company which realizes
only from time to time a dedicated M&A project or from one of a Private Equity (PE)
player. Accordingly, the M&A Process Design needs to be tailor-made.
Contents
1 End-to-End (E2E) M&A Process Design ............................. 1
1.1 The 7th Merger Wave: The Age of Digital Disruption and
Business Model Innovation ..................................... 2
1.2 End-to-End M&A Process Design for Digital Times ................. 7
1.2.1 Overview of the End-to-End M&A Process Design ............ 7
1.2.2 Modules of the End-to-End M&A Process Design ............. 9
1.2.3 Interrelations between the M&A Modules:
An End-to-End View .................................... 18
1.3 Digital Touch Points of the End-to-End M&A Process Design .......... 20
1.3.1 Digital M&A Processes and Tools .......................... 22
1.3.2 The Impact of Digital Business Models on M&A and
Vice Versa ............................................. 26
References ....................................................... 29
2 Embedded M&A Strategy ......................................... 31
2.1 Reframing of Corporate Portfolio and Strategic
Business Unit Strategies ....................................... 34
2.2 M&A for Strategy Development on Corporate Portfolio and
Strategic Business Unit Level ................................... 36
2.2.1 M&A for Corporate Strategy and Portfolio Management ........ 36
2.2.2 M&A for Business Unit Strategies and
Competitive Advantage .................................. 52
2.3 Purchase Price, Synergies and Shareholder Value .................... 58
2.3.1 M&A Value Added Versus Dilution ......................... 58
2.3.2 Synergies ............................................. 60
2.3.3 The Tao of Value ....................................... 62
2.4 Embedded M&A Strategy Design ................................ 62
xi