M&A Turnaround Strategy

Editor's Note: Take a look at our featured best practice, M&A Sell-Side Process Letter - Phase I and Phase II (5-page Word document). What is the M&A process letter? The M&A process letter is a template or example which assists transaction advisory consultants, investment bankers, and M&A practitioners with a sound basis from which to outline the proposed transaction steps in an M&A process. As the M&A process progresses [read more]

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The impact of the global pandemic, volatile stock markets, and slowed economic outlook across the globe has hurt the performance of enterprises across the world.  The scenario has forced leaders to consider undertaking Transformation of their strategy and operations significantly.

The strategy to buy out troubled businesses and determining to fix the issues that upset the target companies has been a focus of Buyers’ senior leadership for the past 2 decades.  In the year 2017 alone, 36,000 M&A (Mergers & Acquisitions) transactions were announced globally.  Acquisition of troubled businesses hoping to have a Turnaround account for around 50% of all M&A deals.

A Turnaround can be defined as the financial recovery of an economy or an organization after a period of inertia or Downturn.  Several issues trigger a Downturn—issues pertaining to technological disruption, regulations, processes, organization’s financial health, management, business model, hierarchy, or competition.

The ratio of success for M&As is, however, not very healthy.  Historical data of 61% of M&A deals based on a BCG’s study, carried out on 1400 M&A deals globally between 2005 and 2018, shows a high failure rate (61%), where they remained unsuccessful to show any improvement in financial performance.

The ones that do succeed offer significant revenue growth and profit margins—around 25% positive variance in TSR than unsuccessful M&As.  However, buying and fixing a business under the weather isn’t an easy job.  This necessitates a meticulous strategy.

In order to materialize a Turnaround, the leadership needs to thoroughly understand the root cause(s) of the Downturn, have a willingness and plan to reform or transform, and rigorously implement the strategy to rectify the situation (Transformation Execution).

Empirical Research demonstrates that the triumph of M&A Turnaround deals is attributable to 6 Critical Success Factors:

• Investment in R&D
• Long-term Horizon
• Clear Purpose
• Investment in Transformation
• Synergy Targets
• Quickness to Action

Deployment of a combination of these CSFs bring about more pronounced outcomes—in terms of positive 3-year TSR and overall Organizational Performance.

A robust M&A Turnaround Strategy—based on lessons learnt from empirical research—revolves around 4 key M&A Deal Characteristics.  These M&A deal characteristics have a profound impact on the outcome of the transaction:

1. Level of Performance
2. Sector Alignment
3. ESG Factors
4. Deal Size

Knowledge of these key Deal Characteristics allow the senior leadership to ascertain the factors liable to affect the deal outcomes.  Now, let’s discuss the first 2 deal characteristics in a bit detail.

Level of Performance

The performance of the Target company during 2 years pre-deal is a key point to consider for a M&A, as it is directly proportional to the deal success rate and Total Shareholder Return.  BCG’s research demonstrates that M&A transactions where the target entity had a 2-year TSR decline of lower than 10% were liable to be more successful than deals where target companies were in more distress (a decline of ~30% or more).

Sector Alignment

Senior leaders should not ignore the significance of uniformity of sectors of the target and acquiring company.  Based on research, the rate of success for an acquisition transaction involving the buyer and the target operating in the same industry is 5% superior to the rate for transactions involving the companies from different sectors.  The reason for this higher success rate is attributed predominantly to similar business models, customers, vendors, and processes in firms of the same sector, which make the Post-merger Integration of the buyer and target a lot easier.

Interested in learning more about the other characteristics influencing the outcome of an M&A deal?  You can download an editable PowerPoint presentation on M&A Turnaround Strategy here on the Flevy documents marketplace.

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M&A is an extremely common strategy for growth. M&A transactions always look great on paper. This is why the buyer typically pays a 10-35% premium over the of the target company's market value.

However, when it comes time for the Post-merger Integration (PMI), are we really able to capture the expected value? Studies show only 20% of organizations capture projected revenue synergies and only 40% capture cost synergies. Not to mention, the PMI process is typically very painful, drawn out, and politically charged, often resulting in the loss of key personnel.

Learn about our Post-merger Integration (PMI) Best Practice Frameworks here.