Redefining the Imperative in Mergers and Acquisitions – The Target Operating Model

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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When organizations go into Mergers & Acquisitions (M&A), its future operating state changes. A fundamental question will arise as to what the Target Operating Model (TOM) of the resultant organization will look like.

What is TOM?

The Target Operating Model (TOM) represents a clearly defined target structure in which the relevant unit should operate in the future. It consists of the structural and process organization as well as the assets needed and the contractual regulation required both internal and external.

The Mission Statement of the Target Operating Model (TOM) is to provide a clear overview of the changes in the course of the Transformation related to the organizational structure and business processes, as well as the assets and contract.

The Target Operating Model is your blueprint. While the design process for Merger and Acquisition may be the same, the approval process is different. For Joint Ventures, the approval process is more extensive due to the issues of governance as well as revenue/cost-sharing. Hence, it is essential for organizations to have a good understanding of the 6 Core Issues essential in developing the Target Operating Model.

The 6 Core Issues in Developing a Target Operating Model

Each core issue must address specific key questions that are raised. Likewise, each issue involves specific types of analysis that should be performed. This is essential for an organization to make when going through the Integration process. As a purview, let us look at the key questions that may be raised.

1. Vision, Integration Principles, and Critical Success Factors (CSFs)
   Is there a comprehensive understanding of the vision and deal strategy/rationale, as well as the Integration Principles and their critical success factors?

2. Organizational Structure
   What is the current organizational structure and that of the target organization?

3. Process Organization and Core Processes
   How are the process organization and core processes currently set up and how will they be in the target organization?

4.  Systems and Technology
   What technologies/systems are currently and will be required in the future?

5. Property Rights and Contracts
   What important property rights and contract do currently exist and will be required in the future?

6.  Assets
   What assets do currently exist and will be required in the future?

Organizations must take a closer look at the key questions and the analyses behind each of the  6 Core Issues. Each core issue has an analytical framework that serves as its guidepost in going through the process. This is to ensure that the core issues are well analyzed before the organization takes on the final step of constructing its Target Operating Model. When this is properly defined, only then will an effective and strategic Target Operating Model can be constructed and put into operation.

Albeit it to say, however, the development of the Target Operating Model is not an easy task. Organizations will encounter several pitfalls as they go through the process of Transformation. It can be a lack of clear and coherent vision and deal rationale with regard to the future business model. This can be a deterrent to the success of a TOM and the target value generation.

Interested in gaining more understanding of the Target Operating Model? You can learn more and download an editable PowerPoint about Mergers and Acquisitions (M&A): Target Operating Model (TOM) 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.

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