Aligning Business Models For M&A Success

SUMMARY

Strategic fit means the degree to which the companies involved in the merger complement each other, in terms of resources, capabilities, and corporate culture

Value creation happens when the merged entity’s value is greater than that of the individual entities’ summed-up value

Performance evaluation includes establishing various KPIs that can track the success of the merger and the realisation of multiple synergies

I recently interacted with a team whose company is into solar energy, and they mentioned that they are now considering either acquiring another business or raising capital to invest more into their existing operations or building their business from scratch.

They have realised that, given the changing environment, it’s essential for companies to evolve continuously and to invest and reinvest in their businesses either in inorganic or organic ways. Hence, this is a clear indication that companies that decide to pursue M&A are the ones that keep pace with the times, which in turn leads them to evolve and grow and, in this way, create more value for their shareholders. In such a scenario, strategic fit and value creation are two critical components for the success of an M&A transaction.

Strategic fit means the degree to which the companies involved in the merger complement each other, which can be in terms of resources, capabilities, and corporate culture. Strong strategic fit can increase operational efficiencies, broaden market access, and leverage complementary strength.

On the other hand, value creation happens when the merged entity’s value is greater than that of the individual entities’ summed-up value. This is a result of various synergies derived from the merger, viz., various cost synergies (e.g., common cost of support functions, reduced compliance costs) and revenue synergies (e.g., cross-selling of products, geographical expansion). These synergies will ultimately lead to an enhanced value for the merged entity rather than the individual entities.

While doing an M&A, companies must evaluate the various parameters from the physics, chemistry, and mathematics (PCM) perspective to determine if they should start a greenfield project or go for a strategic acquisition.

In this context, physics refers to evaluating the opportunities available in that space, while chemistry involves checking whether there is a cultural alignment with the founders and the team, and mathematics refers to the financials, specifically the business’s valuation. 

Based on our vast experience working in this field, we have seen that whenever all the three PCM elements align, there is value creation. However, if any of the three elements falter, it could lead to value destruction. For example, there might be situations where the sector is unfavorable, yet there is a perfect cultural alignment with an attractive valuation.

On the other hand, there can be instances when there is a positive outlook on the sector, and valuations are cheap, but there is no cultural alignment. Additionally, there can be cases wherein valuations are too expensive while the industry has certain tailwinds, but there is perfect cultural alignment with the founders and the team. In such scenarios, it would be advisable not to pursue an M&A strategy.

The success of an M&A often depends on the strategic fit between companies and their teams and the ability to create incremental value in the long run for all stakeholders. A lack of alignment between parties creates friction and may result in process delays, operational inefficiencies, and, in some cases, attrition.

Now, when it comes to post-merger strategies, this includes implementing integration planning and performance monitoring. Integration planning means combining the operations, cultures, and systems of the individual entities.

Performance evaluation includes establishing various KPIs that can track the success of the merger and the realisation of multiple synergies. Regular assessment of the KPIs also allows timely adjustments to the strategies and helps achieve business model congruence.

Strategic fitment is expected to drive synergies and create value in terms of turnover, costs, and operations for benefits that exceed the sum of the parts. While this is usually envisioned right from the beginning of the M&A process, actuals may differ significantly from what is projected. 

Ensuring a common goal to achieve outcomes is a function of cultural integration, which requires business leaders to enforce their vision and leverage the strengths of both organisations. While challenges exist across all of these elements, a well-executed strategy requires patience and foresight to navigate the complexities of merging entities.

Thus, for any M&A to succeed, aligning the business model through strategic fit and focusing on value creation remain essential components. Companies that carefully assess cultural compatibility and operational synergies are more likely to achieve sustainable growth and realize the full potential of their mergers.

In short, as business models keep evolving to align with the needs of customers and the market, there may be opportunities for M&A transactions, which will go a long way to enhance the value proposition.

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