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Stealing from Private Equity’s Playbook: M&A

Merger and acquisition (M&A) strategies are near and dear to the hearts of private equity professionals. They rely on M&A strategies for value creation in a majority of their investments and are intimately familiar with the execution of M&A in just about any environment. For CEOs and business owners, I suggest stealing a page from the Private Equity Playbook and develop your own M&A strategies to create value. When executed well, an M&A strategy is a central part of a value-creating plan.

As a rule, mergers and acquisitions fall into one of two categories: roll-up strategies or strategic acquisitions. Both categories can create significant value, though the goals and execution for each present a unique set of challenges for a business owner/CEO to navigate. If you’re a business owner considering an M&A strategy, taking the time to fully understand the requirements for success in each M&A category is mandatory. Without clarity of strategy, preparation, and execution you’ll be hard-pressed to capitalize on any M&A.

Roll-Up Strategies

Roll-up strategies are uncomplicated in theory. Generally, a larger organization integrates smaller competitors in its marketplace. Don’t let the straightforward nature of a roll-up strategy fool you; they aren’t without their challenges. From a success perspective, you will want to know where exactly you’ll create the economic value and ensure you have the capabilities to create that value. For example, you might find economic value in new synergies or efficiencies that come with acquiring another organization leveraging your technology, people, and processes. If you already know that the value will come with efficiency, you can prepare to integrate the acquisition into your organization in a way that makes the most of potential synergies.

A rollup strategy relies on three execution elements. First, develop your foundation- ensuring that you have the best people, processes, and systems in place to support integration. Then execute the acquisition - buying at the right price and terms to support integration and value creation. Finally, rapidly integrate while retaining customers and key team members to set up for growth post-integration.

In the case of roll-up strategies, integration, from experience, is the biggest challenge. How you execute the period after the close of the acquisition significantly impacts economic value creation. I’ve good news; a post-purchase integration plan follows some basic precepts. You’ll need to spend some time to determine: 1) how to integrate an acquisition into your organization after the purchase, and 2) how to best create value after integration. Once you develop the core components of your integration strategy, you will be able to leverage it (with minor adjustments) for future acquisitions.

Strategic Mergers

Strategic Mergers- two companies with differing capabilities and footprint merging into one - are always more nuanced and risky than a roll-up strategy. In my experience, most of the challenges center around the people aspects: Who’s in charge? How will the company be organized? Where are we looking to go post-merger? These are challenging questions.

From experience, the only way to succeed is to have a deep and clear understanding of the combined companies identity. Only then can you and your leadership group accurately determine the “who,” “how,” and “where” answers. You may discover you have talented executives that just don’t have the right skill set to navigate the transitional period, a need to design a new organization structure or strengthen a weak functional area or make investments in processes and systems to ensure success. If you find yourself making foundational changes or major investments, then you’ll be glad to have a detailed understanding of what a successful end state will look like.

The people side of mergers and acquisitions is the hardest to manage. It helps to treat the executives from both companies as a talent pool to draw on when creating your new organization. If you look at the pool and don’t find your ideal executive candidate, then look again. Perhaps there is a candidate that you can develop with the right mentorship and training. Bringing in an outside executive creates an entirely new set of problems to solve. External talent is your last resort in extreme circumstances, not your easy plan B.

After identifying the executives that form the new company’s leadership structure, carefully consider their titles and roles. Titles matter. They create clarity and lead to buy-in from leadership, while back-and-forth bickering about who has what title only creates distractions and conflict. More than one merger has stumbled due to the complications that come from quickly naming executives as “Co-CEOs.” Your ultimate goal is to fill leadership roles with executives that are committed to the new organization’s long-term success. If you have a good team in place, an effective organizational structure, and a clearly defined strategy, then economic value will generally follow.

There will always be environmental conditions that will impact the success of your M&A strategy, but those are outside your control. You can, however, control your planning and execution. If you’re considering adopting an M&A strategy, but need help to evaluate preparedness and strategy, reach out. The Bancroft Group and our Operating Executive Network have decades of experience navigating successful mergers and acquisitions. We’re happy to share our experiences with you and help you plan for your own successful merger or acquisition.

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