The Art of Protecting Value Drivers

Jai, can you quickly overview the legacy of value drives in M&A? Where do value drivers drive from and why are they important pieces of any deal?

Value drivers in M&A are the reason why you buy a company. People typically talk about synergies, but the key to synergies in M&A lies in the value you are willing to pay for, which will essentially enable you to get synergies.

The key question is what really drives the value of the deal? Is it people, assets, IP, the sales acceleration, or the consolidation? Understanding that is key to success.

Is there a prioritization when you look at those M&A value drivers? I often hear cost synergies and revenue synergies tend to get prioritized because these are the most difficult to obtain.

In a sense, yes. It always varies with respect to the strategic intent for the acquisition. The best players look at where they see themselves going in the next five years and what their strategic M&A opportunities are.

Typically, cost synergies are easier to realize than revenue synergies.

How do you identify the key value drivers of a deal company or a deal outcome?

It starts during the diligence phase. You come up with a thesis on why you are going after certain targets because this ties back to your strategic intent.

Part of the diligence is bringing in the right subject matter experts to start crystalizing the value drivers. You need to have a point of view before you begin, but then it is during diligence that you get them validated and start adding additional value drivers that you have not thought about before. 

How does bringing in subject matter experts come into play?

The value drivers become the anchor of how you build your business case and as you start bringing in the subject matter experts you create this capability of creating a bottom-up business case during the diligence process.

This is a must-do if you want to ensure successful integration and acquisition.

Each of these experts is there to help identify the value, but not only in terms of what the source of the value is but also in terms of execution. This is what the typical gap is between buying the company and successfully integrating it. 

What frameworks are important to implement in order to produce the best information regarding the value?

This is an art and a science. The art is that you need to have a theory of how you are going to extract the value or where the value sources are, but the science comes in terms of how you come up with a process that ensures a repeatable and successful outcome.

In this case, the repeatable and successful outcome framework is how you are going to validate your numbers. 

This means you should have done enough homework or have enough lessons learned from the past, that give you templates and frameworks that will serve as guidelines.

Essentially, you start building your own timelines and processes from a resource standpoint, timeline standpoint, and modeling standpoint, and then during a 30-45 day period into diligence you start building this in the back end. 

One thing I often hear about is the investment thesis becoming too ambitious. How do you prevent that, so that those goals can actually be attainable?

We’ve done projects on both sides. I think from a programmatic serial acquirer perspective, you realize the value only when you can execute, so you need to be able to articulate how you can execute.

Being able to do it well comes only by practice. First, prove yourself and then go after the ambitious plan, because only once you’ve got enough projects, enough integrations under your belt you will know how far you could push. 

How about within a single acquisition? I feel like a lot of times you hear about predictive value drivers getting overemphasized than what they actually could be obtained.

The best way to prevent that is by building a bottom-up business case during your diligence process.

Doing this while you are doing your full-on diligence means you have developed capabilities not only regarding your corp dev team but also regarding all the subject matter experts who are creating their own processes, timelines, and resource capabilities for execution.

It is about capability building across each of the value driver subject matter experts and using that during the diligence phase to build it up, so at least you are not far off from your number and you know the risk that you are taking. 

So you have integration people validating those value drivers?

That’s correct. The diligence is not separated from integration. Once the diligence begins, the investment thesis is validated. It is a close-look validation where the diligence and the integration are done simultaneously, so you have a better chance of success.

The challenge is typically around how many people you want on board during the diligence phase and still maintain confidentiality.

I have found that successful serial acquirers bring in a fairly large number of people during the diligence process and still manage to maintain confidentiality. 

How do you protect the chosen value drivers during post-close integration?

Part of the diligence process is not only to come up with a thesis around value drivers but also identifying newer value drivers, be it on the customer side, employee-side, customer side, or cultural standpoint.

For example, one of the companies we acquired in the past had an excellent NPS score which was around 80, while ours, back then was around maybe 40.

In this case, it turned out to be a reversed integration opportunity where we decided we want to leverage that kind of service level to our own customers and improve our customer experience, which is exactly what we did.

In the end, by protecting the value drivers we were able to add value both for the parent company and the acquired company. This shows the role of integration management because they are the stewards of capital. 

Are there any specific step-by-step approaches around that so a company doesn’t get lost in doing things the traditional way?

Integration is anchored on value drivers. There is an operating guideline that you read out to the executive leadership team, and I would highlight that preserving value drivers is the first step. After that, during the diligence phase and integration phase, your focus is around what that means, which is the second step.

Referring to the previous example of the acquired company that had the NPS score of 80, we have made maintaining this score a mandatory part of the integration process. In other words, you turn it into a goal that you can not go down from.  

How does that transition from goals into getting a team that’s actually going to execute on it?

In the integration process, we break it down to two sets of meetings, where one is focused on value drivers, traditional plumbing, connecting and integrating amongst different functions.

This is a functional integration meeting. We first focus on value drivers that were either part of the original thesis or something we have uncovered during the diligence process and then share it with key members of the to-be-acquired company. 

We share with them our original goals or thesis and what we uncover, and then ask them to highlight what other value drivers we might be missing. This is done collaboratively between critical leadership members and it is a focused, structured approach on both sides.

The second meeting is the value driver-focused meeting. Ultimately, your value drivers identify the list of things that need to be done, and that becomes the plan based on which all the support functions can develop their plans. 

Can you tell me a little bit about what the cadence of those meetings looks like between the functional and integration meetings versus value driver-focused meetings? 

The value driver-focused meetings typically happen on a bi-weekly basis between key leaders of both the acquired and the parent company. These typically last an hour, depending on the size of the deal.

For large, multi-billion dollar deals we frequently have separate focus meetings as well, where we dedicate a separate meeting to each value driver.

For smaller deals, these meetings would be more of reports from all the functional value driver leads. The functional integration meetings typically happen on a weekly basis.

What governing systems enable successful value integration?

The governance sets the tone for success. The minimum you need for setting the governance is having the integration management office take ownership of executing on the business case, truly being partners to the company.

The governance starts with holding people accountable, holding the value drivers leads accountable and the best practice is to have cascading levels.

If you can, even for smaller and mid-sized companies, I would encourage getting the CEO or the CFO to be part of meetings on a periodic basis, because that can have a big impact on how things unfold.

How can practitioners build a strong and agile integration playbook to protect these values?

This has to be intentional and it has to be codified. You’ll be learning lessons throughout your acquisition and your ability to integrate lessons learned, not only on the integration side but also on the deal selection and the deal modeling side is critical because that’s what makes your practice more agile.

After you’ve learned lessons you can determine whether or not something is a new deliverable that you can incorporate into your playbook.

What are some of the biggest mistakes you’ve seen in extracting and implementing value drivers?

The biggest one would be people not following the process. Some believe that they can pull it off without validating their execution capability.

Every time you are going off the tangent without any past proof, that’s a big red light and it needs to be called out.

In some scenarios, the leadership tends to minimize the risk of the execution because, in their mind, they’ve done it in the past, and sometimes that just doesn’t work.

What advice would you give to a company that’s more of an occasional acquirer in terms of validating execution capabilities?

The key advice for an occasional acquirer would be to bring in their best talent, ideally people who have done work in a similar industry.

The second piece of advice would be to find those nuggets of wisdom from the subject matter experts in the trenches, because the leadership will always present the final output, but not necessarily all the mess that happens in between.

I would also focus on key talent that has the credibility to drive and influence the leadership team.  

What is the craziest thing you’ve seen in M&A?

We all like to believe that these are all data-driven, logical decisions and that there are plans made out, but I would say not everything is data-driven. I think it's a people-driven process where emotions are present, and most of the time emotions can exaggerate the story.  

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