This week let’s delve into the success factors—both simple and complex—for mergers and acquisitions, including questions for McKinsey M&A expert Andy West. Plus, building buzz around robotics and a newly topical piece by Corning’s CEO on why shareholder value isn’t the only metric for success. |
|
|
“There’s often a sense of mysticism about M&A,” says Michael Carr. As the coleader of global mergers and acquisitions for Goldman Sachs, he would know. Still, it’s possible to penetrate the muzzy aura enveloping corporate deal making without breaking out the Ouija board. |
Carr starts with the basics. Always begin with, “Why are we doing this, and how does it fit within our business and our team?,” he said during a lively panel discussion at McKinsey’s Global Business Leaders Forum in New York earlier this year. “Most important, make sure your people are prepared, that they know their roles and what the delivery is supposed to look like,” he added. “Once you have that, more than half the battle is taken care of. After all, these are just companies, and companies are full of people and processes.” |
For Russell Fradin, an operating partner at private-equity firm Clayton, Dubilier & Rice, two major drivers of M&A are diversification and capability building, which can easily fail. “I don’t want to insult anyone, but do you really think the hottest AI start-ups are looking to become part of a 100-year-old company? If you’re a strategic buyer, and capability building is the rationale, you need the people to stick around, because what you’re really buying is people—it’s a mass-hiring situation.” He also warned that having M&A strategy reporting to the CFO is a bad idea: “The CEO shouldn’t have that input filtered,” he said. |
Then there’s the thorny matter of operational change once the deal is done and it’s time to spin off assets or improve business units. There’s a lot for management teams to contend with—assuaging employees, customers, suppliers, and regulators while protecting their base businesses and managing market perceptions of their companies. The usual thinking is that it’s better to wait until the deal closes, and then focus on making big changes. |
But data suggest the opposite: companies that undertake significant restructuring prior to spin-off tend to outperform those that don’t. And an evaluation of major divestitures between 1992 and 2017 showed that separations completed within 12 months of announcement delivered higher total returns to shareholders than those that took longer. So make it snappy. |
Happily, there are plenty of new tools for executives who want to do just that. As M&A activity and acquisition premiums hit historic highs, companies can use advanced analytics to increase value and accelerate impact during integration. Still, executives need to attend to much more than data or a deal’s value targets, because all too often a company’s health and culture can be sacrificed along the way. |
Recent McKinsey thinking expands on these and other factors, like the pros and cons of activist shareholders and how lots of small M&A deals add up to big value. |
|
|
|
MORE ON MCKINSEY.COM |
Building the buzz around robotics | A new survey shows how OEMs and systems integrators can help unleash the potential in the global industrial-robotics industry. |
The productivity imperative in insurance | Most carriers are struggling to meet their cost of capital, and productivity has barely moved over the past decade. How to make progress on productivity? Take a more structural approach. |
Pulp (paper and packaging) fiction | If you thought the paper industry was going to disappear, think again. Graphic papers are being squeezed by digitization, but the rest of the industry has major changes in store and exciting new growth prospects. |
|
|
|
THREE QUESTIONS FOR
|
Andy West |
Andy West, a McKinsey senior partner in Boston, is an expert in M&A, restructuring, cost management, and large-scale reorganization and transformation. In a recent Inside the Strategy Room podcast, he spoke about trends in M&A and the importance of aligning your transaction strategy with your overall strategy.
|
|
|
|
|
What are some of the challenges that companies face in shedding assets? |
Particularly in the US, but also in Asia and Europe, activists are taking a hard look at your portfolio. And if you’re sitting with assets that don’t look like they make sense or are mathematically trading at some sort of discount, it’s observable—and it raises a lot of questions. |
How do you know it’s the right time to get rid of a business? It’s hard to time the market, it’s hard to understand value, and it affects people. Leaders don’t want to disrupt their organization. |
There are very few strategy processes—or very few companies—that look at getting rid of assets in the same way they look at, for example, acquiring assets. You don’t have a systematic plan to shrink the businesses. You don’t have a systematic plan to break things up. It’s just not ingrained in decision making and strategy. |
Are there any companies that have gotten very good at both M&A and divesting? What have they put in place to get good at it? |
When we look at M&A performance over long periods for large companies, typically the best strategy—if you control for a lot of things, like industry context—is to be a relatively active acquirer and a semiactive divester. We call this “active portfolio trading.” |
It’s important to have a clear link between who you are and the markets that matter, and how you allocate your resources and stay in the business. You have to have an active management dialogue that’s clear and consistent. I think one thing that people who are quite successful do is that they make this very clear link between their general strategy and their transaction strategy—both on what they’re acquiring and what they might be divesting. |
How does the governance work around this process? |
The hardest thing to do is to have alignment at the top, including with the board, on what businesses you want to be in and why. That’s usually when you ask five board members and five management-committee members what they think the natural source of advantage is for a company and where they need to go, and you’ll get at least two or three different answers, even from a very well-aligned management team. If you’re going to migrate capital [those viewpoints have] to be aligned. |
Then you have to turn that into some actual deals, whether it’s something you’re going to acquire or a boundary condition for some assets that you want to sell. And that also requires real work and can be quite complicated. You then have to turn that into a fair market price. Then you have to turn that into an entire plan, whether on the separation side, dealing with all of the separation activity, or obviously on the acquisition side, turning that into integration. |
Managing the strategy to the concept—to the deal, to the actual value—is a lot of work, and the governance around it is typically very poorly articulated. It bounces between the board, managers of different business units, executive management, corporate development, strategy, and obviously all the back-office and corporate functions and operating functions that need to enable it. It is not easy. It’s hard for others to emulate a mind-set for shedding assets. Companies that can crack the code can be quite successful. |
|
|
BACKTALK |
Have feedback or other ideas? We’d love to hear from you. |
|
|
|
|
Copyright © 2019 | McKinsey & Company, 3 World Trade Center, 175 Greenwich Street, New York, NY 10007
|
|
|
|