The following is a guest post from Daniel Burkly, principal, and Jonathan McElhannon, senior manager in the strategy and transactions practice of Ernst & Young. Opinions are the authors’ own.
Acquisitions can be highly complex undertakings given the significant integration, leadership and cultural challenges they raise. Indeed, studies suggest the failure rate may be as high as over 70%. As a CFO, do you fully understand the extent to which your acquisition created (or destroyed) value? Did you achieve the synergy targets for the combined company? Did you end up overpaying for the acquisition?
Based on our experience, few companies consistently perform objective post-acquisition assessments necessary to answer these questions. Consequently, there is little or no institutional learning and there is little knowledge to course-correct existing deals or to gain insight to better prepare for new deals. Despite the abundance of data, companies are hindering their ability to meaningfully improve and understand their M&A processes, which is a pre-condition to realizing an acquisition’s full potential.
The stakes are high. Increasingly, investors — especially activist investors — are holding boards and CEOs accountable for deploying capital wisely. CFOs have the responsibility (and the data) to ensure their M&A playbooks position their companies to be successful based on learnings from experience.
Key elements of a successful post-deal assessment
There are four key elements to a successful post-deal assessment:
1. Set the tone from the top for objectivity and collaboration
When evaluating a past acquisition, particularly one that has not fared well, internal politics and blame can abound. It is important that the CEO and CFO set the tone for a credible and objective process, as well as one that engenders cooperation and collaboration in a spirit of continuous improvement for the organization. To help ensure objectivity, it can be beneficial to involve independent, third parties with both financial and operational knowledge to manage a non-biased and thorough process.
2. Design a holistic and balanced approach
Consider both quantitative and qualitative aspects and identify areas of success as well as improvement. Include financial elements, such as comparisons between the internal rate of return (IRR), return on invested capital (ROIC) and forecast per the original deal model vs. the revised outlook at the time of the assessment. Include qualitative elements such as governance, strategic alignment, diligence and integration.
3. Prepare individual transaction scorecards; identify patterns
For each acquisition, summarize qualitative and quantitative findings using clear and concise scorecards that evaluate how well the company executed. Then take the time to identify patterns. For each of the areas you are evaluating, what does the organization consistently do well? Are there recurring themes or challenges that you see across deals?
To streamline the process, use artificial intelligence (AI) to unlock insights. Advances in AI and machine learning (ML) can help companies systematically analyze large volumes of data from past deals. AI tools can identify patterns and insights that might otherwise be difficult to uncover through manual analysis. Consider leveraging AI to augment a formal assessment process to gain additional views into the key drivers of deal success and failure.
4. Convey results and implement into future processes
Share the results with the corporate development and integration teams, business unit leaders, senior management and, ultimately, the board to fully unlock value creation potential, provide insights for portfolio management evaluation processes and make recommendations to enhance your organization’s M&A playbook.
Proof of concept: healthcare case study
In practice, how well do independent post-acquisition assessments work at adding value? An EY team was hired by a large, highly acquisitive healthcare company to assess whether its acquisition and investment program had met expectations, and to identify lessons that could be applied to future transactions. The team assessed the performance of various acquisitions and investments during five years, representing the majority of the capital the firm deployed during that time.
The post-deal analysis identified the following areas where acquisitions added significant value:
- Enhanced diligence and integration opportunities: The assessment revealed opportunities for enhanced diligence and integration planning with potentially significant deal impacts, including collaboration between diligence and post-close integration teams earlier and establishing clear communication channels between teams.
- Catalyzed and framed strategic alignment discussions: The assessment laid the foundation for critical management discussions around the strategic alignment of certain investments. Post-deal feedback was found to be particularly critical for certain types of acquisitions, such as transformative transactions.
- Developed a process for future post-transaction assessments: The assessment helped to establish a blueprint to consistently monitor the company’s M&A program moving forward.
- Provided the board with better M&A program visibility: Improved board visibility and transparency into the M&A program increased trust, enabled better CFO-board conversations and facilitated the board’s fiduciary duty to look after shareholder interests.
Assessing the use of capital
With the slowdown in acquisition activity, now is an opportune time to assess your firm’s use of capital on earlier acquisitions and to refine your M&A dealmaking process to ensure future deal success.
In our experience, the most successful acquisition practitioners have developed repeatable acquisition models by continuing to review their transactions and investments to refine and improve their deal planning and execution processes. An unbiased, structured post-acquisition process is one of the best forms of insurance against value-destroying acquisitions.
CFOs should take responsibility for building an M&A playbook based on lessons learned to help ensure the success of existing and future deals and ultimately create a continuously learning and improving organization.
The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization