1. Abetter
wayto
merge
companies?
M&A project
teams
STRATEGY
46 BUSINESS STRATEGY REVIEW ISSUE 4– 2011

2. The old way to conduct mergers
and acquisitions was to have the top
brass of the firm do a deal,then pass
the messy details to others who have
had no prior involvement.Richard
Parry tells how progressive
companies are now using project
teams to both originate M&A deals
and make them happen successfully.
Many merger and acquisition (M&A)
corporate teams have relied on a
tried-and-true comfort zone.The
most familiar paradigm assumes that
a deal originates from the corporate
centre and is then passed to an
in-house business unit to integrate
the new acquisition into an existing
entity. If your company is too small
to have a large standing M&A team,
your ability to be proactive about
M&A can be limited. In recent years,
however, many companies have relied
on in-house project teams both to
originate the deals and to tighten
the nuts and bolts, so to speak.
Many companies — large and
small, foreign and domestic — are
turning toward project-based teams.
Since so many firms are using such
teams over a broad spectrum of
situations, the top-line question is:
how effective are these teams?To
answer this question, companies
who use project-based M&A must
examine the functions of the typical
life cycle for such a corporate event,
since little has been written about how
an effective team should operate.
Clear aspirations
An optimal M&A strategy emerges
when the company’s growth
aspirations are clear. Certain priorities
are allowed to surface, and pathways
required to achieve specific goals are
defined. Done correctly, a project-
based approach leverages a single
front-to-back team that is nimble and
flexes in size during different phases
of the M&A life cycle. Companies
who plan for built-in flexibility
can create a robust and proactive,
rather than reactive, M&A team.
A practical M&A strategy looks for
new opportunities and screens and
prioritises them to narrow down a
universe of deals to a capability-specific
shortlist. Due diligence, valuation
and negotiation are conducted when
the target is in play but are not
conducted in isolation from integration
considerations.These considerations
need to be factored early into valuation
models and planning assumptions.
Finally, once the deal is consummated,
the acquired company needs to be
integrated into the host company.
Companies that conduct
successful M&A programmes
tend to exhibit the following
characteristics in each of four phases.
Having an acquisition strategy
Warren Buffett cautions companies
not to kiss a frog and expect it to turn
into a prince. Companies should be
clear about how each deal can quickly
(and with a high degree of certainty)
add value to the acquirer. Does the
new company have a capability that
is lacking in the acquirer? Can the
capability be built within the existing
company in time? Could it be a better
strategy to consider a joint venture?
Will the merger create a ‘1 + 1 = 3’
synergy?The capability being acquired
can be physical resources, management
processes, customers and so on.
However, a clear acquisition strategy
is required to ensure that there is
sufficient potential value in acquiring a
complementary resource to warrant the
acquisition premium. As Buffett put it:
“Many managers apparently
were overexposed in impressionable
childhood years to the story in which
the imprisoned handsome prince
is released from a toad’s body by
a kiss from a beautiful princess….
Absent that rosy view, why else
should the shareholders of Company
A(cquisitor) want to own an interest
in CompanyT at the 2X takeover
cost rather than at the X market
price they would pay if they made
direct purchases on their own?”
In other words, investors can
always buy toads at the going price
for toads. If investors instead bankroll
princesses who wish to pay double
for the right to kiss the toad, those
kisses had better pack some real
dynamite.We’ve observed many kisses
but very few miracles. Nevertheless,
many managerial princesses remain
serenely confident about the
future potency of their kisses….
Uncover more target opportunities
The market for acquiring desirable
capabilities is not an efficient one.
Indeed, many capabilities are not
currently for sale or are locked up in
“Many managerial
princesses remain
serenely confident about
the future potency
of their kisses....”
47www.london.edu/bsr BUSINESS STRATEGY REVIEW
M&A project teams A better way to merge companies?

3. undesirable bundled combinations,
sometimes with unloved owners.
For this reason, the first screen in an
acquisition search should not focus
on financials. Instead, it should focus
on whether the potential target fulfils
a strategic need for the acquirer.
The best way to do this is to adopt
a multifaceted approach in order
to uncover and unbundle attractive
capabilities, wherever they lie.
An effective M&A strategy
should leverage opportunities
from multiple sources by:
– Depending on banks to screen
targets for your company instead of
you screening targets for the bank
– Seeking out public companies
first, because they have public
information that can be analysed
quickly to see if they are a good
fit for your MA strategy
– Searching for private companies
that fit your growth strategy,
because private companies are often
ignored (unless they are a close
competitor) since a limited amount
of public information is available
– Looking for capabilities that
may be hidden inside a larger
company; an unloved division
may not be core to the company
and potentially could be divested
and integrated into your firm.
Performing due diligence
Contrary to the usual advice to cut
costs by using in-house resources
rather than hiring external advisers,
this is an example when investment in
outside experts is warranted.They have
the advantage of being able to provide
an objective opinion and are able to
provide specialist expertise that might
not exist inside your company. Indeed,
private equity firms consistently spend
significant resources on due diligence
to ramp up their knowledge of an
industry, to help secure debt funding
and to feed their decision-making
process.This fast-paced and focused
process routinely provides private
equity firms with an edge over their
corporate rivals in bidding wars.
At minimum, companies should
contract external advisers for three
types of due diligence activities:
– Verifying financial data, which
provides a check on the prospect’s
quality of earnings, structure/
debt, special charges, contingent
liabilities and goodwill
– Confirming commercial value,
which provides a validation of
the assumptions that underpin
growth and cost forecasts
– Inspecting operations, which
provides a practical check
on the prospect’s ability to
operationally deliver top-line
growth forecasts without the
addition of significant new capital.
Having an integration strategy
An overall integration strategy should
be established upon completion of the
acquisition strategy and should have a
clear ‘deal owner’. For opportunities
that are in your existing market
sector, there are often redundant
cost structures.The emphasis should
be on a quick integration to deliver
complete and quick cost synergies, a
single operating model and a single
culture within the new organisation.
Acquiring companies that reside in
adjacent market spaces or in new
business models has the advantage
of reducing the need to integrate the
two companies. Instead, the acquired
company can be left to its own devices
so that each organisation learns to use
the resources and capabilities of the
other to achieve its independent goals.
Capability development
What is often missing from the life
cycle view of many mergers and
acquisitions is the requirement
to develop an MA capability.
The capability required to define,
source and transact deals may
be vastly different from one
company to another.The main
constituents to developing an
effective MA capability are:
– Effective governance Strategy,
finance and operations are different
animals, in terms of being three
parts of the same firm; an effective
governance structure is required
to get them to work together. Each
should be adequately represented
in all stages of the deal-making
process. Strategy conducts
screening efforts, is the project
management office and develops
a personal relationship with the
target’s management. Finance
provides the financial discipline
and transactional capacity required
to do deals. Operations provides
ideas for inorganic growth, target
suggestions and due diligence
transaction capacity. It is critical to
tailor each governance structure
“What is often missing
from the life cycle
view of many mergers
and acquisitions is the
requirement to develop
an MA capability.”
STRATEGY
48 BUSINESS STRATEGY REVIEW ISSUE 4– 2011

4. to the needs of each company
and to develop a clear roadmap,
checkpoints, stage gates and a
feedback of best practice, which
is used to continually refine the
strategy and improve performance.
– Corporate oversight Business
units without corporate support,
accountable to corporate under
ongoing performance metrics, tend
to be risk averse.With corporate
support, business units can pursue
deals that have a wider scope, are
less immediately profitable and
possess less certainty (in terms
of an immediate payoff) but that
can offer greater strategic value.
Of course, the MA team also
has a role to play in determining
the divestiture of capabilities that
are not core to the company or
for whom the company is clearly
not the best owner. An active
approach to MA should include
this divestiture component.
– Strategic measurement and
incentives Rewarding an MA
team based on deal volume does
not make sense.The best way for an
MA team to be measured should
be to assess its performance against
the acquisition strategy. An effective
acquisition strategy should have a
timeline of value creation in order
to meet the company’s growth
objectives. Performance should be
measured simply against this value
timeline and incentives should be
rewarded accordingly over time.
– Step-by-step process A stage-
gated process ensures that the
MA team (comprised of
stakeholders from strategy, finance
and operations) work together
with successful handoffs while
bringing to bear the best of the
firm at any stage in the MA life
cycle.This increases deal capacity,
allows the whole MA deal
portfolio to be managed effectively
and when documented facilitates
continuous improvement.The
process can be easily developed
with online document repositories
and spreadsheets.To be successful,
though, it needs to be customised
to the needs of each company’s
acquisition programme with
the development of a clear road
map, checkpoints, stage gates
and a feedback of best practice
to continually refine the strategy
and improve performance.
the author
Richard Parry
rhparry@us.ibm.com
Parry is a Senior Managing
Consultant in the Strategy and
Transformation MA Centre of
Competence at IBM. He holds a
Masters degree in Engineering
Science, Economics and
Management from St. Johns’
College, Oxford University and
is a Sloan Fellow of London
Business School.
Resources
Prashant Kale, Harbir Singh and
Anand P Raman, ‘Don’t integrate
your acquisitions, partner with
them’, Harvard Business Review
(December 2009).
Robert P Miles, The Warren
Buffett CEO: Secrets from the
Berkshire Hathaway Managers
(John Wiley Sons, 2002).
Maximise growth potential
The reality is that companies no longer
need to be dependent upon maximising
their organic growth potential and
waiting for deals to be brought to them.
Instead, they can be proactive acquirers
by developing an MA strategy and
capability that allows them to maximise
their growth potential and become
more agile organisations.With such an
approach, companies of all sizes can
feel more confident that their
MA programme will
create value for their
shareholders.
“Developing a proactive
MA strategy and
capability allows
companies to maximise
their growth potential
and become more
agile organisations.”
49www.london.edu/bsr BUSINESS STRATEGY REVIEW
MA project teams A better way to merge companies?