M&A teams across all industries often struggle with workflow friction points that slow down their pipelines and initiatives. According to Bain & Company’s Global M&A Report 2023 — which covers the top 250 recent strategics and polls the hundreds of operating acquirers involved —M&A teams can overcome this problem by creating their own customized toolkits.
The Bain report reveals that by developing toolkits based on acquirers’ unique goals and market forces, M&A teams can “accelerate decision-making, gain conviction in potential deals, and preserve value through integration.” To make the toolkit-creation process as easy as possible, you’ll need to invest in the right technology.
DealCloud was created with dealmakers’ unique needs in mind — including their need to be able to customize the DealCloud platform to mirror their everyday processes. Learn more about insights from the Bain report, and discover how your firm will benefit from a customized toolkit, both now and in the uncertain future.
1. Learn from past recessions
Dealmakers have witnessed several unexpected and unprecedented events in the 2000s, including the financial crisis of 2008–2009 to the global coronavirus pandemic. Global events will continue to shake the markets, which is why firms need to assess and build upon lessons learned from previous recessions. By creating a repeatable M&A model, firms can successfully face upcoming catastrophes and downturns with confidence.
So what insights and lessons can we take away from past recessions to create a strong M&A model and toolkit for the future?
One key takeaway is that, despite growing doubts and pessimism surrounding the current downturn, the M&A market is favorable for operating acquirers with recession experience and liquidity. Bain’s report reveals that the total shareholder return of companies that acquired targets in the most recent recession outperformed those that entered retrenchment mode and remained hunkered down.
Source: Bain & Company’s Global M&A Report 2023
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These findings align with what other corporate development firms are saying. Consider the 2009 Stanley Works acquisition of Black & Decker, a move made during one of the worst periods for the housing market. Exposure to the construction cycle had battered Black & Decker’s revenue and earnings, naturally choking the brand’s overall valuation. While other acquirers entered retrench-and-defend mode, Stanley Works utilized its well-developed M&A methods, honed over the course of more than 33 other deals in the preceding 7 years, and successfully integrated Black & Decker — despite the company being much larger than Stanley Works. The deal positioned the newly combined entity to catapult its market share when the sector began to rebound.
You should also consider the post-internet-bubble 2001 recession. According to PwC, “Median shareholder returns for companies that made acquisitions outpaced their respective industries in the following months, rising as high as 7% one year after the transaction was announced.” For this reason, PwC’s Global M&A Industry Trends: 2023 Outlook predicts that exciting acquisition opportunities will be available in 2023, and encourages companies to seize those opportunities.
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Firms shouldn’t wait for the next upset to look for patterns and plan for future instability. The economy is in a downturn now, and there’s enough information from past recessions to judge whether offensive or defensive moves work best. By analyzing past data, creating new processes, and leveraging customized tools, your firm can sidestep similar risks, capitalize on current opportunities, and gain firmwide and marketwide visibility to approach targets with accurate, reliable information.
2. Buy — don’t build — with the aid of customized tools
With each M&A opportunity, M&A teams must determine whether it’s more advantageous to merge with the company (“build”) or acquire the company (“buy”). Because business valuations drop during a downturn and acquisition targets become more affordable, buying has become the faster, more effective, and more profitable option.
“Companies that are able to do M&A in a downturn end up better off because they buy things at good valuations,” said Susan Dettmar, a Principal at Deloitte Consulting, in a recent interview with CFO Brew. Dettmar explained that, after being in a seller’s market for years when building was often a more viable choice, dealmakers have finally entered buyer-market territory. Strategic buyers “don’t have to work so hard to generate the synergy that pays for the premium,” she said.
Experts at Bain also believe that the best targets to acquire now are those that fuel (or make up) an entity’s “Engine 2.” Bain first coined the term in 2017, defining Engine 2 as “new businesses built within an existing company that use the existing scale benefits — namely, the assets and capabilities of the strong core business (Engine 1) — to grow to a large size faster than an independent start-up could.”
From 2017 through 2020, Bain advised firms to build their Engine 2 business from the ground up. However, Bain’s latest report now urges acquisitors today to buy their Engine 2 business, stating: “Among the 58 most successful Engine 2 businesses, 40 used M&A as a significant part of their scaling plans.”
Speed, effectiveness, and cost are the three key reasons Bain consultants are pushing strategic buyers to move now, but these benefits can only be realized when partners and directors leverage tools built for their unique work.
If your firm still uses a generic toolkit and outdated, analog internal approval processes, you’ll continue to struggle with efficiently moving M&A deals forward. For example, firms that rely on spreadsheets and PDFs must pass these documents back and forth between teams and internal committee members to track deal updates; but by the time these documents are approved, they’re already out of date. Without the ability to collaborate and update information in real time, dealmakers will end up working slower and less effectively, costing the firm untold opportunities.
On the other hand, customized toolkits add value to every transaction and equip acquirers with the workflow automation, data management, relationship management, and information security they need to do the following:
- Create a laser-focused due diligence process — A buyer’s due diligence process must accurately confirm the strength of the business and determine how well the asset fits with the new engine.
- Draft a clean integration thesis — An integration thesis is a much more detailed version of a deal thesis, and includes timelines, milestones, and synergies relating to both cost and revenue. A customized toolkit enables this definitive statement to honor the original deal thesis by giving your team democratized access to the data that first attracted your team to this target.
- Design the integration plan — Modern day technologies include collaboration features that simplify connecting and sharing information with colleagues and service providers. Streamlined collaboration allows firms to gather everyone’s input before making pivotal decisions during the transition.
- Evaluate the incentives for the new team coming onboard — Firms can use customized toolkits to manage talent when executing M&A deals, and to show who’s working on what (and why) in real time. Increased visibility enables leaders to move people into the best positions for both them and the newly acquired organization. Additionally, storing all information in one place helps accelerate the new-hire process by letting new team members quickly access and learn from prior deals, relationships, and internal decisions.
3. Improve due diligence capabilities
The frenzied pace and volume of M&A deals in 2021 pressured strategic buyers to deploy capital and execute acquisitive strategies quickly. Although this speed kept buyers competitive, it also resulted in buyers’ remorse, dissolving value, and a reflective resolve not to repeat those same mistakes.
Initiative evaluation shouldn’t mirror what was done in 2020 and 2021. Instead, firms should invest in technology that improves due diligence to identify, integrate, close on, and realize synergies from bargain targets.
Tech-enabled due diligence can speed up the transaction process (while also ensuring firms aren’t buying too quickly) by eliminating the temptation to cut corners to beat rivals to the bid or preempt. Advanced M&A tools also provide deeper insights for every transaction, allowing dealmakers to uncover more value-realization opportunities, and to quickly and confidently decide whether to approve an opportunity for the next phase of purchase.
Take, for example, a manufacturing company that needed to investigate a target more closely. The company relied on its M&A tool to gather insights such as “additional benchmarks, primary research, and data from external sources,” and combined that information with the company’s collective historical experience. The company uncovered more than twice the original estimated cost synergy potential, and created a winning bid that its rivals couldn’t confidently match.
M&A competition is no longer only about buying as quickly as possible: It’s now a battle to uncover synergies earlier and improve data-driven confidence in decision-making. Speed is simply one more advantage.
Define and adopt your own customized M&A toolkit
To ensure that your firm can efficiently and strategically overcome the many evolving challenges within the corporate development market, you must adopt custom-built M&A technology that addresses your specific needs.
Schedule a demo with DealCloud today to see how your daily slowdowns and holdups will disappear as each function’s configurability addresses the exact friction points that hinder your strategy’s execution.