Knowledge Center: Publication
Chief Executive Officer & Board of Directors
A boardroom guide to accelerating time to value in M&A6/23/2016 Heidrick & Struggles
In 2016, forward-thinking boards will increasingly frame strategy, including M&A strategy, in terms of time to value. Because the pace of disruption across industries has called into question the assumption that advantage, once achieved, can be sustained, companies must now be ready to rapidly identify and seize opportunities, make the most of them, and, when necessary, exit them before they go into decline. Instead of acting as sage overseers only, the best boards will also act as catalysts of speed, making sure that management has in place the ability to accelerate performance at will.
In our experience, an organization’s capacity to accelerate performance depends on 10 drive factors and their corresponding drag factors. These drive and drag factors can operate at all three levels of the enterprise: individuals, teams, and the organization as a whole. Consider, for example, the drive factor customer-first orientation. At the individual level, it shows up in leaders who cultivate deep relationships with customers and innovate with them ahead of the market. In teams, it is manifested in customer-led decisions. And at the organization level, it appears as consistent service excellence and low rates of customer attrition.
Its corresponding drag factor, internal focus, shows up in leaders who maintain merely transactional relationships with customers. Teams feel no shared sense of responsibility for resolving customer-service failures. And the organization suffers chronic service lapses and high customer attrition and is often overtaken by market disruptions.
The story is similar with the other nine pairs of drive and drag factors. The drive factor or its corresponding drag factor shows up clearly and concretely in the behavior of leaders, teams, and the organization. When systematically cultivated, the drive factors prepare the organization to accelerate performance when time to value is paramount, as in M&A. The corresponding drag factors, when ignored, materially slow and at times completely inhibit performance. And during a merger, when the stakes are high and the premium on acceleration is greater, those drag factors will be thrown into even sharper relief. Boards that insist that the company systematically address these critical drive and drag factors will not only see better overall performance but also help ensure that the company can shorten time to value in acquisitions, where time is the enemy of every deal.
M&A and time to value
In M&A, time to value unfolds in four distinct stages: explore, enter, exploit, and exit. While corporate directors are familiar with these stages, we find that taking a disciplined look at each provides a useful framework for generating discussions about accelerating time to value. And even richer discussions arise when directors consider how each stage may be accelerated if the requisite drive factors are present or slowed down if insidious drag factors permeate the company.
In this stage the organization looks for a new opportunity. The strategy underlying a particular deal may be any one of the usual suspects: consolidate to grow market share, acquire a technology or new capabilities, roll up highly fragmented markets, diversify risk, achieve economies of scale, improve the target company’s performance, and more. While these are all worthy goals, boards and management often confine exploration to the company’s industry and to narrow objectives, overlooking innovative and disruptive opportunities that could produce far more value faster. The underlying drag factor in such narrow thinking is fear. Instead of experimenting and learning, individuals, teams, and the organization play it safe, exhibiting a low tolerance for failure and missing many valuable opportunities.
By contrast, leaders in companies where innovation is a pronounced drive factor have the courage to experiment. Teams seek ideas from many sources, and the organization maintains a culture of idea generation and learns quickly. Recently, for example, a major financial-services company was shifting dramatically in order to grow a previously sleepy line of business. Instead of acquiring a large company to provide instant growth in market share, it acquired a far smaller, seemingly tangential company. But the acquired company possessed a technology platform that the acquirer was able to implement across its global operations, turbocharging the newly critical line of business and quickly winning market share at much less cost than that of a big acquisition. In addition, the outlay for the target company’s existing technology platform was only one-third of the cost to build or buy a new one.
In this stage the company pulls the trigger on the deal. In a world where competitive advantage is fleeting, timing is critical. If, for example, a target company possesses a desired capability, market, or technology that will push the acquirer ahead of competitors (as was the case for the financial-services company) then the advantage must be secured quickly, before competitors inevitably catch up.
Unfortunately, boards often hear from management about opportunities under consideration in an untimely way—usually for reasons that are rooted in one or more drag factors. For example, the management of a high-tech company wanted to acquire a major player in an adjacent technology sector. But the opportunity didn’t reach the board for nearly two years because the CEO was adamant about continuing as CEO if the companies joined. Only after he had extracted that assurance from his counterpart in the other company did he bring in the board. In the meantime, the multibillion dollar price tag for the acquisition had nearly tripled.
Clearly, the drag factor—in this case, at the individual level—was competition. The CEO put his personal agenda above the good of the company, significantly and expensively slowing time to value. Had he been driven by collaboration, he would have brought in the board far earlier and worked transparently with it on all of the issues surrounding the deal, including his personal fate.
In this stage the company extracts value from the opportunity. Accelerating this phase in M&A is critical, especially when the premium is high and the promises of value are great. Yet it’s not uncommon to see integration—the initial step in exploiting the opportunity—drag on for years. A major European company, two years after closing a multibillion dollar deal, still had more than 200 people working on integrating the two organizations. Multiple drag factors were at work, first among them unclear accountability. Two executives, one from each organization, co-led the integration, slowing decisions and paving the way for blame shifting. Progress was further slowed by complexity, including the awkward dual-reporting structure. Confusion, resulting from too many priorities among leaders and competing agendas among teams, completed the picture of near paralysis. Four years later, the acquirer sold the acquisition for one-fourth of its original purchase price.
Contrast that with a global industrial company that bought a biotechnology company and fully integrated it in six months. Or a fast-growing software company that has made more than two dozen acquisitions in recent years and integrated each of them within 30 days. Both the industrial giant and the nimble software company enjoy some powerful drivers of performance: ownership, where leaders and teams expect to be held accountable; simplicity, with little bureaucracy; and clarity, with everyone committed to a shared purpose.
In the fourth and most often neglected stage of time to value, the company disinvests in an opportunity. (In M&A, divestiture is so often overlooked that we don’t even include it in the “M&A” shorthand.) Instead of trying to sustain advantage unreasonably—in a market or region, a product, a line of business, or an acquisition—the company focuses on time to value by moving on before decline sets in. Boards are uniquely positioned to ensure clear-eyed, rational disinvestment decisions. Top management, including CEOs, are often emotionally invested in their products, markets, and the deals they have engineered. They can’t always be expected to make hard choices about these pet projects.
The drive factor at play in timely exit decisions is challenge, where the organization is quick to act on underperformance despite such emotional investment. The corresponding drag factor is complacency. At the individual level, leaders who fear straight talk accept mediocre performance in order to avoid conflict with the “owner” of a beloved asset. Teams, mired in groupthink, are slow to see the advantages of a timely exit. And the organization as a whole accepts mediocrity, taking far too long to address poor performance generally, whether in individuals or businesses.
In many cases, only the board, unbiased by emotion or the willingness to accept mediocrity, can provide the clinical detachment required to make rational exit decisions. (And if the board won’t, activist investors often will.) That doesn’t mean that the board should overstep its authority and decree disinvestment, but it does mean making sure that management isn’t blind to the possibility of exiting an underperforming asset sooner rather than later.
Put simply: Time to value provides the overarching competitive frame for M&A. Strategy provides the business logic driving a particular deal. Drive factors provide the means for accelerating the time to value on which success ultimately depends.
Among those drive factors, agility is a first among equals. Agility acts as a kind of “force multiplier” across the three key elements of acceleration: mobilization around a common set of strategic purposes, execution that fully and efficiently harnesses resources, and transformation to put new engines of growth to work. Companies that can mobilize, execute, and transform—all with agility—can not only get to value faster in M&A but thereby realize more value overall.
Ordinarily, “M&A” and “agility” don’t appear in the same sentence. But successful M&A (like all other processes, activities, and operations of a company) requires individual leaders who are curious, visionary, and resilient; teams with a bias for learning and execution; and an organization that is nimble and adaptable. Where inflexibility predominates—leaders with rigid mind-sets, teams that produce old solutions to new problems, organizations that are slow to adapt to changing circumstances—it is unreasonable to expect that even the most advantageous M&A opportunities will percolate up to the board. Nor is it logical to expect that deals will be consummated quickly or exploited efficiently, let alone exited opportunely.
Apart from poor financial performance measured after the fact, how can the board, far removed from day-to-day operations, determine what critical drag factors might be holding back the organization’s capacity for acceleration? The warning signs include high customer-attrition rates, too many layers of responsibility, missed objectives and milestones, unclear accountability, and a weak talent pipeline. All of these can be visible to the board in the normal course of oversight if they are identified as critical early warning signs. But these problems shouldn’t be regarded as isolated issues to be fixed piecemeal and sequentially. Rather, they should be seen as a systemic challenge that requires a systematic solution that addresses all of these factors in parallel, resulting in an organization that is ready to accelerate performance when called upon—and nowhere more effectively than in M&A.
About the authors
Colin Price is an alumnus of Heidrick & Struggles' London office.
Carolyn Vavrek is an alumna of the San Francisco office.
A version of this article originally appeared in Governance Challenges 2016: M&A Oversight, a report from the National Association of Corporate Directors.