Mergers and Acquisitions, typically shortened to M&A, haven’t necessarily defined the business landscape of recent years, but they have indeed shaped many industries, including, of course, the contemporary tech sector.
Major tech companies like Facebook (Meta), Apple, and Alphabet, (parent company of Google) have all set a standard of frequent high-value buyouts that has led many startups to prioritize demonstrating their value to companies such as theme, specifically for the purpose of enticing acquisitions.
Of course, entertainment, including film, television, and gaming, has also seen major M&A developments, with Tencent expanding not only in China but also abroad. And in the US, major Hollywood studios, via their parent companies, have consolidated significantly, both in terms of production and distribution (specifically streaming distribution).
Despite the reach and impact of M&A deals, relatively few business leaders and company stakeholders have an in-depth understanding of how potential deals are assessed or how deals lead to benefits post-close.
As a senior M&A professional, it’s Ramendra Rout’s job to apply his extensive experience and expertise to M&A scenarios before, during, and after deals come to pass.
Rout has experience with business partnerships, growth strategy, value creation, change management, and cultural assimilation, all of which are essential components of the M&A process, and there will be more details on the value of these components in the interview itself.
Rout not only walked us through the specifics of the M&A process and variations based on the type of deal and the industry of the target and seller companies but also charted the evolution of M&A in recent years, which also provides clues as to how it may change in the near future as well.
What was your entry point to M&A?
I started my career in technology consulting and spent the first few years working with consulting firms, then I transitioned to business development and focused on leading large total technology transformation-related sales pursuits. After that, I moved to M&A, which was a fabulous opportunity to get exposed to a myriad of aspects like value creation, integration, due diligence, merger models, investment cases covering accretion/dilution of EPS, purchase price comparison basis EBITDA and revenue multiples of past deals, ROCE, and IRR.
Overall, these were new horizons for me, and it has been an exciting journey so far. As the M&A landscape evolves, I look forward to keeping myself up-to-date with the latest changes.
Can you briefly describe your acquisition assessment process? Are there any aspects of this process that you now consider to be more relevant given current business conditions?
The starting point is a business strategy for every unit. Annually, every business vertical comes up with its growth strategy for the upcoming year and the inorganic/organic break-up of the same. This covers further details around technology or geographic areas of focus. Next is interaction with the bankers and secure CIM (Confidential Information Memorandum) and basis, discussed with business sponsors.
The usual path that follows this is full due diligence including business, commercial, human resources, legal, and other areas. Basis this and an initial view of the business case, and submit a nonbinding-offer. If this is all ok with the seller, then the next step would be to sign a term sheet and, as agreed, perform confirmatory due diligence. Lastly, negotiate the purchase agreement, sign, and announce the deal. Post-announcement, complete the closing formalities and legal close.
While the market situation is volatile, the tech sector remains buoyant in M&A deals. The timelines for closing deals have reduced significantly. Higher interest rates would mean lower valuation, and that is holding back some of the sellers. NASDAQ Composite, a proxy for the tech sector is down by approximately 35%. Companies are figuring out innovative M&A constructs. One way of addressing demand uncertainty is target takeover of subsidiaries, and along with the transaction, sign a committed revenue with the parent seller.
The second approach is to pump in cash through minority stakes in companies that cannot afford to modernize and transform during this time and would like to continue business as usual. It’s also helpful to have a contract between investor/buyer and seller/customer to redirect the cash inflow into the business transformation spends. This would be a win-win for both.
What are some important requirements for value creation management, in general?
For every M&A deal, based on the target revenue base, a budget can be apportioned as a one-time cost of value creation. There is no defined rule, and the budget varies from deal to deal. Every buyer would make their own judgment about this. Certain input factors come from operational due diligence and timelines for integration. For small tuck-in acquisitions, the idea is to fold them as quickly as possible, while for large transactions where both buyer and seller would operate independently for a longer period, a higher-budget provision would be required.
Some of the teams who consume this budget are driving brand-building campaigns, team meet-and-greet, training and assimilation, external consultant support for operational integration roadmap, and special incentives and bonuses for sales teams or identified critical employees. This budget is also used for funding software licenses during scenarios of dual spending for short periods of time before a cut-over.
The idea is to expense these below the operating margin so that the target business leaders do not get impacted, and the business strategy and operating plan continue independent of the value creation roadmap.
In addition to budget, a strong team needs to be identified for driving all aspects of integration and value creation. Often, it is a difficult ask, as it would mean a strong leadership commitment towards inorganic growth and, accordingly, investment in a fixed team who would continue from deal to deal, build on the learnings, and perfect the art of partnering with the target and bringing them together with the buyer as a single unit. Besides that, leadership also plays a pivotal role in ensuring a robust governance model is established for quick clearance of any roadblocks and making decisions.
Good playbooks help in a big way to drive the execution roadmap, align project teams, set expectations with the target, and save time by not trying to reinvent the standard financial, fiduciary, and market-related actions that need to be undertaken regardless of a deal type.
Overall, it is a good mix of team, budget, governance, and customizable project plans that accelerate the post-close phase of value realization.
What’s the typical timeline for executing a brand refresh strategy?
It depends. For some deals, such as asset transactions, it is a day-one re-branding, and everyone is newly branded with the buyer. For small transactions, usually, it is a flat approximate six-month to one-year window before the target brand can be sunset and merged with the buyer.
Usually, this involves an interim state of co-branding where both buyer and target logos are placed side-by-side in all assets. The assets that are uniquely positioned and that have a distinct capability compared to the buyer would require thorough due diligence and some level of ascertainment from the market. For unique assets, this could mean that the co-branded status continues for the long term and is never sunset, while for some the time is longer and sunset in approximately three years. A brand survey with clients is a good way to establish an opportune time for brand sunset. It helps to establish brand equity and client mindshare for both buyer and target offerings.
So, in summary, assets will fall under three categories: first are acquisitions that provide scale and can be sunset on day one, second, acquisitions that provide capability adjacencies and basis the level of difference can be sunset in six months to one year, and some acquisitions bring unique and distinctively different capabilities and hence will retain the brand for the long term, exceeding three to five years. For both the second and third categories, post-deal, the target brand is modified to reflect both target and buyer logos or with a subtext that says “A buyer company.”
The above will only be applicable for strategics, while for private equity, this may not be relevant, as most private equity and financial buyouts do not undertake the brand refresh path.
Can you provide an overview of the ideal financial outcomes of the average merger or acquisition?
M&A deal rationale goes back to something that is not very surprising: increase market share, add capabilities, vertical or horizontal expansion, and expand the client base. Most M&A have a vision for long-term value creation, and at times they come with short-term dips in business performance, especially in margin or EPS dilution. At times there is a minor uptick in people-related metrics like attrition. This could be spurred by transaction anxiety.
But I’d also like to describe some of the long-term markers for strategic buyers. The first marker is financial performance in terms of the year-on-year base revenue growth for the seller, the synergy revenue growth for the buyer and seller, the margin improvement, and then it gets further into details like improvement in client bill rates, reduction in cost of revenues, and SG&A reduction.
The second marker is the overall positioning of the target and buyer in a particular sector. Good measurement criteria would be, for example, being a preferred vendor for clients, client net promoter scores, and wallet share for top clients.
The third marker is the attractiveness value for prospective job seekers. M&A is an opportunity for both the target and the seller to benefit from mutual cultural and work policies that are differentiators in the market. A good way to measure this would be to take candidate feedback.
The fourth marker is joint accreditation with ecosystem partners and influencers. Either the target or the seller would have strong credentials and recognition from industry analysts, and the other party would benefit from this as well when both parties come together.
The fifth marker is brand goodwill. These are associations or recognition with certain global purposes like ESG and philanthropy. These themes are more pro-bono, they don’t always have a direct business benefit. But if either the target or the seller has a positive identity in relation to these themes, then it would be a good strategy to have the other benefit from this recognition.
Has strategy development always been part of your core skillset? Are you continuing to develop your strategy development abilities?
I’ve been involved in strategy-related work for a while now. Part of my role in business development was preparing a competitive strategy to win sales pursuits. Most of the opportunities were fiercely competitive, and the winning strategy was a blended version of innovation, technology solutions, and commercial models. Preparing innovative business cases, such as a consumption-based commercial service model, self-funded innovation model, and cost take-outs, etc., are areas that I’ve worked on in the past.
At the moment, especially in acquisitions, the biggest question for leadership is, “What do we do with the acquisition and how do we ensure that the value is realized?”
This is a whole different world because strategy and execution are dependent on people and change. So in one of these situations, the aspects that drive strategy development are culture, operating model nuances, and team dynamics.
While the ultimate objective is to deliver tangible benefits to the business, the intangible aspect of winning hearts and minds is critical to delivering the strategy. Specifically, a lot of my efforts go toward identifying areas that are quick wins and would deliver cost benefits to the business. Next, I prepare an operating model that would support joint go-to-market, and finally, I handle the long-term business structure of the target and the combined organization unit.
UPDATED: Do you feel that M&A professionals have needed to adjust any of the core tenets of their work over the last two years specifically?
M&A is on a continuously evolving path. Over the years, the appetite for mega deals has not waned. Companies that have deep pockets don’t shy away from spending top dollar to acquire assets that align with their core business, which helps them take a dominant position in the market or gain market share. In spite of market uncertainty, mega deals still constitute about 30% of the overall deal volume globally.
Private equity buyers have become very active, and now lines are very blurred between strategic and financial buyers. Often, both cross paths frequently. The regulatory watch has increased significantly. Deals perceived as vertical mergers as well as cybersecurity-related deals are closely scrutinized by the FTC and Commission for Foreign Investment. The Microsoft and Activision Blizzard deal is the latest case in point.
Companies need to constantly make changes to their playbook based on the market trends and, most importantly, have a clear view of value creation or integration because that is the big question that boards are keen to understand, and they’re impatient to see the acquisition start delivering value in a quick turnaround time.