Managing change: acquisitions and divestments
Combining businesses requires management teams to be at the top of their game to ensure long-term value is extracted. So what are the priorities for leaders considering mergers, acquisitions and divestments?
When an M&A deal is struck, the subsequent announcement will regularly feature photos of smiling executives and triumphant handshakes. But while this can be a time of celebration and optimism, a lot of work is still needed to transform a transaction into tangible added value.
Michael Butler, investment director at private equity firm ECI Partners, has overseen many such deals and says a huge amount of planning is required to define how a deal will translate into growth.
“Thinking of M&A as a route to growth is one way to go, but actually working out how to build a better business as well as a bigger one is important,” says Butler. “How do the M&A deals fit with the strategy you want to deliver? Whatever the reason, it’s about matching deals with the long-term goals of a business.”
Planned or opportunistic?
Supporting an overall business goal is key and Michael Whitfield, managing director (UK) of new business at CPP Group, attests to this. In late 2019, he oversaw the acquisition of Business & Domestic Insurances Services (B&D) from Motorway Direct for an undisclosed sum.
“We had been relaunched into the UK for 18 months, and at that point that we knew we wanted to build an insurance MGA,” explains Whitfield. “We wanted to expand the business along the lines of the B&D business portfolio.
“It neatly added to the book we were already building up. It was in some sense opportunistic, but it fitted well with what we were overall looking to achieve.”
Today, with the B&D acquisition being a case of stars aligning for CPP, Whitfield maintains the management team are keeping their options open. He is wary about being too closely wedded to one approach.
“We are following a blended growth strategy, so both organic and mildly opportunistic, which means we are still looking for good opportunities,” he says.
“Acquisitions can be a major distraction if you’ve not done your prep and haven’t ascertained if you genuinely have the appetite to make one.”
For this reason, Butler sees a balancing act being struck between opportunistic M&A activity and deals which form the bedrock of a business strategy. He says: “Being opportunistic isn’t a strategy, but that doesn’t mean it can’t be successful, you just aren’t in control of your own destiny.”
To deliver long-term, sustainable, acquisitive growth rather than “the odd deal here and there” needs a more front-footed approach, says Butler. “But if you are being opportunistic this means you’re looking at each deal in isolation and you lack that overall, broader prospective on what good looks like.”
Unfortunately, the reality of M&A deals doesn’t always live up to the hype with which they are announced. Jana Mercereau, head of corporate M&A (Great Britain) at Willis Towers Watson, has seen first-hand the fallout that can arise from deals gone bad. She picks out two reasons for this: overpaying for an acquisition and poor integration afterwards.
“We often see hubris from the deal team sitting in finance, but when you get down to individual workstreams the people there very quickly see if this is going to be the makings of an unwise acquisition,” says Mercereau.
“If you can start planning integration beforehand that is ideal, but many times the buyer will not see full information until the close of the deal and there’s a lot of planning that needs to be done afterwards,” she warns. “Being flexible is important in terms of what does ‘good’ look like?”
Poor integration was an issue Daniel Sharpe-Szunko, founder of iamINSURED, encountered when a business partner in a previous venture exited and sold their stake to a private equity firm.
At that time Sharpe-Szunko was managing director of The Insurance Surgery and found himself managing the business alongside Seneca Partners.
“It was a bit difficult,” recalls Sharpe-Szunko. “[Seneca] didn’t necessarily understand the business and how it functioned. They were just interested in bottom line figures and wanted to see growth in a pretty short period of time, so there was a bit of a disconnect between the expectation and the reality.”
Looking back, Sharpe-Szunko concedes that although his hand was forced by the departure of his business partner, the episode highlights the importance of due diligence.
“Keep your eyes very open,” advises Sharpe-Szunko. “I didn’t have that level of control to make the ultimate decision. With things like private equity, you have a level of responsibility to them to make sure you do your background research on what their expectations are and where their experience is.”
Calling it a day
Divestments may not receive the fanfare of M&A, but they still require a lot of work. Mercereau warns against thinking of divestments as “acquisitions in reverse” and says as much planning needs to be dedicated to them.
“I always say it is equally important to sell well,” says Mercereau. “Large organisations often burn bridges and employees often talk about this on sites like Glassdoor so there are several dynamics to consider.”
Planning needs to start well before a business – or part of one -- goes on the chopping block, says Mercereau, “especially in these days with entangled businesses and services. For the buyer, day one [of the deal] is the start of the work. For a seller, they have to everything done by that time.”
Divestments may require a different approach than acquisitions, but Butler points out these still need to be aligned with a long-term business strategy if possible. For instance, would the time and effort required to sell a loss-making unit of business be better allocated to making it profitable?
“It comes back to this point about having a long-term strategy about why you want to do this, namely what benefits does this bring to the group?” asks Butler.
“If you answer these questions and have thought through everything properly, the chances of having to make divestments can be significantly reduced. It takes a lot of time buying businesses, and if you are trying to do that and divest at the same time it can be a huge distraction.”