As the GCC recovers from the impact of COVID-19, we see a growth in economic activity. This is driven by ongoing diversification, a move towards more sustainable sources of energy, accelerated adoption of advanced technology, and increased flow of inbound/outbound investments.
M&A, divestitures and joint ventures (JV) can be catalysts for accelerated transformation, enabling businesses to gain a technological edge, capture market share and reallocate capital. In the first six months of 2021, more than $40 billion worth of deals have been announced where either the acquirer or seller is located in the GCC.
We know from past data that nearly two-thirds of acquirers don’t capture optimum value due to ineffective pre-deal integration planning and/or post-deal execution. In divestitures, many sellers don’t achieve their target price due to ineffective estimation of carve-out costs and the resulting impact on financials.
Early planning and effective execution of integration and separation may be critical to unlocking the full deal value. This requires a combination of skillset, including financial, operational, technological, program and cultural change management.
Maximizing value in divestitures
Conduct pre-deal carve-out planning and design
Increase bidder confidence through a clear articulation of the operational perimeter, including the impact on people, processes, assets, contracts, systems and data. A well thought-through carve-out approach provides adequate articulation of dependencies with the remaining group, an approach to disentanglement while minimizing BAU (business as usual) disruption, and operating models with a clear articulation of transitional services agreement (TSA) scope and proposed fees.
Control cost narrative
It is crucial to identify how separation financials, including adjustments to profit and loss (P&L), balance-sheet and cashflow. The seller should control the cost narrative and maximize valuation earnings before interest, taxes, depreciation, and amortization (EBITDA) through robust calculations of the carve-out’s impact on financials, as well as calculation of one-off costs.
Effective completion planning
It is critical to clearly focus on the path for completion. Organizations need to appoint competent experts to prepare the business operationally for deal completion, including enablement of transitionary services and compliance to conditional precedents (CP).
Aim to reduce stranded costs
A TSA service fee should be calculated to compensate the seller for the services provided. TSA extension and exit clauses and notice durations should be carefully designed to minimize stranded costs.
Early negotiations with suppliers can be vital to adjust the contracted spend based on the consumption of the remaining business and obtain consent for the provision of TSA services. Finally, the divestiture should be leveraged as a catalyst for transformation of the remaining business.
Maximizing value in integrations
Conduct pre-deal integration diligence: Have an early view of the integration approach, as well as key risks and opportunities to create synergy. Include such opportunities or integration risk into the offer price and be able to negotiate acquirer accountabilities and their financial impact.
Align integration approach with deal rationale: Develop a clear view of the combined operating model at a level of detail to enable buy-in. Have clarity on the integration team structure, resourcing and governance and get executive management buy-in for it.
Take effective control early: It is essential to ring-fence the core business and resources to protect day-to-day performance. Organizations would be well advised to take immediate financial control (cash, reporting, authorities, Month 1 audit). A detailed action list would include all key activities required within Month 1 for all key business functions.
Focus on value creation: Value creation is a priority, as is a ‘bottom up’ synergy analysis, cost-to-achieve estimation and prioritization based on cost/benefit, with a robust approach for synergy tracking. Use integration as a catalyst for wider change/transformation in the business.
Establish strong leadership: The acquirer would do well to appoint a senior leader with sufficient decision-making authority to lead the integration management office (IMO). It is essential that there is a clear cultural vision for the combined organization, and the senior management’s reward structure is aligned to successful integration. Finally, a clear and robust communication strategy is crucial to integration success.
M&A is a crucial enabler for rapid and strategic change. However, it is easy to lose deal value due to misalignment of operational and commercial levers to deal rationale, lack of planning or ineffective execution. Clear and compelling articulation of the integration and separation approach - which maximizes financial value, combined with value-led execution - will enable a successful outcome.