Why You Should Bring Customers to the M&A Table
Deal-makers often don’t consider customers according to a global branding consultancy
|Thursday, September 6, 2018|
By Josh Feldmeth and Sam Walter for CFO.com
As most finance executives know, M&A is hot. The market is on pace for nearly $5 trillion in mergers and acquisitions this year, the most in over a decade. Corporate spinoff activity is also healthy, with the likes of General Electric, Johnson & Johnson, and Danaher refocusing their portfolios.
The reasons for pursuing M&A are clear: Companies are looking for revenue in a low-growth environment, new capabilities to defend disruption, and fresh ideas to jump-start innovation.
Less obvious is how to make deals more successful. Historically, returns are a mixed bag, which is even more concerning as asset prices increase.
At Prophet, we’ve seen that many organizations leave value on the table by neglecting strategic go-to-market decisions. Often it’s because they misunderstand customer-experience variables or tackle brand and marketing decisions as superficial or secondary issues.
In a series of one-on-one conversations with executives, they’ve described to us an M&A process that typically ignores questions about customer engagement, marketing, and brand strategy. Post-deal analysis is infrequent and superficial. And customer-focused questions, so crucial to the success of all businesses, are often left for someone else to figure out later.
Problem 1: Customer-facing teams are the last to know. Often, we’ve learned, marketing and brand teams don’t enter the deal until late in the process.
“Decisions are made around product, technology, and organizational structure before brand,” one business-development exec tells us. “And go-to-market factors are rarely brought into the process.”
Even after these teams are engaged, their input is given less priority than legal, financial, and operational issues. Excluding the perspective of the customer creates blind spots.
Problem 2: Sloppy analytics, weak data. Customer-facing decisions are shut out of early deal conversations because M&A teams, while rigorous in many areas, are routinely weak in analyzing brand and customer data.
Often, deals are made with low-grade analytics. Sometimes, for example, there are no brand valuations. Or they use disconnected customer insights, or unvalidated assumptions of the ideal go-to-market brand structure. They may rely on unsophisticated capital-allocation modeling for post-deal integration.
But when companies integrate rigorous brand and marketing analytics in the deal, they may capture significant incremental value.
For example, one deal we studied doubled the final price of a $5 billion global asset by using a brand-valuation method. Another, using a brand portfolio optimization strategy, identified a market-share gain of 2% to 3% on a $60 billion deal.
We have seen post-merger migration costs reduced by 15% to 40%, thanks to cost-optimization analysis.
Even potential revenue synergies are often zeroed out, meaning that any potential growth opportunities resulting from the transaction are assumed to be non-existent. These factors point to a chance to increase the value captured in deals by considering customer-focused growth opportunities during M&A due diligence.
The main barriers to better data?
Pacing: Deal teams move fast and re-run their models frequently. They think in terms of days. That clashes with traditional multi-week marketing and customer research timelines.
Vocabulary: Marketing and branding colleagues struggle to frame issues in terms that are relevant to deal teams, like financial engineering, risk, and capital-market strategies.
Confidence: Deal-makers often assume that proving return on investment in customer-facing decisions is just too difficult.
Problem 3: “It’s not my problem.” Most companies with an active M&A agenda have a playbook — a set of processes, decision rules, and governance to ensure that the deal closes and operations proceed with continuity. “Our playbook covers the things that absolutely have to get done to keep the lights on,” says one corporate development exec.
But what comes next — such nuanced issues as portfolio strategy or value proposition development — requires a different type of problem-solving horsepower. It’s just easier to leave customer-facing decisions out of the playbook.
“During merger deals, front-end considerations are primarily financial, and in the middle the focus is operations,” says a branding chief at a Chinese multinational. “But the go-to-market strategy is left for the operators to figure out.”
Closing the Performance Gap
The gap that our conversations with executives identify is real. Narrowing it would lead to improved M&A returns. In the same way Amazon famously leaves an empty chair in every meeting to represent the customer, we’re discovering that deal-makers who make room at the table for customer perspective can find more value through:
Stronger bargaining power: “Our hospital network has data on what our brand assets bring to the table, and we enter partnership discussions with a strategy based on those insights,” says one marketing exec. It also makes for smoother and more efficient negotiations, setting expectations for potential brand solutions early on.
Clearer strategic vision: Earlier quantification of the impact of potential branding decisions on customers and competitors will equip the deal team to negotiate a more valuable post-deal structure. “If our CEO had known then what he knows now, we would have struck a very different deal,” says one executive.
Faster value capture from integration: Both sides of the deal benefit from clarity on post-acquisition portfolio strategy while the deal is being crafted.
Addressing the customer perspective is about more than logos and branding decisions. By inviting strategic brand and marketing expertise into preliminary deal conversations, companies can address important questions, like brand asset valuation, portfolio strategy, and post-deal brand structure. Such intelligence may well increase the value captured during the deal.
Customer obsession is what distinguishes the world’s most successful companies. It can enrich deal-making, too.