Last Updated on February 27, 2024
Ramendra Rout, our interview guest today, is a renowned expert on the subject of business mergers and acquisitions, and he’s been working in the field for many years now. While we can’t mention the details of some of the major deals he’s worked on due to non-disclosure agreements, we can say that Rout oversees many different and highly crucial components of the M&A process, which can be incredibly complex, both in the short-term and the long-term.
During our interview with Rout, we managed to cover a lot of ground, discussing many of the key areas of adjustment that have to be considered after an M&A deal has been finalized, as well as the recent history of M&A activity on an international level, which is essential to understanding what we’re likely to see in terms of M&A activity over the next few years.
For any of our readers who are intrigued by M&A or want to know more about what happens behind the scenes after one of these deals is allowed to go through, this interview is an excellent resource.
In your view, what are some of the core pillars of value creation with regard to mergers and acquisitions?
Value creation can be looked at from two dimensions. The first is tangible improvements in business metrics and the second is intangible aspects like brand equity gain, employee advocacy, and market positioning improvement.
In the context of M&A, the former has a defined scope, and preferably should be a continuation of the business case basis which the board approved when agreeing to purchase the asset. The primary focus invariably remains on synergy revenue, Y-o-Y growth, margin improvement, client add, client wallet share, and employee attrition. Each of these need to have a defined execution plan and roadmap for accomplishing them.
The later aspects of acquisition value are long-drawn. Brand equity transfer happens over time when clients and markets see the moat of both companies reflect across all levels of engagement. Surveys are a good way to evaluate brand positioning and conclude that the market mindshare is leveled off for both buyer and target. Similarly, employee advocacy is an outcome of the right level of engagement and direction-setting by the business leaders, clarity into career path, market-relevant work, and coaching. A good recipe for the target employees to become advocates is to ensure that the combined organization provides a platform where leadership makes everyone feel like they belong, the business vision is well understood, and there is clarity on career growth.
Can you explain the basics of integration & divestitures for any readers who aren’t familiar?
For an outsider, integration is about creating value by bringing two organizations together. It’s an opportunity to capture synergy benefits often referred to by the adage, one plus one is greater than two. The strategy for integration generally is grounded in the deal rationale: whether the acquisition gives access to new geography, access to new capabilities, or access to new clients. That becomes the starting point, and the integration objectives are defined in terms of desired market growth, must-have clients, and potential opportunities for developing organizational capabilities.
Then we look at the enablers like business processes, end-state organization structure, brand identity, and ultimately arrive at the optimal operating model that is well positioned within the parent organization, well positioned to collaborate between internal business units, and meaningfully serve clients. Integration strategies differ by the deal construct whether it is a 100% entity takeover, a subsidiary takeover, or an asset takeover. Each of them would then take a different approach to Day 1 readiness, i.e., the day the deal is legally closed.
Divestitures have a completely opposite principle for value creation. Some of the key drivers for arriving at a decision to divest are conducting a portfolio evaluation and identifying business units or subsidiaries that do not align with the core focus areas of growth, or those that are not operating with sound business fundamentals.
These units are potential areas for divestiture, and as part of that, the parent will redeploy capital in areas that align with the focus areas of the business. In summary, the value created from the divestment is greater than a single company. There are multiple divestiture constructs, most notably spinoff: divesting a part of operations to create a new and independent operating entity; sell-off: divesting assets, subsidiary, or business unit to another buyer as a free-standing entity; spin-merge: a sell-off followed by a merger with the buyer; and management buyout: divesting and transferring ownership to an entity whose management comprises of management of the parent company.
Can you comment on your expertise in cultural assimilation?
This is one of the toughest areas to address in an M&A, the primary reason being there is no single definition of culture or a single solution to addressing cultural change during acquisition integrations. An approach that helps address cultural assimilation is conducting stakeholder interviews with the target CEO and leadership team. The interview reports are summarized across a multitude of categories, e.g. growth at all cost or profitable growth, hierarchical or flat, conflict or conformance, and many more.
The report would read where the target vs the parent entity stack up on a scale of 1 to 10. I believe cultural survey reports are great. They provide a broad organizational cultural DNA. But if that can be complemented by an assessment at the operating level, then a good 360-degree picture emerges. This is a perfect medley of subjective assessment from the leadership interviews and objective assessment of the operating model differences. We get the answer to the culture conundrum, “How does work get done?” or “What drives the right behavior?” The outcomes influence integration strategy, which aspects will be retained and probably can also be adopted by the parent organization.
In my experience, workplace dynamics often vary between organizations. The integration strategy should address the cultural nuances through retention, replacement, or new investment.
What is the typical timeline for portfolio assessment?
Once-a-year assessments are good to evaluate the portfolio, covering, offerings, capabilities, and business unit performance. Annual business line strategic plans provide inputs on white spaces and areas that the business sponsor would like to fill through an inorganic path. This also is a point of decision-making for the board and leadership to evaluate businesses that are underperforming or do not blend with the focus areas.
In an M&A scenario, the target portfolio assessment starts right after signing the NDA. Often, the portfolio assessment leads to certain elements being common between both the target and the buyer. A good way to ensure that portfolio overlaps do not become a point of disadvantage post-acquisition is to have the right level of governance, incentive structure, and operating charter that would enable a market-ready unit aligned towards the competitive forces.
Have you noticed any major global M&A trends over the past year or so that you would like to comment on?
The M&A market globally has slowed down in 2022 after reaching an unprecedented high in the year 2021. The Covid-19 pandemic gave a huge tailwind for cloud and digital technologies, and given the new model of remote working, restrictions on mobility, and changing consumer habits, this created a new type of addressable market demand. Strategics and financial buyers went on a buying spree and the year was one of the best in M&A history.
However, in 2022, central banks increased interest rates to curb inflation, leading to a higher cost of financing, and that, combined with the demand uncertainty and geopolitical instability, led to a dramatic reduction in M&A activity. The lower valuation has also made sellers pause before getting back to the market.
In terms of deal volume by industry, tech deals remained at the top quadrant. Between strategic and private equity, both maintained an aggressive appetite for M&A in 2022. However, contrary to the intuition that uncertain markets will lead to smaller M&A ticket size, mega deals constituted close to 30% of deal value. Volatile markets would be an opportunity for both parties to take another look at their value-creation strategies.
The year 2022 also saw a significant increase in regulatory scrutiny. Government departments have increased antitrust enforcement in a big way. The committee for foreign investment in the US has been very active in cybersecurity and data-related acquisitions. Given data privacy and security concerns, this is an area to watch out for in 2023. The recent deal where Microsoft announced its intent to purchase gaming company Activision Blizzard, has been blocked by the FTC (Federal Trade Commission), and going forward, this might become a trend for other vertical mergers or tech deals.
Overall, deal volumes are down compared to 2021, but there’s good momentum across sectors like information technology, industrial, and real estate.
Can you explain the importance of change management?
There are two focus areas for change management: the strategic importance of winning hearts and minds and operating-level change management and advocacy.
In one of the acquisitions early on, we realized that the founder had a very strong follower base among the employees, which was good for us as that meant everyone was engaged. However, we also recognized that having a single point of success or failure is a risk for the business, especially when the context is to integrate businesses.
Hence, early on we started designing forums for joint leadership addresses and identified several organizational themes in which we could invite the target employees to participate. This gave an opportunity for soft assimilation, and over a period, it helped in bringing teams together and transitioning them to the new operating model.
At an operating level, processes and systems are an area of massive change. Some are easy to adopt and some are extremely tough. We ensure that enough time is provisioned for user training and clarification. Additionally, we create user journeys that would help them understand how their average day would change. We identify a pilot group of early adopters and ensure that they understand the change and become the first level of support for the target employees.
Certain decision-making roles change due to integration and that is addressed upfront as we develop an end-state target org structure. Lastly, we set up an omnichannel strategy to address concerns, clarifications, and issues post-change.
Do you think it’s essential for professionals such as yourself to stay on top of international business news?
The M&A field has become so dynamic, and at times I run out of time to catch up on news and trends. There is just so much happening globally. China, Taiwan, Turkey, and Europe are going through different upswings and downswings. Capital raising, exits, mergers, and divestitures have been at the helm of business globally.
Besides that, the regulatory landscape is continuously evolving. S&P 500 and Bloomberg are great avenues, and I ensure that I read my weekly subscriptions from these platforms. Besides that, I also read Seeking Alpha and Reuters for keeping myself abreast with the latest in M&A.