How Bold CEOs succeed at M&A Turnarounds
How CEOs Succeed at M&A Turnarounds. Growth is difficult, especially in a slowing economy, and sometimes M&A can offer a solution. Although few M&A deals wind up creating value, CEOs with a proven ability to transform an organization and improve performance in difficult conditions can create massive value by picking up a troubled business or brand—often at a discount. It’s a bold idea: buying distressed assets, turning them around, and integrating them to produce a company that is much stronger than the sum of its parts.
BCG recently analyzed 1,400 M&A-based turnarounds between 2005 and 2018 and found that the Total Shareholder Return (TSR) of winning deals was 25 percentage points higher than that of unsuccessful deals.And we identified five factors that can increase the ability of bold CEOs to succeed with such turnarounds:
1. Willingness to Act Quickly. The single biggest factor in a turnaround deal’s success is a willingness to take bold and rapid action. Buyers that launched a turnaround in the first year after a deal closed generated 12 percentage points more in TSR than those that waited until later. Engaging quickly generates momentum and frees up capital, both of which can spur longer-term initiatives. Early action also helps boost investors’ confidence, which is a key factor in turnaround success. Successful CEOs treat speed as their friend.
2. Ambitious Synergy Targets. Leaders need to aim high, with ambitious synergy targets factoring in both increased revenue and reduced costs. These should be stretch goals that look at the “full potential” of the turnaround: improvements to the acquired company, improvements to the buyer, and synergies from combining the two. (See the exhibit.) CEOs who set ambitious targets, announced them externally, and reported on progress generated higher TSR in the years following the close of an acquisition.
3. Sufficient Investment in Transformation. Turnaround programs cost money—to close plants, restructure business units, or repair assets that have become obsolete. Rather than treating these as expenses and dragging the program out over a long period of time, successful leadership teams treat them as investments (often as restructuring charges), and companies that invested more and moved faster than the average for their industry performed better over time.
4. A Long-Term Orientation. CEOs who are integrating a troubled business need to consider the short term and make tactical and operational moves that will generate the necessary funding. But those who can balance this short-term perspective with a long-term strategic orientation show better financial returns over time. These leaders do not get so caught up in daily crises that they miss emerging opportunities. They invest more in digital and R&D and less in capital improvements, and their long-term orientation allows them to improve their strategic positioning.
5. A Well-Defined Purpose. A growing body shows that companies with goals and aspirations that go beyond profits perform better over time. The same principle applies to M&A turnarounds. Acquiring companies that spell out a common purpose can motivate and align employees around long-term goals. Leadership teams and employees will push themselves hard on a turnaround program if they see the long-term objective.
While each of these five factors on its own can improve the results of an M&A turnaround, a combination of two or more is even more powerful. In fact, there is a direct correlation between the number of factors that a company takes into account and the boost in three-year TSR from the deal.
Source : website BCG, JULY 18, 2019