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Capturing and Creating Value in M&A via Strategic Intent

As businesses in the consumer products industry continue exploring new avenues and acquisitions for growth, creating value in M&A is imperative to long-term, sustainable success. Last year, Walmart upped its apparel game with two key acquisitions: the 10-year old, digitally native brand Bonobos (whose apparel products are sold primarily online, through a small number of company owned boutique stores, and through department stores in partnership with Nordstrom) and the vintage-inspired women’s clothing ModClothWhat can these two example transactions in the apparel world teach us about the state of retail, capturing and creating value in M&A, and the importance of strategic intent?  

Consolidation in the search for scale, cost synergies, and talent/capability acquisition is apparent in the number of M&A transactions taking place over the past 12-18 months (with a record $3.2 trillion this year alone). Leading organizations are on a continuous search to complement and expand their core capabilities or in constant pursuits to gain competitive advantage.

However, the challenge for executives lies in creating value in M&A transactions while at the same time capturing that value in a sustainable way that leads to long-term profitable growth. The role of strategic intent is paramount in balancing both sides of this equation.

Articulating Organizational Strategic Direction and Purpose 

It is our experience that, over time, companies lose sight of the purpose of a deal (or a series of opportunistic transactions) as they fall short in articulating an organizational vision / direction (or it simply changes over time) dragging old organizational behaviors by inertia without careful consideration and consistent attention to organizational performance.

To succeed, we find that senior leadership needs to effectively articulate the different ways in which value creation and capture is intended to occur – and to strategically define how that is meant to take place from the get-go. Typically, we see this happening in four ways:

  • Acquire and fully integrate
  • Acquire and “let them be”
  • Acquire and disintegrate
  • Acquire and figure it out later

The last scenario above is more common than most organizations like to admit, highlighting the criticality of the development and use of an M&A playbook and an Integration Management Office (IMO) that instills the necessary guardrails to ensure all M&A actions are cohesive to the organization’s ambition.

Read more: M&A Due Diligence for the 21st Century

Additionally, the ability for leading organizations and executives to internally communicate their quest for value creation & capture in the M&A space falls under one (or more) of several strategic choices and intents that are important for senior leadership understand and articulate.

1.   Growth Strategy: Searching for Growth and Scale

Economies of scale are often cited as a key component of M&A activity, but habitually focus solely on financial implications without a broader, deeper perspective that includes industry specific strategic dynamics, people, technology, human resources, and organizational design considerations. If the focus of your deal is on growth & scale, a holistic business and organizational perspective should always be incorporated and weighed against financial considerations.

For example, Gildan Activewear’s acquisition of American Apparel not only expanded their diverse brand portfolio, but it also enabled them to boost its distribution network in the North American and international print wear markets.

Of important consideration for most organizations pursuing the growth imperative through M&A is that performance and goal shortfalls present challenges that will put the overall strategic intent into question – a key component that is often unplanned for.

2.   Cost Enhancements:  Improving the Bottom Line

Extracting value from the integration of activities by combining or dismantling value chain components is a traditional way to gain cost-side advantages in a transaction. The ability to articulate this strategy and vision is critical given the potential delicate nature of these changes (e.g., restructuring, closing of manufacturing assets, etc.)

Several known filters and techniques exist through which management should think about cost opportunities:  intrinsic costs (e.g., are we doing the right or wrong activities?), structural costs (e.g., are we doing it in the right / wrong places?), systemic costs (e.g., do we have the good or poor processes?), or performance costs (e.g., do we have utilization issues or lack of skills/capabilities hold us back?).  The ability to articulate the strategic imperatives under a cost-enhancement pursuit is critical for organizational alignment and to move all necessary pieces of the company in unison.

3.   Limiting Potential Competitive Threats

Organizational alignment of strategic intent is critical when transactions focus on limiting / absorbing potential threats as this type of move can lead to non-accretive growth/profitability in the short run and sometimes even in the long-run. Legal and regulatory constraints also play an enormous role in shaping the strategic choices in this arena and fallouts due to regulatory decisions can have significant impacts on company morale, talent acquisition and retention, and even performance.

Given this dynamic, organizational discontent can occur when senior leadership understands the purpose of a transaction but its essence is lost or misunderstood by other management layers within the organization.

4.   Talent / Emerging Capabilities Acquisitions

The ability for organizations to acquire talent and/or emerging capabilities is also an often under articulated imperative. Targeting new and emerging technologies or acquiring an entire team are often cited strategies for approaching this type of acquisition. As important as tangible assets are, the criticality of intangible assets can be often overlooked or under explained by senior management to the rest of the organization – after all, if assets were the primary success factor, the most successful companies would be those with enough capital to purchase the assets which is not the case in today’s world.

Driving M&A Value Capture and Creation 

A coherent M&A strategy strikes a balance where the right vision and strategic intent is clearly articulated, communicated, and executed at every step of the M&A lifecycle – whether in strategy mode, targeting/screening, valuation, diligence, execution, or value-realization stages.

Winning organizations that plan and account for the need for significant incremental investments post-acquisition (e.g., when brands have to invest to propel growth) are often better positioned to make the right strategic moves as it relates to M&A.

As with any of the other strategic choices outlined before, changes from the original intent to a new imperative are bound to occur.  Leading organizations and executives manage to thrive when a consciously chosen and implemented approach is taken to pursue a strategic choice – and its consequential trade-offs are understood, mitigated, and used as strategic advantages, not as reactive moves to market pressures.

To learn more about Clarkston’s M&A Services, contact us.

Co-author and contributions by Sebastian Valencia

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Tags: Specialty Retail, M&A
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