What’s your M&A Strategy
I have been spending a fair bit of time in the social sector in Australia talking to a lot of not-for-profits. The consistent thing I have heard from the CEOs is we are exploring “mergers”. I am actually surprised at the consistent tone of the mergers meme in this space.
The surprise is for a few reasons. One, that there is an inevitability about it. Two, that it will solve the problems. For lots of reasons it makes sense to think about Mergers & Acquisitions (M&A). You get scale, you get reach, you are big enough to get the contracts from government. Possibly there will be operational savings but in a people business (in some cases its 80% costs) it will be about remodelling the top management and other operational level staff.
What is not clear to me is where does the advantages show up? How do we know that is the way to go? Is it due to government policies? Is it due to operating margins being thin? What is the minimum size of a NFP that is valid at scale? What does 1+1 equal to ?
Like innovation, M&A needs a strategy too. In the business world, it has not always worked out well. In Do Shareholders of Acquiring Firms Gain from Acquisitions? (NBER Working Paper No. 9523), co-authors Sara Moeller, Frederik Schlingemann, and Rene Stulz calculate that takeovers by large firms have destroyed $226 billion of shareholder wealth over 20 years. In contrast, small firms, defined as companies whose market capitalization is equivalent to the smallest 25 percent of companies listed on the NYSE in each year, created $8 billion of shareholder wealth through their transactions.
In Australia, according to research conducted by Indra Arunachalam, University of New England (2012), there has been increasing trend of consolidation especially in the Aged Care and Disability sector.
How do we avoid being on the biggest M&A disasters list?
Lets get back to basics here. Lets look at it from the lens of two organisations: Organisation 1, let’s call it M and and organisation 2, let’s call it A. M is interested in exploring a merger with A.
We start off with an initial assessment. “What’s your current business model?”
At Business Models Inc, we use the Business Model Canvas to articulate how an organisation creates, delivers and captures value. First, you would sketch out your current business model. Second, lets do an honest effort of understanding our strengths & weaknesses.
No.1, What’s your aspiration? What’s your ambition?
Organisation M, What’s your current ambition and why can’t you reach that on your own? Same goes for Organisation A. Why can’t your reach that on your own? If you have answered No to that, what’s the aspiration of the overall entity going to be? Is that clear?
No. 2, Which areas will you continue to provide services and products?
Is this merger to create economies of scale: the biggest aged care provider? Or is this about economies of scope: we can use our marketing budget to reach a bigger audience?
Are we going to continue to be in all the places where we play right now? or are we going to stop in some places and double down on others? What happens when we get a new contract or grant?
Will the new partnership provide new areas to play in?
No. 3, What’s the killer value proposition for this merger?
How will this merger create the difference? Is it about internal efficiencies or external value? How will your client/customer/beneficiary be better off?
If I ask one of your homeless youth, what will they say will be the benefit?
No.4, What capabilities are you bringing to the table?
Is M & A here complementary or not? Are you both bringing in the same capabilities or different ones? Do you have a clear sense of your current business model strengths & weakness? How will the capabilities of the new entity look like? How will they create better lives?
No.5, What systems, governance and policies will be needed?
A new IT system that can’t be afforded by any one entity? Or is it about collaboration to create a new social enterprise? Is it about risk management?
At the fundamental level, it’s asking the basic questions: What’s your mission, who is the customer and what do they value? And how is this strategy going to deliver that?
The benefits of the merger should show up in the future business model after change management and added challenges, that is key.
To create your M&A plan, contact me.