The number of mergers and acquisitions (M&A) worldwide has dropped for the first half year 2020 vs. 2019 in construction, civil engineering, construction materials as well as construction machinery, as the global economy absorbs the repercussions of COVID-19. Low performing businesses that lacked a clear USP before the crisis will have tough times to survive. Businesses weakened by the crisis will become viable M&A opportunities for companies in search of expansion, because they offer solutions that meet market needs.
We therefore anticipate an uptick in M&A activities in the sector as the economy meanders toward a “new normal” and a return to full swing when the COVID-19 pandemic subsides or a vaccine is found.
Five perspectives of a market-driven PMI approach
This begs an important and persistent question: how can companies derive the most value from their M&A activities? Cost synergies are certainly important for value creation, but this article shows how a market-driven approach to post-merger integration (PMI) enables a company to seize opportunities in two areas. The first is topline improvement in the short and medium term, and the second is mitigating risks from sales cannibalization, customer retention, and price erosion. We will look at the market-driven approach from five perspectives:
- Customers: How will the integration impact existing customer relationships? What are the right measures to secure business continuity?
- Competitors: How will competitors react to the new market set-up? Would they see this as an opportunity to gain share by luring away key accounts?
- Product: What are the implications for the product portfolio? How big is the overlap? How should the combined entity capture the value of product synergies?
- Pricing: How big is the price risk at overlapping customers of the combined entity? What are the best ways to mitigate that risk?
- Sales: What are the synergies and value creation opportunities from optimizing the sales approach?
Market-driven PMI at its best: 3 examples
Perfecting sales and pricing
Imagine the acquisition of a specialty materials company by a base materials company. This created a clash between the upstream bulk-commodity operating principles and the downstream requirements of the specialty business. The “bulk” model was slow, lacked flexibility, and had IT infrastructure that was unable to handle greater business complexity according to infrastructure monitoring tools. Furthermore, the business was already very lean, with optimized production costs. When this business was up for sale, it was clear that the value creation had to come from the market side and not primarily from the cost side. Adapting the sales operating model and professionalizing the pricing process to the business needs accounted for 68 percent of the total value creation of the deal.
The “combined company” took several steps to generate that value:
- First, it realized that the market for both suppliers and customers had become increasingly fragmented. Identifying and serving homogenous customer segments had become more difficult, but was therefore more important and required higher levels of efficiency in the sales department.
- Second, the main sources of growth opportunities were customers who were dissatisfied with their current suppliers. Winning them over would require close cooperation between sales and operations to demonstrate superior quality.
- A third source of growth were price increases, but the existing processes to raise prices had been neither fast enough nor effective enough to offset rising input costs over the last three years. Improving these processes and boosting the sales teams’ confidence generated additional revenue.
Avoiding customer churn
The sixth-largest supplier merged with the second-largest one to build a new market leader based on capacity. Securing customer retention was vital to this merger’s success, as some customers feared a one-sided dependency on such a powerful supplier. How did the merged entity succeed in keeping customer churn to less than ten percent? It took a streamlined and systematic approach to developing a customer retention plan. First, it identified the customers most at risk and assessed them according to risk level and customer value. The resulting segmentation enabled the organization to develop customized account plans for the most important customers, including communication, sales visits, client engagement workshops, and retention bonuses. KPIs to measure customer retention and closely track them during the merger period were developed in order to take immediate countermeasures where needed.
Broadening product offering
The successful market-driven approach to commercial PMI involved a merger of equals. However, the firms had complementary product portfolios and different regional footprints. The PMI plan therefore took a broad and diverse approach. It included the optimization of go-to-market strategies supplemented with an upgrade and professionalization of pricing as well as cross- and system-selling based on the broader product offering. The plan also called for additional regional penetration. The value creation through these commercial measures clearly outperformed the cost synergies and savings. Figure 1 shows the impact of the individual levers.
FIGURE 1: Impact of commercial levers in post-merger integration
Digitalization is another significant opportunity in market-driven PMI. The level and scale of digitalization typically varies significantly between the two parties. The merger creates a strong incentive to accelerate the digitalization process and adopt best practices.
Typical approach to commercial or market-driven PMI
The successful integration of commercial functions mirrors the three steps in any post-merger integration process. In Step 1, the first 100 days, the goals are to stabilize the business, outline the target design of the new commercial organization, and set the objectives. Step 1 also includes the baselining for measurement. Step 2 is all about detailing the target design, i.e. establishing new processes and new ways of working with respect to products, customers and pricing. Step 2 also involves defining new commercial functions and the new organizational set-up, with the goal of initiating and supporting topline and bottom-line growth. In larger mergers, Step 2 is done in pilots and then rolled out to the rest of the organization. Once Step 2 finishes, the organization will “go live” in Step 3.
We support you in successfully mastering these three steps, shown in Figure 2.
FIGURE 2: Approach
Summary: Market-driven PMI grows top and bottom lines
Following the right process to integrate commercial functions can generate significant value in PMI. Although M&A activity in the construction sector industries has declined so far in 2020, we expect an increase in deals across several segments for 2021. Using a market-driven approach to PMI, Simon-Kucher & Partners has successfully helped several companies in integrating their commercial functions and delivered significant strategic uplift to the businesses by growing the top and bottom lines.