Preparing for acquisitions and divestitures post-pandemic
As businesses leaders look to their post COVID-19 future and re-evaluate strategic plans, many are finding themselves in a significantly different position than where they expected to be at the beginning of the year. In the first half of 2020, the business environment amplified strengths and weaknesses of both individual companies and entire industries. Businesses were no longer able to hide areas of lower performance — especially in customer service and operational efficiency.
With dramatic shifts in delivery models and customer preferences, some companies and industries saw significantly lower revenue and experienced customer loss. However, other businesses are emerging from the pandemic stronger, in terms of customer loyalty and revenue. In some cases, the growth or losses were due to the changes in demand. In others, performance changes were the result of an organization’s ability — or inability — to quickly shift and adapt.
Increased opportunities for businesses
Following the disruptions created by COVID-19, the contrast between strong companies and their weaker counterparts creates an increased market for merger, acquisition and divestiture activity. For many companies knocked off balance, the goal is to get back to basic operations in an efficient and streamlined manner. Well-positioned companies are in a unique position to potentially acquire now-struggling organizations, which creates opportunities on both sides. During the second half of this year, liquidity stabilization, valuation clarity, and balance sheet disparity will likely create a higher volume of acquisition and divestiture activity.
Although a majority of respondents (51%) in a survey conducted by the M&A Leadership Council reported a “temporary pause” of current deal activity, plans indicate increased activity in the near future, reported the Harvard Business Review.Almost half (49%) of the 50 C-level executives and senior corporate development leaders surveyed said they plan to opportunistically buy distressed companies. Additionally, 23% of respondents indicated that they will target new non-core technologies, solutions or segments.
Focusing on operations and people before acquiring
Companies that are financially stable and considering the acquisition of a company or divestiture have many avenues to pursue over the near to mid-term horizons. With the disruption in the economy, businesses have the opportunity to reset and redefine their core business models. By strategically planning now, companies can prioritize the resources and tasks needed to turn lucrative acquisition benefit opportunities into reality.
To begin the process, companies must understand their required core processes and supporting digital technology to provide differentiation both today and throughout the next decade. These core strengths serve as the foundation when looking for opportunities and synergies in the market. Businesses must carefully view the future of both their business and industry with a post-COVID lens instead of clouding their perspective with past realities.
Often the most significant synergies and cost savings from acquisitions are a result of operational integrations between the involved companies. Before considering the acquisition of another company, a business should evaluate their own operations, data and processes to assess if they can quickly add another organization to its current platform. If not, the business needs to first focus on streamlining its own core operations to ensure flexibility to thrive as a single company and capture immediate cost savings to support the acquisition business case.
Businesses that are considering acquiring companies that have a heterogenous operating model or business focus must take incremental preparation steps. For example, an office supply store that wants to acquire a delivery business must decide upfront how to vertically integrate the new line of business. With a flexible enterprise resource planning (ERP) core already in place, businesses can acquire new companies while allowing their differentiation to thrive when brought into the organization.
Because employee satisfaction and retention is essential during acquisitions, businesses must also focus early on people transformation and culture. By bringing this topic to the forefront before the acquisition process even begins, businesses build the foundation with their own people to bring in new employees in a positive manner. Businesses must look at the transition from a people perspective and create a culture and environment that new employees want to work in, or they risk significant retention costs or knowledge loss.
Increasing attractiveness to companies considering acquisitions
Businesses that want to be acquired also need to focus on getting their house in order. The business’s value and attractiveness increase based on the ease with which the company will be able to integrate into another organization. Businesses should start by reviewing their current technology landscape and simplifying it where possible. Leaders should also consider implementing quick win digital differentiation that will provide additional value to an acquiring company. By also focusing on getting data clean and into a format that’s easy to analyze and digest, businesses increase their value to another company.
Next, businesses should look for short-term opportunities to increase their value to bolster ROI for a company that may be interested in acquiring the business. By focusing on ways to boost performance through operational wins, such as procurement or planning optimization, these companies can rapidly improve their income statements and valuation multiples.
ERP enables more seamless acquisitions and integrations
Some business models and types of revenue have already shifted, and others will shift in the future. Preparation for the next juncture begins with having a core ERP system to provide the agility needed to manage the many challenges and opportunities ahead. ERP systems create an integrated, standard format and operation which are needed for scaled success through acquisitions and mergers. With the process already defined, companies can focus on replicating processes instead of creating new ones. As most merger, acquisition and divestiture transactions include a time limited Transition Services Agreement agreement for ERP services with onerous deadline penalties, executing transformations and migrations in an accelerated manner is critical.
Because properly preparing for acquisitions has a significant financial impact and can determine a company’s future success, many organizations turn to IBM for strategic ERP guidance and support through their merger, acquisition and divestiture lifecycles. By defining the integration strategy and envisioning the future ERP landscape, IBM helps companies increase valuation opportunity or amplify their integration benefits after an acquisition. Through unique experiences, especially with clients that have resource constraints, IBM brings both technology infrastructure and process execution to the table.
Although previously unexpected opportunities are likely to be available for companies due to the effects of COVID-19, businesses must still proactively position themselves to capture the opportunity. By taking forward thinking strategic steps, including focusing on ERP systems, businesses can emerge from the pandemic stronger than they ever imagined before.