The de-boundary of M&A

Our present generations are experiencing climate change in dimensions never seen before. Events people used to call “the greatest disaster of the century” are now happening at ever shorter intervals and with ever increasing vehemence. Fast-spreading diseases, epidemics and pandemics are no longer limited to specific climate zones or regions (such as Africa or the Far East) but threaten people on all continents. We are observing a striking accumulation of economic crises with growing severity, whether caused by natural climate change or human-induced conditions. Entire waves of such crises have rolled around the globe over the past 20 years. Meanwhile, competing political systems create new hotspots of tension which could evolve into long-term problem regions or even cold (e.g. cyber) or hot wars.  Violations of economic rules as well as economic egotism are generating additional problems causing supply chains to collapse and leading to raw material and other supply bottlenecks. These are new, unfamiliar threats to the prosperity of our societies, destroying the social status of many while creating gaps from which new, human-induced ecosystems arise.

Important | M&A plays a key role in the fundamental transformation of the economy. After all, disruptive change can only be implemented with the required speed and vigor if suitable cross-enterprise solutions are available. Organic change alone will not do it.

Apart from climate change, wars and disasters, we have seen entire waves of technological-economic upheaval to which we have given labels such as "Industry 3.0” (driven by digitalization) and "Industry 4.0” (initiated by the establishment of global networks, especially the Internet).

This transformation was accompanied by the emergence of the "virtual" online economy which now competes with the conventional "stationary corporate world". Virtual commerce is pushing many purely classical suppliers out of the market. The stability of traditional business models is in question. New solution providers are appearing, threatening to relegate established product manufacturers to the role of mere suppliers. Digital business models and the digital transformation of corporate processes are gaining ground, changing industries and behavior patterns while disruptively turning entire markets upside down. The Internet provides globalization opportunities at minimal market entry costs. It is a great breeding ground for startups: They appear out of nowhere, threatening the established players, shape-shifting suddenly, rising to gigantic "unicorns" in an instant, and sometimes disappearing just as quickly.

The boundaries of enterprises and markets are dissolving. Competitors begin to collaborate directly at selected steps of the value chain. Customers enter their suppliers' businesses by way of backwards integration. New, digitally-driven design and manufacturing concepts make mass customization and individualization viable, allowing manufacturers to offer a wide range of product variants. Customers of standard solutions now seize these opportunities, becoming manufacturers themselves; a new type of competitor has arisen, the “Prosumer”. When these providers focus on specific supply bottlenecks in the market, for example by feeding electricity from photovoltaics plants into the grid when the spot market rate is high, they are referred to as “Xsumers”.

It seems only natural that this would lead to the formation of many different kinds of cross-enterprise cooperation agreements.  As an equivalent alternative to classical equity-based M&A, non-equity partnerships, sometimes in the form of project-specific short-term partnerships or consortiums, are established to contribute personnel and expertise across all phases of the value chain.

Note | These partnerships are an entirely new kind of “competition" to conventional capital-driven M&A. We are observing a veritable wave of innovative, highly specialized joint ventures. As the classical boundaries of enterprises and markets dissolve, the boundaries of M&A projects become less clearly defined, as well.

The enormous impact of societal transformations, digitalization and interconnectedness on markets – not just through the Internet but also, and particularly so, through contractual arrangements – is a powerful driver of mergers and acquisitions. M&A has become an instrument of "external restructuring", opening up additional options for the continuous process of organic change in many enterprises.

This reflects in the individual phases of M&A projects. The constant influx of new competitors – whether startups and new market entries of existing suppliers and customers, or new technologies arising from digitalization, new microelectronic technologies, software, network integration of disparate systems, and the progressing intrusion of Artificial Intelligence – broadens the available range of potential partners and competitors to such an extent that searches for M&A partners are downright exploding. This in turn greatly increases the importance of screening candidates for potential M&A projects. It is no longer sufficient to resort to well-maintained databases; the "research menu" has to be rearranged for every new M&A project.

As the preparatory stages of the M&A process stretch and grow in scope, the completion phase, traditionally marked by the formal dismissal of the integration team, is followed by extensions, as well. For example, there are now specific processes which must take place upon completion of the actual integration phase, which typically occurs one and rarely more than two years after closing. These new processes can continue for years. In particular, they include milestone controlling for the implementation of certain measures, as well as a change management rearguard in charge of making sure that the cultural adaptation stabilizes so the newly formed organization will not revert to the old power structures of the merger partners.

M&A races within an industry segment are no longer unusual. When a company seems to take the lead after a completed deal, its competitors may feel the need to recapture their previous market position through M&A projects of their own. As a consequence, one M&A project triggers the next: after every merger or acquisition, enterprises reconsider their business units to identify divisions that should be divested because growth means sharpening your focus. So even before a restructuring or integration program is completed, it is necessary to make preparations for subsequent reorganization.

Apart from that, cross-enterprise networks of any conceivable type are gaining in popularity – whether for sharing personnel, forming know-how and knowledge pools, or establishing common data backbones for specific, shared purposes such as purchasing, development, performance controlling or forecasting purchasing behavior. As the “co-opetition” model described above (e.g. collaboration between competitors on the same step of the value chain) expands, all this could give rise to cartel-like structures whose legality must be clarified in advance.

The digital transition even changes the internal mechanics of the M&A process. For the most part, this occurs in four ways:

Beyond a given M&A project, the entire M&A ecosystem surrounding it needs to be subjected to a thorough review, provided this has not happened already. This review would include items such as process management models. There are now some leading hybrid models emerging which include elements of both, pure process organizations and stepwise models.

New questions have to be answered regarding the set-up of an M&A project, such as how an individual project and its leadership structure (project head, steering committee, project owner in an enterprise-managerial position, full-time teams, supporting teams, etc.) will align with the overall organizational structure of the company. For example, it is a good idea to have a project coach on the management board. An entire network of relationships with complementary departments and operational business activities has to be structured.

M&A must be firmly embedded within the enterprise as part of the organizational network. Apart from the centralized M&A department, other departments need to be integrated. M&A must be anchored in the periphery of the enterprise. Operational staff should receive additional M&A training far in advance of any M&A project that might come up, and stand ready within their respective business units as "satellites" or "sleepers" of the M&A department so they can be activated whenever a project is launched in the respective unit.

As a "third pillar” apart from M&A process management and the network-embedded M&A organization, an M&A knowledge management system is essential. This must include an M&A specialist team and an M&A knowledge platform that resides in a special, protected intranet. The high dynamics that are typical of the M&A world require all participants to be involved in repeating learning loops, learning reports, performance feedback, performance controlling, enterprise-wide training, and knowledge transfer events.

We are further away from standardization than ever before. Every M&A project type requires specialized solutions; every industry is driven by unique success factors; and every technology segment needs its own project structures. Major corporations face different challenges than medium-sized companies, and startups work differently from small service providers.

The current huge challenges for M&A result from the need to adopt the many transformative processes occurring today in a timely manner. An enterprise failing to do so could easily be at a disadvantage because the restructuring and reorienting processes would not be in a mature state when the next M&A project is on the doorstep. Therefore M&A leaders are well advised to take early action for "backwards integration" and familiarize themselves with the transformation processes that are relevant to them. One of the interdisciplinary topics to be addressed – apart from digitalization – is cybersecurity. Other areas where fundamental change should be expected include the ecological and energy transitions. The transformation of the healthcare sector, of public administration, infrastructure and social services should likewise be addressed in this context, considering the timescales associated with M&A.

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Feb. 07, 2022 - Form of citation: Lucks, Global Mergers & Transactions, TLE-004-2022