M&A Strategy: Creating Value from Competitive Anchors

Introduction

The M&A world is changing, yet integration is executed the old way with a dated playbook focusing on cost synergies and functional approaches with limited attention paid to shareholder value. Given that most old economy companies now aspire to undertake digital transformation, acquisitions are one of the preferred routes to acquiring new capabilities. These new M&A transactions require a core competitive anchor which can be tied to value drivers and finally to shareholder value. The anchor enforces value drivers to align with shareholder value even when synergies are not present in the conventional way e.g., high-valuation technology M&A deals with little back office costs and headcount.

Defining Competitive Anchors in M&A

Competitive anchors distinctly convey the new identity and brand promise to the market and investors clearly e.g., survive, maintain, and grow, etc. Competitive anchors help answer the question “what allows the NewCo. To consistently beat the competition?” i.e., how does the transaction provide a right to win? They are sufficiently detailed to outline unique sources and sustainable competitive advantages and shareholder value delivery potential.

They are a strategic tool applied to the overall business (not at a function or regional level), any M&A transaction can have more than one anchor and they are not exclusionary.

Types of Competitive Anchors

There are multiple competitive anchors, each M&A transaction may have more than one. If a company is acquiring several targets as a part of its digital transformation journey, one must leave room and factor in anchors from subsequent acquisitions. Let us examine a non-exhaustive, but common list of competitive anchors.

Operational Excellence (best total cost)

Companies that focus on reliable, middle-of-the-market products at competitive prices delivered with minimal difficulty or inconvenience offer a low price and hassle-free service proposition. These companies focus on core processes such as product supply, expedient customer service, and demand management to provide their customers with the best experience. Examples of companies that have succeeded in this space include Fed Ex, Walmart, and McDonald’s, all of whom have built their businesses around making it easy and affordable for customers to get the products and services they need. By offering a combination of high-quality products, efficient customer service, and low prices, these companies have proved themselves to be industry leaders and continue to thrive in a competitive market.

Product Leadership (best product)

For companies always looking to push the boundaries of what is possible, the focus is on continually innovating and delivering the best product, period. This proposition is based on offering products either unknown, untried, or highly desirable to consumers. Such companies put significant effort into their core processes, including invention, product development, and market exploitation. Examples of companies that have mastered this approach include Intel, Nike, 3M, Sony, Motorola, and Johnson & Johnson. These companies have become synonymous with cutting-edge products and continue to push the limits of what is possible. By consistently introducing new and innovative products year after year, they have set themselves apart in a highly competitive market and continue to be leaders in their respective industries.

Customer Intimacy (best customer experience)

Companies that focus on products specifically tailored to individual customers, rather than following what the broader market wants, focus on cultivating long-term relationships with their clients. These companies specialize in satisfying unique needs that only they - through their close relationship with the customer - recognize and build loyalty. The proposition they offer is not just the best solution, but also includes all the support needed to get the ideal value and results from the product. Core processes for these companies include personalized services and relationship management, which are critical to their success. Examples of companies that have excelled in this approach include Nordstrom, Airborn Express, Home Depot, and Cable & Wireless. These companies understand that personalized service and relationship building is essential to creating customer loyalty, and they focus on providing the best experience for their clients. By doing so, they have built strong and long-lasting relationships that have helped them stand out in their respective industries.

Critical Success Factors

When competitive anchors are applied to M&A integration, the operating model must be less rigid as it must leave room to accommodate new competitive anchors and value drivers from subsequent acquisitions. Let us examine some of the core attributes and critical success criteria around the competitive anchor approach.

• The M&A integration planning must hinge on the competitive anchors as shareholder value and sustained competitive advantage will be resultant of the execution
• Focus on the core process of digital innovation, invention, product development, and market exploitation is a must.
• Loosely configured business structure (not a rigid org design rooted in older hierarchical principles) to accommodate ever-changing internal and external shifts. This will also allow entrepreneurial initiatives and redirections that characterize unexplored territory.
• Management systems that are results-driven to measure and reward product success and that don’t punish the experimentation required to deliver.
• A culture that encourages individual imagination, accomplishment, out-of-the-box thinking, and a mindset driven by the desire to create the future.

Leading Practices

Once the M&A integration process is nearing completion one must weave the anchors into the operating model of the sponsoring business with measurable and tactical actions. For example,

• Continually strive to provide its market with leading-edge products or useful new applications of existing products or services
• Creative, recognizing, and embracing ideas wherever they originate (inside or outside the company)
• Commercialize ideas quickly (supported by business and management processes geared for speed)
• Relentlessly pursue ways to leapfrog their own latest product or service (prefer to render their own products obsolete than must have someone else do it)
• Measure success along with M&A integration teams every quarter to determine the quality and fit of the competitive anchors

Concluding Thoughts

Competitive anchors are the new structural elements from which value drivers are spawned, the advantage of setting the anchors also set shareholder value as the north star. Historically many M&A leaders have taken the value driver approach which has driven synergies. However, in many new deals, there are no conventional synergies but deal valuations are high with shareholders expecting returns, the competitive anchor approach makes sense as a discipline as M&A evolves and deal signatures depart from the conventional economic logic.