Peeking at the answer key: how EY prepares companies for their capital agenda test

Distilled from the collective knowledge gained from EY M&A practitioners executing thousands of client engagements, The Stress Test Every Business Needs: A Capital Agenda for confidently facing digital disruption, difficult investors, recessions and geopolitical threats is a comprehensive book that applies the EY proprietary capital agenda framework (a guide to preserve, optimize, raise or invest capital) to real life business situations — and advises on how boards and management teams should address them.

Although M&A activity is strong, The Stress Test can help corporate leaders proactively prepare their companies to be buoyant in more turbulent times. It offers ideas and tried-and-tested strategies from those working every day in the field advising the world’s largest companies, and it asks provocative questions that all executives should be able to answer from their boards and shareholders. For executives working in strategy and M&A, this book will speak to their essential role in helping make their company’s capital agenda internally consistent and resilient. 

How does integration fit into the capital agenda? Considering serial acquirers have higher enterprise value growth than those that don't, it is imperative for every growth-focused firm to consider M&A as a crucial tool for survival.

So how do executives “stress test” their mergers and acquisitions in order to maximize shareholder value? In The Stress Test, I suggest four areas: 

1. Choose the right deal type for your goals:  Whether scale, transformation, tuck-in, or strategic growth (also referred to as “bolt-on”), make sure that the deal rationale aligns with the integration strategy and architecture.
2. Use objectivity in valuation and business modeling: Avoid overpaying by plotting more than one path to risk-adjusted value creation for inorganic growth. Rigorously apply a “stage-gate” process to confer with stakeholders at the end of each phase to decide whether to proceed or not with inking the deal.
3. Conduct thorough due diligence: Due diligence should focus on the future potential of the target as opposed to its past. The most crucial areas to assess are tax, financial, commercial (IT, cyber security, manufacturing operations), legal and environmental, and cultural fit.
4. Formulate integration strategy and implementation plans, and work to make sure they’re aligned to deal strategy: Don’t underestimate the importance of integration. Increasingly, boards are demanding to see the integration playbook. Executives should work closely with their integration leader to align on a plan, communicate it to stakeholders, prioritize resources and help troubleshoot throughout implementation.

The Stress Test also covers many more facets of running a company, including surviving in a digital world, restoring a distressed company back to health, tax planning, portfolio reviews and divesting for maximum value.

Happy reading!