Today I'm here with Nitin Kumar, a seasoned C-level operating executive and management consultant in the TMT sector. He's done over 1000 M&A transactions, including over 75 integrations.
He consults CEOs, boards, investors, and leaders on how to best transform business models to leverage disruptive tech and M&A. He's led organizations ranging from startups through multi-billion dollar companies. Some of his notable roles include Deloitte, PWC, and FTI.
Can we start off with a brief introduction on your background?
I'm a seasoned veteran in the M&A world. I have done probably over a thousand M&A integrations, most of them have been on the diligence side, which gives a lot of valuable insight into what comes downstream, which is the integration side.
I have been very heavily focused on the TMT, which is the tech media and telecom sectors, occasionally playing outside of those.
What do you see as some of the greatest challenges in the M&A integration planning and execution process?
We are in the middle of seven or eight shifts in technology, and some of these even conflict with each other. When we add a human-to-machine, real to virtual, close to open relations to that, the business environment is complex and conflicted.
The integration process is not agile enough to adapt to these changes. They're still following a very linear pattern when it comes to both strategy, planning, and execution. Over the last few years, there has been a shift between the process piece of the M&A integration and the value creation piece.
The value creation has really shifted into the functions. The value creation has to adapt on the fly in a strategy and operations that create the value, whereas IMO is the infrastructure. This has also changed the way IMOs are configured.
When we talk about some of those industry inefficiencies and shortcomings, are there any specific causes of those challenges?
First, the way people think about M&A has fundamentally changed. The definition of serial acquirer has changed. It's not about bringing two companies together or combining the back office and taking a bunch of synergies.
Let’s think about the 2X2 Matrix. On the Y-axis you can draw what's an occasional acquirer, a frequent acquirer and what's a serial acquirer. On the X-axis draw the types of deals. You've got consolidation, adjacencies, technology tuck-ins, you’ve got carve-out integration, and you’ve got acquihires.
So, today, you're a serial acquirer at a certain point in time for a certain type of a deal. This means that you don't have a single playbook that scales across time and across deals, which creates a problem in the way people think.
How do you see the industry overcoming those types of challenges?
There are disruptive business models at play, which are altering the fundamental economic logic underlying the business model of companies, so the functional integration does not scale. The bulk of the deals today change or adapt to a new business model. A lot of these deals are done to plug capabilities in their technology stack services, products, or plainly drive revenue synergies.
Cost synergies tend to come out of specific functions, finance, HR, IT, and there are finite ways on how you take these synergies or functions. But, in the case of revenue synergies, it doesn't come from a single function.
You got to get the whole machinery between sales, marketing, product pricing, customer experience, and service support, all firing in unison. That means that you got to go and configure the IMO cross-functionally, ideally by value driver.
The second interesting trend that I'm noticing is that there is a lot of emphasis and effort on diligence. There is technology diligence that is coming up into play because more often than not, people are acquiring technology stacks. The investors and buyers want to know whether the technology stack is stable, scalable, interoperable, extensible, whether it has adequate security, etc.
The other trend that we're starting to see is customer diligence, which is about the structural forces in the market. With all this in mind, there needs to be an increased awareness of creating value under uncertainty.
You talked about cross-functional alignment during integration and alignment around the value drivers. Could you talk a little bit more about that specifically?
There are typically a few reasons why deals go wrong. One of them is that there's a lack of a definitive governance structure to the cross-functional model. All the governance structures are built towards the functional side of it, and that creates a problem.
The second is misaligned incentives. The machinery between the corp-dev people, the sponsoring business unit, and IMO are typically not well-defined and aligned on who is responsible for the success of the deal and creating that shareholder value.
There's always light, or no commercial diligence is done, given that people think that they understand the business they are in and that commercial diligence doesn't really go into the nuts and bolts of the technical and customer, which has been an issue.
In any given company, there'll be a certain business unit that is acquiring more and their maturity may be slightly different than some of the other parts of the organization and this isn't very tightly linked up. People also often underestimate the ability to execute on revenue synergy, which is modeled in. Sometimes it's baked into the valuation, but sometimes not.
In terms of revenue synergies, what are those challenges specifically?
Whether you pay for it or not, it's always modeled into the shareholder value in the market. A lot of times the product and the sales teams are not in unison and sometimes that really comes in from an org structure standpoint.
As an example, if a salesforce is structured regionally, whenever you acquire a company and put them on to the regions of the countries, they are not incentivized to sell this. They take regional orders and the deal value is often diluted with no added incentive to sell the new product or the new service.
The second big issue is that there is very underestimated leverage inside revenue synergy. People intuitively go after sales and product, but there is underutilized leverage, like pricing, brand, or customer experience and all of these aren't formulated or baked into how people capture revenues.
Are there any areas that you think teams should think about and focus on?
I think that revenue synergy has to have a little bit more science and a little bit less art. I believe that integration people need to be part of the integration diligence upfront, and maybe there is a need for another discipline called integration diligence. This should be not only about quantifying these synergies, but also baking them into value drivers and stress-testing them through simulation or wargaming before they can actually go and execute these.
Revenue synergy needs to come in three distinctive waves, and the common mistake people make is trying to pull all these levers together. Wave one has four primary levers. For any acquisition to occur on the revenue side, you either acquire a brand, a channel, a product, or you acquire a customer segment.
At any given point in time, you're acquiring one or more of these. Whatever be your primary reason for the acquisition, the other three will have to very quickly rally and support your primary acquisition lever.
There is always integration upfront in the form of alignment. The integration diligence or diligence, in general, has to figure out this alignment because you will know what is the direction of momentum. Then you go into wave two of pulling the leverage of revenue synergy, which is product bundling, pricing, and getting the pricing rate because now you know the direction of momentum and sales incentives. Wave three is new product innovation, which can take a much longer time.
What are your thoughts about having integration people early enough in the process, where they're assisting with validating the value drivers in the deal?
It's not the people who do your PMO or IMO staff or people who do your governance, but the people who understand the value creation and come from the business who are brought in the upfront. The integration diligence is thought of as the framework on the revenue synergy side. There are three buckets of it.
The value protection side of it, which is what takes you to day one, is focused on elements like brand protection, customer retention, channel conflicts, or product value dilution. Then comes the value capture piece, which includes rationalizing the salesforce and capturing value from the confusing parts of the business.
The third one is value creation, which is the revenue synergy piece. These three bodies of work inform the integration diligence. People who are cross-functional and teams that have expertise in pulling one or more of these levers have to be part of it.
Who would be those people? How would you pull them in from business units to be more involved with integration, since they're already in a full-time role, running the business?
There are rotational roles, where a business unit people take into the integration organization for a finite period of time. The corporate strategy and the corporate development people understand the pipeline that's coming in there.
A lot will depend on the deal type. Are they sales-savvy, product-savvy, or brand-savvy? The consolidation and adjacencies are a little bit easier to figure out while figuring out a new business model is very difficult.
You need people with a strategy bent, who are savvy with integration and value creation, and have a people, culture, and product lens on it. It's very hard to find one person that has all these skills, so you have to rotate a number of different people at a given point in time, looking at your deal pipeline on who are the best ones to create value.
You also take a cohort of these people and put them through integration training. This is a new world training that goes through essential techniques and frameworks. These people understand their business and the product, and the moment you give them these tools and nuggets of how to create value, they can hit the ground running.
What does your dream team configuration look like?
You need people from sales, marketing and you need people who understand the product very well. You also need pricing and branding people, but they are not full-time in it. The culture is a big element, so you need HR specialists, again, not necessarily the operational side of HR, but the organization development side of HR.
We talked about the transformation of companies' business models. How has this impacted the approach to change management and integration?
Change occurs in a specific business unit and a specific given point in time. We need to go beyond the touchy-feely part around drawing change curves and employee engagements. Getting the pulse is important.
Having said that it's very important to size the change and, and get into the specific aspects of what is changing. Is it people's location? Are we changing our systems and processes, our incentives? Are reporting relationships changing? Where does that change occur?
It's almost imperative that the sponsoring BU or the function leader owns that change. It needs to be HR facilitated, not necessarily HR led. The magnitude of change has to be assessed with a level of specificity so that you can design the right change interventions into your integration plan and mitigate your human capital productivity and overall value dilution.
It is not an IMO-led process, but an IMO-governed process, which is facilitated by HR and led by a business unit. Previously, it was the exact opposite.
What are some of the biggest challenges you've seen with change management? How has that impacted or changed when it comes to integrating a transforming business model?
Its culture, because nobody's really cracked the code on it. It takes years to gradually shape the culture, you just can’t do it overnight. Also, sometimes you don't want to change that. There is a difference between a financial acquire and a cultural acquire.
Sometimes you acquire somebody's way of doing things, which is their culture, and you don't want to spoil that. Culture is always contextual, and there are no definite rights or wrongs.
The best way to do this is to isolate the top three behaviors that need to change in both organizations, and both executives need to combine forces and align on what those three things are. Cultural change is nothing but aligning behavior to results. Once you agree on those top three or four, you can then bake that into the integration plan with the right incentives and the governance structure, and then go and cascade this into the organization.
The more people buy into those top three behaviors and agree upon those the better. This is a lot easier than forcing change through creative change curves, employee engagements, and trying to neutralize the culture within a week or a month.
How do you see integration today and evolving, going forward?
The first thing is, the integration process needs to move from a very rigid linear process into agile. The second thing is that there's a lot of automation coming in. There's going to be artificial intelligence and robotics, that's going to do a lot of your contractual diligence in the future. The technology leverage is going to be pretty critical in automating certain parts of the M&A process.
Number three, I think the staffing and configuration of the IMO need to change from a functional approach into a cross-functional/value driver approach. There is going to be a retooling of the M&A integration professionals regarding strategy and operational skills. Every company, no matter the sector they are in, will need to adapt in size, shape, and form to the technology shifts, and these shifts are more structural in nature.
Synergies are just informing shareholder values, and not shareholder value, so we need to think about it that way in the future. Regarding the integration process, we need to develop the capability to execute under uncertainty, as well as preserve and create the value of the deal in such an environment.
We need to adapt very quickly moving into changes that impact customers and shareholders. There will also be more uncertainty in the business environment coming both in the political landscape and in the regulatory landscape.
I'm a big advocate of agile, and I see M&A as slow in a lot of ways. With the technology piece, but even agile, how do you see that changing in the future?
There are a lot of deals that are starting to not create shareholder value and there is more activist M&A happening, and those activists are starting to question past acquisitions. I think one or two of those have to really come into fruition and at scale for things to change.
The best acquirers are changing, or at least thinking of changing, and have adapted one or more of the advanced practices. It is a slow process, and part of this is accredited to the legacy skills of integration people and even corporate people, who have still not adapted to the changing business.
When it comes to adopting agile, do you think it's something that's going to trend with the tech companies first because they have it in their organization, or are there other means that you think would progress the adoption?
The good news in tech is that they already have proceedings and they know what to do. The bad news there is that there's a lot of baggage there that needs to be overcome. There is no reason why others cannot lead it because all the other companies are starting to buy tech, and these people actually don't have the baggage from the past.
They just have to be educated so that they can leapfrog their legacy processes. It is difficult to foresee who is going to take the lead. The capabilities naturally reside in the Tech or the TMT sector. Having said that, the opportunity to go and rewrite the rules of the playbook lies in the other industry.
What's the impact on M&A strategy due diligence, valuation, and integration?
The M&A strategy is extremely difficult today given all the tectonic shifts in technology, and now it's going to continue to evolve. The platforms themselves are creating a new issue. The new business model is not only SAS or all that.The platforms are real and they're here and they're here to stay and here to scale.
With decentralization and blockchain, which will become a reality in the next few years, this is even going to alter the economic logic underpinning the conventional platforms. We are going to see de-centralized platforms, and M&A integration professionals need to stay current, relevant, and adapt to the new business world order.
Can you provide an example of one major deal failure and a major deal success?
If you take a look at the Yahoo and Verizon deal, you may have taken the synergies from it, but it didn't create shareholder value ultimately at the write-off. This is because products cannot take on platforms, and definitely not at a galactic scale where Facebook and Google are playing. There is also the Microsoft and Nokia deal, which may have created the synergies, but didn't take shareholder value.
The successful deals have been Oracle and NetSuite to a certain degree. And I think after a long time, they've got their union story and the NetSuite story together, have kept NetSuite at an arm's length, but also pulled the right levers.
They've done a good job on SAS play by bringing it not only on top of their licensing model but also an existing SAS business. I think acquihires continue to mature. Google is a classic example of who does these types of deals well.
If you were to go back and look at those different transactions, is there any general theme in terms of one thing that you think these companies could do differently to increase their probability of having better success?
I think everybody needs to just step back and see where their integration processes are with respect to what they're buying. Just understanding your own capability on what type of acquirer you are at what given point in time, what's your pipeline coming forward, and what you have done in the past can be helpful. Thinking about this in an objective manner without being emotional is a good start.
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