Realizing Revenue Synergies in M&A

Revenue synergies are often the reason for companies doing acquisitions. However, unlike cost synergies that happen instantly, they are more difficult to achieve and often go unrealized. One of the biggest problems in M&A is that when a company pursues a deal, different departments have varying perspectives on what's essential. This results in massive value leaks in the deal rationale. In this episode M&A Science Podcast, Chris Von Bogdandy, Global Lead M&A Solutions at Slalom, discusses his framework for realizing revenue synergies in M&A.

Realizing Revenue Synergies in M&A

15 Jan
Christian von Bogdandy
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Realizing Revenue Synergies in M&A

Realizing Revenue Synergies in M&A

“Our (IMO) job is not to create a perfect solution that will run forever. Our job is to get to the synergies and to stay focused on the synergies.” - Chris Von Bogdandy

Revenue synergies are often the reason for companies doing acquisitions. However, unlike cost synergies that happen instantly, they are more difficult to achieve and often go unrealized. One of the biggest problems in M&A is that when a company pursues a deal, different departments have varying perspectives on what's essential. This results in massive value leaks in the deal rationale.

In this episode of the M&A Science Podcast, Chris Von Bogdandy, Global Lead M&A Solutions at Slalom, discusses his framework for realizing revenue synergies in M&A.

special guests

Christian von Bogdandy
Global Lead M&A - Managing Director, Slalom

Hosted by

Kison Patel

Episode Transcript

Importance of revenue synergies

Who are you asking? If you pose that question to corporate development, they would say the revenue synergy is the most important thing. It’s the deal thesis. 

As head of IT, revenue synergies aren't my focus. I'm concerned about data and system integration, wanting to resolve issues and return to normal operations. This highlights a gap between corporate development goals and integration team objectives in M&A.

For corporate development, it's all about synergies and the deal thesis. However, for the integration team leads, it's about returning to their regular routine where they manage their businesses. M&A can be highly disruptive for them

But overall, revenue synergies are often the reason for companies doing acquisitions. 

I conducted a survey about four months ago, asking my clients about the realization of their deal thesis, specifically focusing on revenue synergies. We had responses from around 150 companies, so it was a substantial sample size. 

The questions focused on whether they surpassed their deal thesis or revenue synergies, with categories ranging from 80 to 100 percent, 60 to 80 percent, and so on. Surprisingly, almost half (48%) admitted they had lost track of their revenue synergy goals.

There are several reasons for this. When I'm involved in an integration, particularly one or two months post-close, there are two primary dimensions to consider. 

The first is the operational dimension, ensuring everything runs smoothly: vendors are paid, customers receive consolidated invoices rather than separate bills, and sales teams collaborate effectively. Most of these operational tasks can be managed using standard playbooks. 

The second dimension is deal value realization. Often, operational stability can be achieved without necessarily driving revenue synergies or enhancing deals, or even realizing cost synergies.

From my experience leading IT M&A for a major tech firm, I can confidently say this. We acquired a company every month, and in my weekly meetings with the CIO, her main focus was reducing system complexity from acquired companies. Revenue synergies rarely came up. While reducing operational complexity is crucial, it begs the question: how do you maintain the deal thesis as a central focus?

Correlation between M&A strategy and Revenue Synergies

You definitely need both and you need an execution framework that allows for both to happen.In my perspective, there are three types of deals:

There are deals within your same business model. These can be further divided into:

  1. Acquihires or TechTuck-ins, where you're primarily acquiring intellectual property without significant customers or revenue.
  2. Mature companies that come with revenue and customers but operate under the same business model, whether B2B, B2C, retail, or another type.

And then there are deals involving a new business model where the acquired company has a completely different market approach.

When I was with Cisco, for instance. We acquired OpenDNS, it was the company's first true foray into the SaaS model. We integrated OpenDNS at the customer-facing level but maintained its standalone operations, mainly because our Oracle systems weren't equipped for such a model.

I'm working with a client that operates on  a classic SaaS model considering acquiring a company with a consumption-based model. Integrating their revenue synergies is challenging due to significant differences in their Oracle ERP and CRM systems. Adapting to a shared framework would likely take at least a year.

Operational complexity is inherent in any company, even outside of M&A. First and foremost, addressing it requires a change in mindset. There's a lot you can achieve before systems are fully integrated. 

For instance, with our current client, it'll take half a year for them to transition to our CRM system, Salesforce. However, we've already initiated joint account planning. By pinpointing the key revenue-generating accounts and scheduling regular sales team meetings, we've sparked a wealth of innovative ideas and strategies.

One of our initial solutions was implementing an integration platform as a service for the two CRM systems. Although not fully integrated, they could communicate. For instance, scheduling a meeting or creating a lead in one system would trigger notifications in the other, fostering collaboration and communication  between sales teams.

Unlocking revenue synergies is primarily about collaboration, achievable even before system harmonization. Shared software not only unifies operations but also streamlines processes. Sales teams often have differing selling processes, commission structures, and territorial mappings, all of which can be aligned for greater efficiency.

The challenges are numerous, but they can be navigated. In M&A, our primary goal isn't to craft a perfect, everlasting solution. Instead, our focus is on realizing the synergies. We aim to encourage collaboration early on and gauge market reactions. 

By observing how customers respond to new offerings, like bundled products or updated pricing models, we gain insights. This approach fosters an agile integration framework. Instead of keeping teams isolated and waiting for ideal conditions to pursue revenue synergies, we act and adapt swiftly.

Timeline of revenue synergies

A deal thesis should align with your strategic growth path, whether it's within your current vertical, geography, or customer segments, or expanding horizontally by improving existing offerings. You might also explore vertical growth by integrating pre and post-value chains into your services.

Foundational thinking is crucial in crafting a deal thesis. As someone once wisely said, hold a plan in one hand and keep the other open for opportunities. While M&A demands careful planning, it's equally about timing and seizing the right opportunities. Many acquisitions occur without immediately clear rationale.

Sometimes companies make acquisitions simply to prevent competitors from doing so. Occasionally, when I ask clients for their deal thesis, it's as informal as a few notes on a napkin.

Realistic revenue synergies

My perspective on this topic has changed significantly in the past year. While I used to mainly work with corporate strategic buyers, over half of the deals we've supported recently have been in the private equity (P.E.) realm. P.E. firms prioritize synergies and deal theses, making them central to their strategies.

Different P.E. firms have diverse value creation strategies and target different company types. For example, I worked with one that specializes in owner-founder exits, investing in businesses where the aging founder seeks an exit and the next generation isn't interested in taking over. This approach has led to a multi-billion-dollar portfolio.

These acquired companies often lack foreign capital. The PE firm modernizes them by introducing technology and advanced management strategies. After enhancing their value for around five to six years, they typically sell them.

For each deal, I use a playbook to outline our technology and due diligence  approaches. A clear value proposition guides everyone, preventing data overload. Uncovering hidden issues is crucial, but enhancing the value proposition is equally vital.

Private equity has taught me the value of precision. In due diligence, we start by identifying three to five key questions, like bundling products, raising prices by 20%, or entering new markets. This focus is crucial for leveraging synergies. Unfortunately, many companies overlook this step, leading to overwhelming and unfocused efforts.

Understanding customer journey 

The best way to do this is to spend time with customers directly. However, there are regulatory issues that might limit this, so firms can use third-party services, like a "clean team", to understand customer perspectives. 

With this team, we conduct due diligence, engage with customers, and evaluate both services as if we were the consumers. We assess online sentiments, such as feedback on social media, and reference technology sources like G2.

Often, we encounter surprises revealing the distinct ways services or products are sold. For example, if you compare how Slalom sells to other consulting firms, distinct differences emerge in our selling methods. 

I often remark to Troy Johnson, our Chief Strategy Officer, that integrating another consulting firm with ours wouldn't be straightforward. We're deeply rooted in our unique approaches, which have proven successful over time. 

Sometimes, such success can render a company oblivious to alternative methods other businesses might employ. Companies can have varied methods to achieve similar results, comparable to chefs having diverse techniques to prepare the same dish.

From a synergy perspective, it's vital to pinpoint these synergies and understand the theories surrounding them. Additionally, about three months after finalizing a deal, we typically undergo a "deal thesis refresh." We reconvene with the corporate development team, those who orchestrated the deal, and those from the integration management office and relevant functional teams. 

The aim is to revisit the initial deal thesis and all associated synergy models. This review helps us determine our progress, identify lessons learned, and discover areas of further value, which we often do.

The “deal thesis refresh” is something that everybody should do three months in, because at that point, the integration has found its stride.

It's often referred to as the crucial 100 days post-close. I'm not sure who originated this concept, but it seems to mark a logical quarter to assess progress on the journey. This isn't just about completing the integration. 

From an operational perspective, finishing all IT integrations promptly is beneficial, allowing focus on other priorities. However, there might still be outstanding matters. The focus should be on the deal synergies and thesis rather than merely measuring integration completion.

Planning for revenue synergies Pre-LOI

When it comes to revenue synergies, it's crucial to focus on the customer. We zero in on the so-called moments of truth. These are well-established customer success metrics that pinpoint when a customer decides to buy or renew the services. 

The question is, how well is the organization positioned to deliver during these moments? Are these moments the key differentiating factors? For instance, when considering Slalom services, what are the pivotal moments for our clients? I'm confident I understand those moments and how to enhance them. 

The next challenge is measurement. What metrics indicate our performance with customers? While this discussion delves deep into customer success, it's vital for M&A because rapid feedback loops are essential. If you're only administering a net promoter score survey annually or even quarterly, that's not frequent enough for M&A dynamics. 

It's crucial to identify what we term as 'listening posts' to gauge whether the value proposition and hypotheses in your deal thesis hold water, uncover additional value areas, or detect segments where the anticipated value doesn't come to fruition.

Many companies assess Net Promoter scores and also consider employee satisfaction. High employee turnover might indicate issues, and reviews on platforms like Glassdoor can reflect the company's service quality.

It's been observed that poor corporate environments can negatively impact customer experiences. 

We consistently evaluate employee feedback and see how it aligns with customer and partner feedback. Many companies we collaborate with sell through a partner channel. Activating this channel with products from an acquired company can sometimes be even more intricate than with an internal sales organization.

Capturing revenue synergies Post-LOI

So the first thing that we usually do is we ask you for your deal thesis. And we have a generic revenue synergy model. Given our experience with numerous deals, we've developed a framework to consider the deal's value drivers, breaking them into four categories:

  1. Spinoff - Is there a spinoff resulting from the deal?
  2. Standalone business growth – How to enhance the revenue velocity of the acquired entity?
  3. Cost synergies - consolidation of functions, vendors, or optimizing supply chains.
  4. Revenue synergies - What does the target company sell, how they sell it, and who do they sell it to.

Though simplified, our model, customized for each deal, clarifies synergies and key drivers. It transforms the deal thesis into a synergy model, delineating the necessary activities and milestones to actualize those synergies. For instance, creating an integrated roadmap or hiring engineers for a tech transition directly impacts synergies.

Establishing this connection allows us to link integration activities with their resulting benefits, providing clarity instead of a long list of actions. Many clients struggle to identify integration activities that truly add value. Our approach ensures a clear association between integration actions and their resulting synergy, always tying back to the original deal thesis.

Executing the plan

The primary role of the IMO isn't functional silo optimization. My responsibility as the head of IMO isn't to perfect the IT stack or system architecture. IT can address this either in association with a deal or even three years down the line.

My primary responsibility is to execute the deal thesis and achieve the synergies described within it. I focus on the deal's key drivers and gauge our progress against them.

Consider a situation where we're acquiring a company, mainly for a product we want to bundle and sell to both our existing customers and theirs—essentially a cross-play. We also aim to tap into a new market. Additionally, there are cost synergies due to facility consolidation. 

If we evaluate this using our synergy model, which initially has around 50 variables, we'd illuminate just a few key areas, thereby simplifying our approach. After pinpointing these core elements, we delve deeper. 

For the cross-play, we ask: 

  • What actions are crucial from day one? 
  • How do we approach cross-selling? 
  • How do we address price sensitivity, customer renewal cycles, and so on? 

We then devise a comprehensive plan, attaching day-one milestones directly to it. Our priority is not just 'day one readiness,' but more significantly, 'synergy readiness.' Is our sales team prepared? Have we mapped territories to avoid overlaps?

Once this foundation is established, we strategize the evolution of our target operating model from day one, determining interim steps and the eventual end state. Recognizing that M&A is agile, we understand it's not about complete integration on day one, but iterative progression. 

With a clear understanding of these phases, we can transparently communicate to our customers. For instance, in the beginning, customers might interact with two sales reps, Frank and Joe, but eventually, they'll transition to a unified platform or system. This clarity in narrative ensures both our customers and internal employees understand the experience we aim to deliver."

Cross-functional work streams

In the planning cycle, everything is cross-functional. Experienced M&A companies manage functional work streams independently. Synergy realization is mainly cross-functional. For instance, facility consolidation involves collaboration from facilities, finance, HR, and IT, particularly regarding telephony and systems—an inherently cross-functional process.

When creating these teams, the first thing I usually ask companies is how do they bring in a new product to market? Because it’s always cross functional. It starts from marketing to everything. 

Some companies use checklists and org charts to define roles and responsibilities, ensuring an organized approach. Meanwhile, others seem scattered in their method. As a consultant, I've learned I can't apply a one-size-fits-all solution to every company. I aim to understand their unique processes and collaboration style. 

For instance, some companies might address challenges by 'swarming the problem', essentially allocating excessive resources. In tech, I've seen instances where a meeting that could be conducted with eight people has 40 attendees. It's essential to discern how things operate within each organization. 

New product introduction process

The NPI process reveals two crucial insights. Firstly, it shows how they collaborate across functions and the level of structure they implement to introduce a new product to market. Secondly, elements of the NPI process can be leveraged when introducing an acquired company's product to the market.

For instance, by examining the NPI process, I might find out that they provide their partners, such as resellers, with a 30-day enablement period. During this time, partners receive the necessary materials and have 30 days to prepare internally before selling the new product.

Then, the challenge is to determine how this approach would apply to products from an acquired company. When enabling sales with a new product, what's the company's strategy? Do they offer structured training, or is it more casual, like sending an email with product details and pricing? Different companies have varied approaches.

Companies are improving at forming cross-functional teams with clear goals. Our milestone plan, based on the synergy model, provides these objectives. It outlines what we aim to achieve without dictating how. For example, on day one of cross-selling, we aim to activate ten customers. Teams decide which customers to target, which sales teams to engage, and how to collaborate.

For technical integration, we might engage IT to discuss solutions like Integration Platform as a Service (iPaaS). Should sales enablement manage both systems to guide the process, or is opportunity mirroring necessary? Teams excel at problem-solving like this. An overwhelming sales integration playbook filled with countless line items isn't appreciated. Clarity on the north star guides actions effectively.

Agile M&A 

Let's discuss an example of how things can go awry. We were brought in roughly three months post-close of a significant acquisition. They were already gathering requirements for the consolidation of the CRM systems. I decided to sit in on one of these sessions. 

In attendance were sales representatives from the acquired company, IT personnel, and a member from the acquiring company's sales enablement team. They were discussing the CPQ (configure, price, quote) aspect of the configuration. 

They described how a product that the acquiring company was selling added complexity to the CPQ process. It wasn’t a seamless fit. Major, costly alterations to the CPQ system would have been necessary, further delaying the cross-sell motion and sales integration.

What was fascinating is that this very product was slated to be phased out, yet they were still trying to integrate it, essentially following the routine without questioning the rationale. From that meeting alone, there arose some 80 to 90 requirements.

After the meeting, I approached an IT individual and asked if they were aware that the product they were discussing would soon be discontinued. I confirmed with another colleague that indeed, the product was set to be phased out soon.

Such missteps are common with a traditional waterfall approach. Disconnected teams operate in their silos, attempting to replicate what they had without clear objectives. If the focus had been different, like bundling a set of products and driving them through the existing system configuration, the outcome would have been different.

This situation reminds me of the benefits of an agile approach. Agile incrementally manages change, which is crucial because circumstances evolve as teams start to collaborate, environments shift, competitors react, and customers' needs change.

Relying solely on old-school playbooks can be misleading. While they offer extensive lists of activities, completing them doesn't guarantee success. It's vital to keep the acquisition aligned with the deal thesis and synergy model, adjusting as needed.

Disbanding team and workstreams

This is a question I often receive from clients about the endpoint of an integration. Here's my perspective. Firstly, the integration phase typically ends when its funding transitions from the deal to regular functional budgets. 

Integration Management Offices (IMOs) and governance forums usually disband after a certain period but serve as investment custodians. If integration teams need unbudgeted resources, they turn to the IMO, such as for unexpected Salesforce integration costs.

The end of the IMO's governance doesn't mean integration is finished. Extended phases often follow. Sometimes, like in the case of Cisco with OpenDNS, an organization might delay integration until the next software iteration offers needed features, as seen in the transition to a new Oracle version. Separate systems may be retained for years before consolidation.

What's crucial is the amount allocated from the integration budget and the IMO's capacity to implement, especially if handling multiple deals concurrently. For instance, during my time at Symantec, we would juggle three or four deals simultaneously. There's a limit to how long we could engage with each deal.

Another factor is synergy realization. Some organizations prefer the IMO to concentrate on cost synergy, while other aspects are managed by the business units.

A structured approach to this process involves breaking down the integration into chapters. The initial chapter focuses on operational stabilization: ensuring continuity, onboarding employees, and standardizing contracts. 

Next, we target cost synergies, such as consolidating general and administrative functions. The third phase addresses revenue synergies and product integration. There might even be a fourth chapter based on specific requirements. 

For example, the IMO might lead up to the 'go-to-market' integration, often linked to integrating the 'lead-to-cash' process. Once this is integrated, the IMO might step back, and product integration, which could involve significant coding or platform shifts, follows.

In essence, it's about defining your endpoint, and then the IMO liaising with the business to hand over responsibilities, understanding that there might still be work ahead.

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