Transforming M&A Performance: The Power of Focusing on Revenue-Generating Processes

A troubling statistic often leaves investors and business owners scratching their heads: approximately 80 percent of mergers and acquisitions (M&A) fail to deliver expected returns. The ambitions of enhancing competitive advantage, expanding market reach, achieving economies of scale, and even creating value often remain unrealized. This blog post delves into the underlying causes of such a high failure rate and proposes a remedy: focusing on revenue-generating processes to improve M&A performance.

The Puzzle of Underperforming M&A

Before we explore the solution, it's vital to understand the roots of the problem. Here are some primary reasons why M&As often underperform:

1. Poor Strategic Fit: A fundamental reason for underperformance is the poor strategic fit between the merging entities. The expected synergies might never materialize if the target company does not align with the acquirer's business strategy or culture.

2. Overestimation of Synergies: Companies often overestimate the cost synergies that a merger or acquisition can provide, leading to disappointment when reality does not meet expectations.

3. Neglecting Human Factors: M&A is not just about financials and operations; it's about people. Neglecting the human aspect—employee morale, corporate culture, leadership transitions—can lead to a breakdown in post-merger integration.

4. Inadequate Due Diligence: Failure to conduct thorough due diligence can result in unpleasant surprises post-acquisition. Companies may overlook liabilities, inflated valuations, or other potential red flags.

Refocusing on Revenue-Generating Processes

Addressing these challenges calls for a shift in focus. Traditional M&A due diligence primarily emphasizes cost synergies, financial aspects, and legal liabilities. While these elements are undeniably important, they are not sufficient to ensure the success of a merger or acquisition. What's often missing is a focus on the revenue-generating processes of the target company.

Here are some ways in which refocusing on these processes can turn around M&A performance:

Understanding the Business Model: Revenue-generating processes are at the heart of any company's business model. Understanding these processes provides insights into how the company creates, delivers, and captures value. This understanding can lead to better integration plans and identify genuine growth opportunities, thus improving the chances of M&A success.

Identifying Growth Opportunities: By focusing on revenue-generating processes, companies can identify new markets, cross-selling opportunities, or product development ideas. These initiatives can drive top-line growth and improve the return on investment.

Promoting Organizational Alignment: Understanding and integrating revenue-generating processes encourage alignment. It requires the coordination of various functions like sales, marketing, product development, and customer service, promoting interdepartmental collaboration and communication.

Mitigating Risk: Focusing on revenue-generating processes can also help mitigate risks. It can uncover potential regulatory risks, competitive threats, or weaknesses in the company's value proposition early in the M&A process.

A Path Forward

To implement this approach, companies should integrate the analysis of revenue-generating processes into their M&A strategy:

1. Include it in Due Diligence: Understand the target company's key revenue-generating processes during due diligence. Look for potential synergies, risks, and growth opportunities.

2. Design a Revenue-Focused Integration Plan: The post-merger integration plan should aim to protect and enhance the key revenue-generating processes. It should ensure that these processes continue to function seamlessly during and after the integration process.

3. Build Organizational Capabilities: The organization should build capabilities to understand, manage, and improve revenue-generating processes. This capability is not only useful for M&A but also for the company's ongoing operations and growth.

The statistic that 80 percent of mergers and acquisitions fail to deliver expected returns is indeed alarming, but it's not inevitable. By shifting focus towards revenue-generating processes, companies can better understand their target businesses, identify real growth opportunities, promote organizational alignment, and mitigate risk. This new focus could be the key to turning around M&A performance.