The Art of Protecting Value Drivers

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during MA deals.

Jay is a Vice President of Business.

Transformation at Intertape Polymer Group. IPG is the global leader in the packaging industry. With over a billion dollars in annual revenue and a growing record of strong cereal acquis.

Jay is responsible for driving IPG's transformation.

Initiatives and integration management.

Before joining IPG's executive leadership, Jay was a product engineer at Dell and moved.

Toward becoming an integration director for their corporate strategy.

How are you doing today Jay?

Fantastic. Thanks for having me.

So Jay, can you quickly overview the legacy of value drivers in M and A? Where do value drivers derive from and why are they an important piece of any deal?

Great. So value drivers are the reason why we buy the company. Typically, people talk about synergies, but the key to synergies here is like, hey, what is the value we are willing to pay for with the company that will enable us to get synergies? The key that goes in like it's across multiple dimensions. So what are the sources of value? Is it the people that we are buying? Is it the assets? It's the ip, or is it the sales acceleration that we will get? Or is it the consolidation? What really drives value for the deal? Understanding that is key to success and there are many dimensions to it. Typically people talk about at a higher level, consolidation versus revenue acceleration or IP capture, but it also varies on the people dimension as well.

Is there a prioritization when you look at those value drivers? Because I often hear of cost synergies tend to get prioritized and revenue synergies are the most difficult to obtain.

In a sense, yes, I think it always varies with respect to the strategic intent for the acquisition. The best players typically look out for where am I going in the next five years and what are my strategic M and A opportunities that could be on the consolidation side, on the revenue side? Or sometimes it could be as simple as like, I need to block that competition from getting that ip. So it varies across the spectrum. Having said that, to your question, typically cost synergies are easier to realize than revenue synergies. We'll get into that as we go along.

How do you identify the key value drivers of a target company or deal outcome?

So it starts during the diligence phase. You come up with your thesis on why you're going after certain targets because again, it ties back to your strategic intent and if you want to go into the adjacency, is it the customers that they love the customers more, or is it the product that you could accelerate with your sales team more? So you start uncovering those sources of value during the diligence phase. And typically what happens is you go in with a point of view, an initial thesis, point, hypothesis. And part of the diligence is like you bring in the right subject matter experts to start crystallizing the value drivers. You need to have a point of view before you begin. But then during diligence is where you validate it and start adding additional value drivers that you have not thought about before. So let me give you a simple example. So for one of the deals that have done in the past, we thought that we could accelerate the sales with respect to that product coming into our portfolio. But then we quickly found out the reason why their product was doing good is because their NPS core, the net promoter score on how their customers valued them or was in the high 80s, which is kind of unheard of in the industry. So now that became a source of value driver on how do we keep that customer satisfaction to that level on top of why we had gone in for buying the deal.

So a couple thoughts. One is when you mentioned you sort of come up with your own perspective about value drivers and you start bringing in subject matter experts to further identify them. How does that come in play? Because I guess optimistically, I want to be as comprehensive as possible to really understand the value of the deal. And to do that, I guess how do you start bringing in some of those other perspectives to identify other opportunities.

So let's go back to how the value driver becomes the anchor of how you build your business case, not only for your investment pieces during diligence, but also from a standpoint of integration execution. Because you go in with a high level point of view, hey, here is a number. It's like your T shirt sizing. Here is what we can afford to pay and here's what makes sense. But then as you start bringing in the subject matter experts and you create this capability of building a bottoms up business case during the diligence process, okay, this is not something most companies do, but the best programmatic serial acquirers, this is a must do to ensure acquisition integration success. So what happens here is you bring in the subject matter expert and each of them start identifying the value, but not only in terms of what the value source of the value is, but also like what it takes to execute. Because this is what the typical gap is between buying the company and successfully integrating. Okay, for me to successfully harvest the value, here are the resources I need, here is the capital that I need, and here is the timeline that I'm looking for to happen to make this happen and that you do that part of the diligence phase.

What frameworks are important to implement in order to produce the best information regarding the value.

See, this is art and a science. So the art portion of it is like you need to have a theory and how you're going to extract the value or where the sources are. But the science comes in in terms of how you could come up with a process for a repeatable and successful outcome. In this case, a repeatable successful outcome framework here is say if it is a consolidation deal, how are you going to validate your numbers? So, which means you should have done enough homework or lessons learned from the past that gives you templates and frameworks that you start tweaking to arrive at like, okay, this type of a deal, these many people, not much investment has happened into the capex side. Okay, what do you need and what has been our past experience in doing it. So you start building your own templates and processes. That includes from a resource standpoint, timeline standpoint, and then modeling standpoint, how long it takes for us to execute. And you start doing this within the short 30 to 45 day time period during diligence to start building this in the back end.

One thing I hear often is about the investment thesis becoming too ambitious. And I'm wondering, how do you prevent that so that those goals can actually be attainable.

So there are two schools of thought. One would say, hey, you got to go after the full potential, shoot for the sky, you'll at least land in the moon. And then the other one is a little more pragmatic approach. Okay, you start small, start proving your capability and then work your way towards ambitious project. We've done projects on both sides. I think from a programmatic serial acquirer process, you start off on the right hand, okay, you realize the value only when you can execute. So you need to be able to articulate how you can execute from your 30,000ft to the three feet down. So that comes only by practice and execution. I'm more favorable towards this framework. So prove yourself and then go after the ambitious plans because now you have enough projects, integrations under your belt, you know how far you could push gotcha.

In terms of framing the next acquisition, how about within a single acquisition? I feel like a lot of times you hear about predicted value Drivers getting over emphasized than what they actually could be obtained to just get passed off to integration folks that are far more ambitious than what's actually attainable.

So let me address that question in a different way. I think the bigger question what you're asking is like hey, how do we make sure that we don't really leak value or we are over ambitious and not execute from an integration because 70% of acquisition integration fail to realize the values. Right?

Yes, yes.

So the best way to prevent that is like what I call is like we build your bottoms up business case during your diligence process. So to do this while you're doing your full on diligence means you have developed capabilities not only on your Karp dev team, but also all the subject matter experts in creating their own processes and timelines and resource capabilities for execution. So a quick example is like how do you validate your raw material synergies? Okay, you walk in with an assumption, but do you know how to validate the contracts? How long, how much can you really validate their inventory during the diligence process? Because there's always these things that you got to keep in account and make sure that you're validating it appropriately. Same thing goes for like your sales acceleration. Do you know on what basis are you able to sign up for a hockey stick improvement? Is it because that you have already validated the productivity ramp it takes for a new salesperson or an existing resource from your past experience that he can bring to bear on these new acquisition as experientially modeling it so that you know you'd be able to hit your numbers. So this comes as I called in like capability building across each of the value driver subject matter experts. And then you use that during the diligence phase to build it up so at least you're not far off from your number and you know the risk that you're taking.

So you have integration people validating these value drivers.

That's correct. So the way we run is during. It's not the diligence is separate from integration. So we are attached to the hip. So the corp dev and the FP and a team and the integration team are attached to the hip from the get go. Once the diligence begins, the investment thesis in terms of validating is validated. It's a closed loop validation. It's not just a T shirt sizing on hey, here's the opportunity and then later on we'll hand it off to integration. It is done simultaneously. So now you have a better chance of success.

So this makes a lot of sense to me because the people are involved, they're actually going to carry out and execute on the work. And it's not disconnected process which I hear about when I talk to some companies.

Typically the challenge has been is like hey, how much, how many people do you want to onboard during diligence phase and still maintain confidentiality? So that's always the common refrain. But what I've found, successful serial acquisition companies bring on a fairly large number of people during diligence process and still maintain confidentiality to make it successful. So for the current company we bring on a larger size team that helps in vetting this process and still maintain confidentiality. And I know on the technology side we used to bring in, I think sometimes more than the size of the small company that we are acquiring, it may range anywhere between 50 to 150 people. On the diligent side, how do you.

Then focus and protect the chosen value drivers during post close integration?

In a value driver integration base or a value driver focused integration process, everything centers around value drivers. So part of the diligence process you not only identify the investment theses value drivers, hey, it's a consolidation deal, it's an acceleration deal, but you also identify these newer value drivers, hey, this set of talented people we need to protect or these customer enhancing experience process we need to protect because that's not what we do. So you identify those that could also not only be on the product side, customer side, but also on an employee decision making process or a cultural standpoint. Let me give you a couple of examples. One of the companies that we acquired in the past, I'm just talking in general of between the multiple hats that I've worn between different companies, their customer. Let me go Back to the NPS, the net promoter score was the high 80s. Digging deeper we found out it's because they had a service level agreement that they were able to support the customer for their critical products within 24 hours. So the first thing that happened when as an acquirer our GM looked at the business is let me show you how to save money here and add to the bottom line. So from an integration standpoint, the reason why because our companies NPS at that time was in the it was good number, it was like 30 to 40%, it's very respectable score. But it's not in the 80s. So the challenge to the GM was hey, you can do whatever you want as long as you don't impact the NPS score. And we found out that it's Impossible because the customer allowed this company primarily because of their NPS and their ability to service them. So now it became a reverse integration opportunity. Hey, is there a way where we can leverage this kind of service level for a select group of customers so that we get that kind of a raving customer experience from our customers, which is what we actually did. But it's not an easy thing to do because if you are a company coming in from a cost savings and gross margin improvement opportunity, you go after that initially that the customer experience piece goes out the window. But by holding steady from an integration management perspective on protecting the value drivers, we were able to add value both for the parent company as well as the integrated company.

I like your perspective on that in terms of protecting the value drivers because I often see it in these deals where the target company may have a more dominant process or approach, but then it doesn't survive because the other company naturally thinks what they have is better and they want to change it and make it all uniform and simulate it versus really getting that type of priority to protect that, that part that was contributing to the value of that company now.

Very true. So this, this shows the role of the integration management is they are the stewards of capital because the money has already been deployed, you already bought it. The trick here is like, hey, what kind of governance process you put in play and how much of a say you have in the overall process because you're going to be up against batting for the small company with the GMs of multibillion dollar businesses who've been successful in their own way. Now you got to protect them because there's nobody else who's going to protect the value drivers other than the integration management.

Right? Absolutely. Is there any specific approaches around that? Because the perspective sounds good, but I'm thinking in terms of really starting to frame maybe a step by step approach in terms of doing that so a company doesn't get lost in the traditional way where it's a bit of a scramble to check items off a list now I think.

So this goes back to the value drivers. So your integration is anchored on the value drivers. So you kind of. It's an operating guideline that you read out to the executive leadership team. We will protect the value drivers and we will preserve and grow the value drivers and do no harm to anything that is impacting the value drivers. Now that's the first step. So it's easy to articulate at a higher level. And then comes the next step during the diligence process and the Integration planning phase. What does that mean? So in the example that I called out during diligence, we found out that their NPS score was 80 to 90%. So one thing we put it as a mandate as part of the integration process, okay, you could go about coming up with the integration plans, relay your synergies. As long as you maintain your NPS score of 80 to 90%, that's the KPI that they have to meet or beat. Turn it into goals, basically, you basically turn that into a goal. That's not a goal that you increase upon. That's a goal that you cannot go down from. Right. In this example.

How does that transition from goals into getting a team that's actually going to execute on it and driving to the task for them to move on?

Great question. So in the integration process, we break it down into two different sets of meetings. One focused on value drivers, one the traditional plumbing, connecting and integrating amongst the different functions. So the value driver focus would be like the key leads on the parent company and the acquired company coming together as part of the integration planning kickoff. We first focus around the value drivers. What we have uncovered or what was our original investment thesis, and what we uncover during the diligence process, we share with our acquired key membership. It's usually their executive leadership team and also other talent that we identified during the diligence process. And what we do is like this workshop. We share with them what our original goals, original thesis, what we uncovered, and then ask them to highlight what other value drivers might be missing. Because this is a critical process for us to understand. Again, this is done very collaboratively between just the critical leadership members, not necessarily all the functional team members, because we want to have an honest discussion because we already paid the money and here's what we believe and here's our thesis. And they ask them to validate. And this conversation is very eye opening on both sides. So we start identifying the different opportunities. In fact, some of the. I'll give you a funny example. So one thing we noticed, like at that time we were not company. It's a successful Silicon Valley software company. They were growing at breakneck speed, but their cultural policies were different than what we had. Where. I know, I remember like when we showed up for diligence in one of their conference rooms, there were a couple of pets jumping out onto the table. Well, dogs bite. That's the immediate reaction, right? That's the first thing you want to cut? No, but we found out they were able to keep their employees happy. You know, the competition and retaining Talent in that part of the world is primarily because they were able to give those perks. Not many companies were doing that. So this became part of our value driver to protect from a cultural standpoint because we don't want to do something, do no harm, Even though that's not our corporate policy. This is something that we want to protect because we know that will help in retaining the talent.

And it's interesting because it seems like you're identifying some of this, as you mentioned earlier, by inviting that company to participate with this integration, share their perspectives, and essentially continue validating those value drivers.

That is correct. That is correct. And it's a focused, structured approach where the key leadership on both sides that are responsible for delivering on the value drivers come together and share the pieces and also, where possible, support with the data. Hey, here's what we have. And also share freely. What else did we miss?

I like that he encouraged the data to be brought into it. So this is interesting because you're running this process. It's not you're spending a couple of weeks with a few people to determine the value drivers, validate it, and just push forward with a deal. It's a very iterative process throughout the transaction, even into the post close.

Yeah. So we start during the diligence, goes into the integration planning, and then we run these two different meetings. So we got a functional integration meetings that goes into the plumbing. Okay, IT systems need to be connected, accounting, tax, et cetera. And then you have the value driver focus meeting that goes on. So these are two sets of meetings. And the way we develop this is also like your value driver identifies the list of things that needs to be done that becomes the plan of record for all the support functions to support or develop their plan. Say, for example, if the value driver is about scaling revenue faster. Now the IT integration tied to like a sales reporting or an ERP integration based on the deal or the value driver might be the timing of that would be fixed by the value driver plan of record. And the support function will have to deliver to that.

Could you tell me a little bit about what the cadence of those meetings look like between the functional integration versus the value driver focus meetings?

So the value driver focus meetings typically on a biweekly basis, again, that both the acquisition and the parent company, it's the key leaders who are responsible for delivering those numbers tied to that the goals. It could be just the goals that we have to protect or the goals or the numbers that we have to deliver. From a business case standpoint, bi weekly.

Are they pretty short, pretty long meetings.

It's typically an hour long and depending on the size of the deal it varies. So we may have separate, there are instances when we do multi billion dollar, multibillion dollar deals. The numbers we would have separate focus meetings on just the sales for example acceleration or it could be the product and then there'll be multiple. Each value driver might have a functional or a value driver meeting and then we will have a steering team on just the value drivers. But for smaller deals it'll be more of report out from all the functional or the value driver leads into one bi weekly meeting and then the functional integration. The functional integration typically happens on a weekly basis because we got a lot of moving parts, a lot of plumbing that needs to be done between HR and IT and finance. So that happens on a weekly basis.

What governing systems and checks and balances enable successful value integration?

See, this is critical in my mind. The governance sets the tone for success because everybody claimed that they have it, but they don't have the power or veto to stop mistakes from happening. If the integration management office takes ownership on executing on the business case, truly being the partners of the business units that are going about buying the companies, that's a minimum. That's what you need for setting the governance. Because if the integration office is viewed upon as more like a pencil, paper task finisher, plumbing connection, then there's no guarantee. So that's number one. Right? The governance starts with like holding people accountable. In this case hold holding the GMs holding the value driver leads accountable on their leading metrics as well as lagging metrics and ability to escalate to the highest levels. In this case the CEO, the CFO of the company. So the best practice here is to have cascading levels. So in large companies we used to do like a quarterly steering team update on a programmatic acquisitions at the CEO CFO level and a monthly update at the business unit. GMs and the business unit CFO and bi weekly value driver focus meetings. I would encourage though for smaller mid sized companies, if you can get the CEO and CFO to sit in on your value driver meetings or even on the integration meetings at a periodic basis that would create a big impact which is what we did with ipg. We have our CEO and CFO both committed and that helps in pushing, making decisions and not going off the rails on the guidelines. What we set out to how can.

Practitioners build a strong and agile integration playbook to protect these values?

See, this has to be intentional. The key here is Everybody talks about it, but they don't put it to practice. When they face the first hurdle or first GM or somebody else not wanting to play, they give up. Okay, now so it has to be intentional, it has to be codified. There are some ground rules that we would play by. Protecting value drivers is how we would run our integration and deal process. This is codified in the process. That's a minimum. And then you go about identifying because you'll be learning lessons throughout your acquisition. And how well have you integrated and not repeating the same mistake because everybody what I have found in the industry is repeating the same mistakes because they never had the influence. So that doesn't work. So your ability to integrate your lessons learned not only on the integration side, but also on the deal selection and the deal modeling is critical. So that makes your practice more agile and then your ability to customize based on the needs of the acquisition.

So really keep like tight learning cycles and continue building on them.

Yep. So after the lessons learned, you identify, hey, is this now a new deliverable that you incorporate into your playbook?

See that, that makes a lot of sense. Because I think the challenge I hear from a lot of companies is they're building this library of lessons learned, but nobody's accessing it and really proactively utilizing that information. But I think incorporating it in your process at the stage necessary to actually have a briefing with the team, talk about what we covered or the most common mistakes were in previous deals would make a lot more sense.

Yeah, because Dell, I remember like we had more than 3,000 plus lessons learned after running 25 deals across 25 functions. Okay, now how do you keep that live and active and then incorporate and make sure we don't repeat the same even though it's a database there you could search. The key here is like to distill that wisdom into actionable outcomes and keeping it fresh for each new deal. That's the key.

What are some of the biggest mistakes you've seen in extracting and implementing value.

Drivers time and again? The biggest one is more on people not following the process. There is this gut feel that you want to somehow you believe that you can pull it off without validating your execution capability. So anytime you're going off the tangent without any past proof, that's a big red amber light and that needs to be called out. So that's a responsibility for the integration management to say, well, this is similar to that, but it's not exactly the same because the GMs and the leadership tend to minimize the risks on the execution because in their mind they've done it in the past, but it may not be the case.

What advice would you give to a company that's more of an occasional acquirer in terms of validating execution capabilities?

I think if they are the key for an occasional acquirer is bring in the best talent from a wisdom standpoint. So people have done work in the similar industry that's so that like you're not making the new mistakes. The second is find those nuggets of wisdom from the subject matter experts in the trenches because the leadership will always present the final output but not necessarily all the mess that happened in between. Those in the trenches knew well the project was successful after three years, not in the first year and a half which was promised. And what are all the mistakes that happened whether the processes currently exist or not. So I would just get external talent, find the internal nuggets of wisdom with the key subject matter experts and dedicate some key talent in the company that will drive some of that have credibility to drive and influence the leadership team.

What's the craziest thing you've seen at M and A Jay?

We all believe, or like to believe that these are all very data driven logical decisions. There are plans that are made out sometimes. No, it's the emotions and how people try to get some deals done because organically investing doesn't justify and you have to go out of the limb to paint the sources of value, which is exorbitant. And it happens because either you have the right side of the you're on the right side with the CEO or currently are doing good in other areas. So I would say it's not necessarily data driven. It's all people driven and emotions somehow you justify.

Would this be fair to say? Emotions can at times exaggerate the story?

Most of the times.

Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kison K I s o nealroom.net M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog thank you again for listening to M and A Science. See you next time.