How to create the “leadership premium” in M&A deals
Leadership is a vital component of all M&A deals. However, in the middle market deal space leadership often becomes an ignored variable in a company’s market valuation equation from both a sell-side and buy-side perspective. To accurately solve the market valuation equation, you must look beyond the two primary variables of financials and intangibles. To effectively and accurately value companies to the benefit of your clients and your business, you must create a leadership premium.
So, how can this be done? Here are four key steps:
1. Understand leadership implications of the deal thesis and objectives. Buy-side firms have a deal thesis and objectives they use as a screening tool in their acquisition process. The deal thesis and objectives each have an associated “leadership implication.” It is imperative to understand what those leadership implications are. For example, a stated objective could be to expand customer market share. The leadership implication of this deal objective is how leaders and their teams focus on customer needs and how they build relationships to attain and keep customers. This analysis reveals what type of leadership experiences and skills you want to see in both buy-side and sell-side clients. By identifying what leadership should look like for a successful deal, you can set-up leadership assessment properly to identify inputs to solve for the leadership variable.
2. Assess leadership first, culture second. Many M&A consultancies typically turn to cultural assessment as the necessary first step in any deal. Knowing differences in leadership styles, communication styles, innovation and risk management approaches between two firms provides the necessary detail to create a smooth integration. However, this is the wrong starting point, and here’s why. Let’s assume you find that the cultures of the two companies are misaligned and will require robust change management and communication plans to mitigate. To enable successful change, you first need to know if you have the right leaders with the right leadership skills in place such as ability to communicate effectively, lead change, or show adaptability. Without this knowledge making change successful becomes harder to achieve.
3. Identify leadership strengths and risk areas of individual leaders and collective leadership. Think of leadership as an iceberg. In sell-side engagements, we typically focus on C-suite leadership—the tip of the iceberg. However, to really understand the true depth and breadth of leadership in the firm, you need to look deeper below the surface. For individuals, understanding what leadership capabilities the CEO, CFO, or COO possess is important because these leaders are the ones most responsible growing the company to its’ current position. From a collective leadership perspective, defined as the overall leadership capabilities of a company from frontline supervisors to the C-suite, a similar approach is necessary. Potential buyers want to know the condition of the leadership bench strength. Understanding the specifics of your sell-side client’s leadership and the depth and breadth of its leadership iceberg creates a new and stronger leadership narrative in the market valuation equation.
4. Create a leadership narrative that secures the leadership premium. As one dealer broker shared with me, if a buy-side client is looking at 10 companies to acquire, the leadership factor can be a critical differentiator. Taking a more focused and structured approach to leadership will allow you to tell a much more relevant and powerful leadership narrative to help your sell-side clients achieve their leadership premium, while also ensuring buy-side clients don’t over pay. This new narrative should still provide insights typically found in today’s CIM management sections, and, importantly, include two new components: identified leadership strengths and key leadership experiences that show how your sell-side clients have successfully utilized their strengths for business growth and impact.
Within these four steps, middle market deal professionals can make the leadership variable work for them and their clients. By solving for, understanding and leveraging the leadership variable, you can better position your sell-side and/or buy-side clients for successful acquisition, and, in turn, enhance your client’s financial success and differentiate yourself among your competitors.