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Chapter 1
Advanced manufacturing
Ahead of the pack or playing catch-up?
Manufacturing companies’ shift to a services-led business model requires a new M&A playbook to capture growth along with cost savings.
M&A activity among manufacturing companies remains strong, with almost 9 in 10 businesses reporting growing confidence in the M&A market in EY’s April 2018 Global Capital Confidence Barometer for the sector. But the sector is changing fast, heading toward a services-led business model, and M&A is a key component of their transformational growth strategy. Acquisition synergies vary widely by subsector. According to an EY analysis of deals from 2010-2017, deals in the traditional manufacturing arena produced an average realized cost synergy of 6% of target revenue, while that figure was 4% in aerospace and defense and 7% in chemicals. The changing manufacturing business model brings an opportunity to look for new ways to integrate acquisitions to maximize value.
The shift to a solutions-led business is leading industrial companies, especially in manufacturing, to make acquisitions outside of their normal skill sets. The focus needs to shift from cost-cutting to using these new offerings to grow revenue.
Here’s our full advanced manufacturing report (pdf). If you have any questions or would like to discuss your M&A and integration strategy, contact David Gale or Neil Desai.
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Chapter 2
Banking and capital markets
Focus on people, customers and speed – but don’t forget about risk
Deal appetite across the banking sector remains strong. As deals are realized, it is critical to understand which synergy and integration strategies offer buyers the most value for their money.
A moderating regulatory environment is favorably impacting the appetite for banking acquisitions, but traditional financial services providers in the sector are reevaluating their M&A objectives as they face an increasingly nimble competitive landscape and technological disruption. What best practices should banking executives follow to achieve synergy objectives through acquisitions?
Deal appetite remains strong in the banking sector, and buyers need to identify integration strategies that offer the most value for their money. Speed to value is essential, but to achieve that goal, the sector will need to keep value creation, customers and culture at the heart of any deal, and start the integration process as early as possible.
Read our full banking and capital markets report (pdf). Contact Charlie Alexander to discuss your M&A and integration plans.
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Chapter 3
Consumer products and retail
Different playbooks for different goals
Transformative consumer products and retail deals focused on allowing a smaller asset to grow require different integration plans.
The appetite for M&A deals in the consumer products and retail (CPR) sector is growing as firms race to counter cross-sector threats and revitalize tired portfolios with fast-growing niche brands. But rapid shifts in everything from technology to talent and consumer taste mean the old consumer packaged goods model is no longer fit for serving the future consumer. Companies need to develop different integration strategies, depending on whether the deal is predicated on growing the acquired brand or reaping cost synergies by putting a sizeable business into their organization.
As consumer products and retail companies try to bring in fast-growing, often smaller, companies, they need to become more nimble in how they approach integration. In order to get the most growth, they need to have different integration playbooks, based on different acquisition goals.
Read our full consumer products and retail report (pdf). Contact Amiya Setu to discuss your M&A and integration plans.
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Chapter 4
Health care
Delivering growth with end-to-end patient care
The race to create a new, integrated health care model requires a new strategy for creating value when bringing the parts together.
Health care payors and providers are racing to create an integrated care model that seamlessly delivers end-to-end patient care from outpatient clinics and urgent-care centers, hospitals, rehabilitation facilities, home health care and hospice services — all increasingly linked more closely with payors and retail (e.g., pharmacies). But, even as hospital networks, payors and other health care providers battle to expand, most haven’t yet figured out the best version of this integrated care delivery model.
The drive to develop end-to-end patient care delivery means health care companies are acquiring assets outside of their comfort zones. Understanding those assets and leveraging the data that they bring are key to getting the most value out of a deal.
Get our full health care report (pdf) and contact Mallory Caldwell or Adam Sorensen for questions or to learn more about health care M&A and integration strategy.
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Chapter 5
Insurance
M&A synergy means transformation
Successful acquisitions in the insurance industry - a sector undergoing massive change - hinge on identifying the steps to take to identify and capture synergies which will create long term value.
After years of low interest rates, stagnant pricing and regulatory changes, insurers are pivoting towards growth. Now more than ever it is imperative for companies to find and capture deal synergies. How can they adopt new business models and capitalize on InsurTech opportunities?
Define sources of synergy early to articulate the deal rationale
The insurance sector is not quick to change, which means opportunities may be missed. Insurers should expand their risk appetite to find new sources of synergy, such as building their expertise in high-growth specialty capabilities or expanding their distribution capabilities to drive synergy opportunities in acquisitions.
Underwriting capabilities, which can often be the largest source of synergy optimization but the most difficult to realize, should be enhanced, and key underwriting talent should be identified and incentivized to stay with the organization.
Insurers should leverage leading practices in operations, such as streamlining processes in front-, middle- and back-office operations; consolidating operations teams; or adopting best-pricing models from the combined entity and lowering reinsurance costs.
Here’s the full insurance report (pdf). If you have any questions or would like to discuss your M&A and integration strategy, contact David Lambert.
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Chapter 6
Life sciences
Finding synergies in new treatments
Regulatory concerns and cultural compatibility can complicate integration in life sciences industry M&A.
Life sciences is a high-risk, high-reward industry where innovation is key to growth. New medical technologies take years to develop and are required to be validated through long and expensive clinical trials in which they have to be compared to the standard of care. After demonstrating clinical acceptance and being proven pharmaco-economically worthy in the eyes of payors to achieve certain scale, larger players often acquire these assets at high EBITDA multiples.
Larger companies are looking hard for these growth assets, as they have been challenged by the lack of home-grown new blockbuster treatments, pricing pressures and medications becoming available as generics. Competition for assets is tough and driving valuation multiples higher. We have seen deals where the bidders have increased the offering price by 10% to 20% at a time, rather than the typical 2% to 5% increments.
Meanwhile, cost synergies, which can help mitigate those higher multiples, vary by subsector within the life sciences industry. An EY analysis of deals from 2010 to 2017 showed that pharma deals generated an average cost synergy of 24% of target revenue, one of the highest levels of all sectors examined, while the similar number for medtech deals was 8%. This variance is likely due to pharmacos having a larger geographic footprint and have more direct duplication in the commercial, supply chain and operational infrastructure that can be eliminated.
Below are several suggestions to maximize synergies and accelerate revenue growth in big deals where integration can take a long time.
Maximizing synergies in a life sciences acquisition brings specific challenges, due to the highly regulated nature of the business, the valuations where deals are being made, dependence on R&D, quality concerns and specific skill sets — developed over many years — of the key talent at the companies.
Get the full life sciences report (pdf). If you have any questions, contact Ambar Boodhoo or Arda Ural to learn more about life sciences M&A and integration strategy.
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Chapter 7
Payment processing
Capturing M&A synergy in an ever-changing landscape
The payments sector is growing quickly on a wave of disruptive technology and changing consumer behavior. Many established businesses in the sector are turning to acquisition strategies in search of achievable – and sustainable – synergies to defend their territory.
With so much M&A activity and high prices in the payments sector, how can you expand the return on investment? Buyers should look for increased synergy opportunities without losing confidence in their initial synergy projections.
The key to expanding deal value lies in clearly articulating and capturing cost and revenue synergies. Don’t underestimate the effort to execute the integration or the impact it will have on your customers and your employees.
Read our full payments sector report (pdf). If you have any questions or would like to discuss your M&A and integration strategy, contact Charlie Alexander.
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Chapter 8
Tech, media-entertainment & telecom
Soaring valuations mean less room for error
Retaining creative talent and the innovation engine are key for TMT companies as M&A deal valuations rise.
Deal values are rising in the technology, media & entertainment and telecommunications (TMT) sector, with 2018 on pace to meet or surpass the record levels seen in 2015–16, as cash-rich corporates and hyperactive financial buyers are competing for targets.
Sky-high valuations underscore the need for TMT companies to find a reliable path to capture synergies, moving away from legacy playbooks toward a nimble, value-focused integration strategy based on the goals of each individual deal. Integration should fuel innovation, inspire talent and catalyze the transformation needed to win as the next generation of technologies matures.
In this era of sky-high valuations, TMT dealmakers have even more to lose from shallow integration and synergy realization planning. They must develop fit-for-purpose, tailored integration strategies with laser focus on capturing deal value.
Read our full technology, media, and telecommunications report (pdf). For questions or to learn more, contact Barak Ravid.
Summary
Post-merger integrations are exciting and dynamic, and can create significant positive change. Merging is just the first technical step towards creating a 1+1>2 equation. But it’s time to throw out the old integration playbook. Changing business models, new and more nimble competition and emerging technologies such as AI and robotics present threats and opportunities.