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How serial acquirers can drive value and confidence
In this episode of The Better Finance podcast, host Myles Corson, guests Hai Tran of MasterCard and Lukas Hoebarth of EY delve into M&A strategies for uncertain times.
Myles Corson hosts Hai Tran, Senior Vice President of MasterCard, and Lukas Hoebarth, Partner at EY, to discuss the intricacies of mergers and acquisitions (M&A) in the face of economic uncertainty. The conversation centers on the important requirement for executive alignment and the strategic deployment of innovative technologies to navigate the complexities of executing mergers and acquisitions (M&A) transactions.
Hai Tran emphasizes the importance of establishing clear integration priorities and the consequences of misalignment, which can lead to lost value. Lukas Hoebarth provides insights into the recent trends in private debt funding and the rise in M&A activity, suggesting a cautious yet opportunistic approach to investment given the macroeconomic volatility.
The episode also touches on the transformative potential of artificial intelligence (AI) across various sectors, the evolving roles within corporate development functions, and the significance of ESG considerations in today's regulatory environment. The guests conclude by discussing the key performance indicators (KPIs) for M&A success and the necessity of a robust talent pool and strategic acumen in the field.
Key takeaways:
Understand the importance of executive alignment and technological innovation for M&A success.
Discover how economic volatility is shaping mergers and acquisitions (M&A) strategies and deal-making.
Learn about the significance of ESG considerations and KPIs in driving and measuring the long-term success of M&A activities.
Understand the evolving roles in corporate development and the need for digitalization and strategic focus in M&A.
For your convenience, full text transcript of this podcast is also available.
Hai Tran
“I think the key advice I would provide would be really push for executive alignment on the integration approach as early as possible and clearly communicate those decisions across the business, the functions, technology, to only minimize churn. It is critical that we're internally aligned so we can clearly communicate what the integration priorities are to the acquired company.”
Myles Corson
That was Hai Tran Senior Vice President and Head of M&A at Mastercard. I’m Myles Corson from Ernst & Young, host of the EY Better Finance podcast. A series that explores the changing dynamics of the business world and what it means for finance leaders of today and tomorrow by sharing insights from global leaders on key topics affecting the world of corporate finance.
For this episode, Hai and Lukas Hoebarth an EY-Parthenon partner join me to discuss emerging trends in mergers and acquisitions [M&A] and their impact in driving corporate growth and innovation. They delve into how companies are adapting their M&A strategies to navigate economic uncertainties and leverage emerging technologies like AI[Artificial intelligence], blockchain, and cloud services. The conversation also highlights the importance of strategic alignment, risk management, and the integration of ESG [Environmental, Social, and Governance] considerations in successful M&A transactions.
Corson
Hai, Lucas, thank you and welcome. I really appreciate you joining us on the Better Finance podcast.
Lukas Hoebarth
Thanks for having us.
Tran
Thank you for having us as well.
Corson
So, perhaps we could start off — if you could tell us a little bit about your roles and how you got to where you are. Hai, do you want to start?
Tran
My name is Hai Tran. I am the Senior Vice President of M&A Integration here at MasterCard. I've joined MasterCard about a year ago. I have a pretty long history of doing M&A integration. So this is something I've been passionate about for the last 25 years.
Hoebarth
My name is Lucas Hoebarth. I'm a partner at EY, and I focus on advising Fortune 500 companies on large M&A transactions specific in the high tech and media space. I've been doing this for the last 20 years and I've led four of the 10 largest M&A transactions of all times.
Corson
One of the things we're going to talk about today is how M&A professionals identify and execute acquisition opportunities to generate exceptional total shareholder returns, or TSR, even in the face of market headwinds, which is obviously a situation that would typically deter most conventional businesses from pursuing new acquisitions. So, really appreciate having the two of you on to share your perspectives on that. As we get started, perhaps you could talk a little bit about the current economic landscape and how companies are using M&A to create value. Based on what you're seeing in the current economic environment, how do organizations think differently about M&A?
Hoebarth
I can get started here. Look, there are a lot of interesting data points on the stake of the economy both in the US as well as globally. Just a couple of data points — so, let's start with the US obviously unemployment is at record lows well below 4%. SMP [significant market power] is at record highs, interestingly enough driven by actually a small number of tech companies that have been driving up and both the SMP, jobs added per months are hovering between 200,000 and 300,000 per month. Inflation has come well below 4%. And while there has been some pause in terms of the actions that the Fed is taking, I think there's a general consensus that we're probably done with the rate increases and are looking at stable or decreases in debt rate.
So, all of that, combined together with an increase of private debt funding and private debt runs that we're seeing, certainly points a much better and healthier picture of the economy and the M&A market than just 12 or 18 months ago. And it's also reflected in some key numbers. So, when you look at the M&A deals that were announced in the first quarter of this year, which were about US$800b, that is up 35%-36% compared to the first quarter of last year. So, a significant healthy increase. Now, it's still well below the peak in 2021-2022 when we had quarters with US$1.4t, US$1.5t of M&A activity. So, we're still below that.
But I think overall, we're certainly on a track back to these levels. In terms of what companies are doing to create excess TSR in the current environment, I think the big focus that I see companies, especially in tech sector focus on is going back to their core capabilities. I think a lot of deals that we're seeing are either on the sell side where assets are being divested that are not core to the business of the company or the acquiring assets to build out their core capabilities and core strength. So, I think that's the big focus here and all of that to really drive increased topline growth. We don't see a lot of deals that are focused on cost synergies. We really see most of the deals around how do you expand your product portfolio? How do you expand your geographical footprint? How do you expand being more successful with your existing and new customer bases?
Corson
Thanks, Lucas, and Hai, how does that reconcile with your perspectives?
Tran
Yes, for the most part, I pretty much agree with what Lucas has said. I think there's a couple things I'd like to add. I think for the most part, the serial acquirers, they continue to use M&A as an important lever for growth. So that hasn't changed a whole lot. However, with some of the uncertainty around the macroeconomic conditions, I think companies in general are a bit more cautious. In addition, I think the risk profile has changed a little bit again with the uncertainty in the economy. I know that Lucas mentioned that it's getting better, but with that still in play, I think companies still want to match their risks in a more balanced way going forward
Corson
We're going to jump into some tactics that companies can use to capture some of that value we talked about. Before we do that, I'd just be interested in your perspectives looking forward and what the trends and developments that you foresee for the industry that could further influence value-creation strategies?
Hoebarth
Yeah, I can get started here. I mean, look, I think I agree with Hai that the picture is trending upwards, but not outright excessive or optimistic if you will. Now when we talk to CEOs, so we recently finished our quarterly CEO survey, and a majority of CEOs are saying they feel there's going to be a stable deal of environment and about a third of them are saying there's going to be increasing in deal environments. So, about 85% to 90% of CEOs do believe that M&A activity either is stable or will increase.
So, I think that's a positive outlook and also that combined, when we talk to Corp dev [Corporate development] executives, there's also an anticipation that valuations are likely going to rise. And obviously, that's always a big driver of how much M&A activity is going to be in the market of your highest point, how attractive the evaluations of these targets are. I think the other thing we're seeing specifically in the tech space are what I would call atypical M&A activity, which includes joint ventures, which includes partnerships, which includes minority investments.
Some of that is certainly driven by increased regulatory scrutiny from the DOJ [Department of Justice], from the FTC [Federal Trade Commission] and other regulatory authorities around the world. And so I would expect some of these trends to continue around M&A activity in atypical assets. Now, the last thing I would mention is specific in the tech sector to your point around value creation, a big elephant in the room obviously right now is AI and generative AI [GenAI]. And while there's a lot of focus on the companies that are building the large language models [LLMs], we actually believe that the second and third order effects is going to be more broadly across the tech sector. So, what do I mean by that?
So, we call them the four Cs — content, compute, chips and custom apps. Content: Every LLM needs content to feed its language models and there are a lot of deals that are being struck between tech companies and media companies, between tech companies and tech companies to get access to that content and some of that will be atypical and some of it will be typical M&A activity. The second one is obviously compute. So, there's a significant amount of infrastructure needed to power all these LLMs. And, so there is obviously, all the data center providers, but then also I would say the companies behind these data centers that are servicing, that are providing the electricity, providing the services to these data centers, they are getting impacted by that AI boom as well.
The server, obviously the chip makers, not only the chip makers directly, but also the software makers that are making the software that goes into the chips, etcetera, will see an impact. And then lastly, all the custom apps, so all the companies, all the tech companies that are building custom apps on top of these LLMs to provide specific use cases across various sectors. So, we're certainly seeing not a whole slew of M&A activity in that space quite yet, but we do anticipate in the next 12 to 24 months there are going to be both atypical and typical M&A activity around that whole AI topic coming up.
Corson
Hai, anything you want to add there?
Tran
The bottom line here is, I think in addition to some of the larger transformative deals, other companies are continuing to look at smaller acquisitions to really drive innovation around the things that Lucas mentioned, which is AI, that's really important for them just getting their foot in the door around the ecosystems around those areas. In addition to that, I think another big area is just how we continue to leverage data across the organization to create value. It's going to be more powerful now with AI using data to improve products or services to our customers and obviously the customer experience, which ultimately all drives a company's growth.
Corson
Great, thank you. I appreciate you bringing that data perspective, which is going to be so important to successful leverage of AI. Hai, we've talked about again some of the current environment for transactions. We've talked about in some of the future directions, can you maybe show us a little bit about what that means for corporate development M&A functions and what are some of the trends you're seeing and how those organizations are evolving?
Tran
There’re just a couple of things. Maybe the first one is a strategic reprioritization. I think a lot of times what we're seeing now is that they're aligning the M&A efforts with the revised strategic priorities, which is focus things like AI risk management. I think, again, with all the new regulations and things coming out around data privacy, there's probably a huge and heightened scrutiny on risk. So again, making sure that you have the right risk appetite, right risk model and the mitigation strategy to address that as you acquire companies. So, those are some of the things that I see as shifts in corporate development.
Corson
And Lucas, I know you've got some data from some research. Do you want to share some of those perspectives?
Hoebarth
We recently completed a study of about 200 corporate development executives in the TMT space. And about 0% to 40% of the respondents are saying what the biggest changes in the corporate development organization were two topics. Number one, an increase in strategic focus and number two, an increase of their charter or their scope. So, when we dig deeper into that really what this means is that the success of a corporate development deal is heavily depended on how well they work together with the corporate strategy team and what we've seen over the last couple of years and what corporate development executives are telling us that they are becoming even more embedded on the strategy side of the business, especially in an environment where capital is a little bit more scarce with your highest point, the connection to the company's strategy is super important.
Making sure that your corporate development team, which is primarily responsible for kind of your non-organic growth activities, is very well connected to your corporate strategy team, which is responsible both for organic and inorganic growth is highly important. And so, we do see more corporate development executives be participating in more C-suite meetings and work-work meetings and really getting well more connected with the corporate strategy team.
The last thing I would say, and Hai alluded to that,we also see that companies are starting to explore how they can use certain automation tool to increase the efficiency in the corporate development process — be it on target screening, be it in due diligence. So, there's an expectation that some of the more analytical and research tasks could become a little bit more automated in the next six to 12 months, which would allow acquirers to look at a broader set of potential targets much quicker than they are doing that today.
Corson
I think collaboration and automation are two key themes that we see more generally. So, good to hear how that's also enabling corporate development in M&A. Lucas, as you look back on some of the transactions that you've studied and evaluated in terms of what drove exceptional total shareholder returns, can you give some examples of that? And also, what do you think is going to be important going forward in terms of continuing to enable that value creation?
Hoebarth
It's actually really interesting. We did an analytical study earlier this year where we looked at all the SMP companies over the last 10 years and compared their success with and without M&A transactions, and a couple of interesting data points — number one, 90% of all SMP 500 companies made acquisitions over the last 10 years. M&A is a toolkit in almost any organization's toolkit, number one and number two, what we found were two things — number one, when it comes to smaller and tuck-in acquisitions, the TSR increase increases at the same time on a correlating basis with the number of transactions they are making.
So, in other words, if they perform smaller tuck-in and bolt-on acquisitions, it pays off to do more of them and then conversely, when you look at transformative deals largely where one company buys another company of equal size, you create excess TSR when you do fewer deals, which makes sense when you think about the bolt-on and tuck-in transactions. When you do a lot of them, you want to build a muscle memory, you want to build an M&A engine that can successfully and effectively move these acquisition targets through the process compared with when you make large transformative deals.
It takes time and energy and focus to successfully absorb them. That was highly interesting, especially on the transformative deals. We found that the companies who are more successful with these transformative deals have a two-fold TSR, compared with companies who are not successful with these transformative deals, who are not performing these transformative deals to begin with. Maybe just to make it real based in my experience, what have I seen companies do to successfully especially execute these large transactions?
I think the first one, Hai alluded to this as well, really aligning your integration strategy with your deal thesis. But sometimes we see companies who do integration for the integrations sake where it's really important to focus all of your integration activities back to your deal thesis. What if you laid out initially in terms of access to customers, access specific to your increasing product portfolio, innovation, etcetera. What are these deal thesis drivers that you laid out at the beginning of the journey and then make sure you carry through to your integration. So, I think that's one.
The second one is certainly execution excellence, acknowledging that the success of an M&A transaction doesn't end when a transaction is closed, but then actually the integration journey starts and then when you have to put in the effort and the hours to really generate all the value. And then the last thing I would say, is really dedicating top-tier talent, which both includes senior executives that are executive sponsors for each of these transactions, but then also dedicating the individuals from the business, from the various functions responsible to drive the integration on a day-to-day basis is critical to successfully manage these especially the large transactions.
Corson
Hai, anything to add on?
Tran
Lucas pretty much hit on all the key points, but I think there's probably one area where I'll elaborate a little bit more in detail, which is really having a very strong approach around value creation early. I think to Lucas’s point, a lot of times we think of integration as being purely operational, a little bit more tactical. So really just making sure that when we think about the level of integration of a company, the value creation or the business objectives really dictate that not the other way around.
So, a lot of times, we have a tendency to go integrate just for the sake of integrating versus really saying, ”Hey, we want to build a fit-for-purpose integration model to really enable and support the objectives that we're trying to accomplish” So, that's quite important. I think the other thing too is in general integrations are never perfect. So, we want to be able to proactively course correct a lot sooner rather than later.
So, it's important for us to really understand what are the core KPIs that are driving the outcomes that we want. Because if we have those leading indicators, we're able to then go back and make the corrections and adjustments much faster. I think a lot of times companies measure performance against revenue, which is a lagging indicator, which is still important.
But really, what we need to understand are like what are the key initiatives that support our revenue growth like Lucas mentioned, do we have to go execute against a product roadmap? Do we have to go hire a sales force? If we don't do those things our ability to hit the revenue numbers are going to be impacted by that. So, having those core KPIs it's important for us to then enable success.
Corson
Maybe we'll come back and talk about the KPIs and measurement piece in a bit more detail. But I did just want to pick up, Lucas talked about talent and collaboration as being the key aspects of the role. Can you talk a little bit about how you see the future of talent and the needs in corporate development, particularly given some of the aspects we've talked about in terms of the current need and also where these functions are going?
Tran
I think most of the serial acquires already have this in place. But I think the role of M&A and corporate development should be obviously more strategic, partnering with the business to plan and execute It's more than just being a transaction execution and program management engine. It's being more business oriented, especially in M&A integration, where traditionally program management is a big component of that. Driving towards a larger focus on value creation that I mentioned earlier.
Corson
Let's go back to that KPI point, because obviously measurement and tracking of the success of transactions, whether again the transactions deliver on what the thesis was and what you set to achieve is really important. So, I do want to share some best practices and the things that you've seen work particularly well in your experience.
Tran
I think most companies should set up a standardized process for measuring M&A performance. Typically, what I've seen, and I've done myself is establish a quarterly performance review process for each acquisition for a two-year period. That way you can measure how you're doing against the business case for the first two years. Secondarily, it's important to establish leading indicator KPIs in addition to the traditional KPIs, such as revenue and net income. Those leading indicator KPIs are important because it helps you and enables you to course correct sooner. So, that's super important. That's what I've seen in the past and that's what I've implemented in the companies I worked at.
Corson
Lucas, anything you'd add on that topic?
Hoebarth
Yeah, maybe just two things to add. Hai certainly highlighted one of the key leading practices, if you will, having a quarterly review on an ongoing basis at the end of a transaction. So that's definitely a leading practice. The other thing I've seen companies do successfully is also having a consistency between the investment committee that is responsible to sign up the deal at the front end and then the committee that's looking at the postmortem after the deal has closed.
Then to the degree you could have consistency between the executives sitting both in the upfront investment committee as well as the ones who was eventually sitting in the committee that's evaluating the success on a quarterly basis. That's certainly a leading practice as well, and then the last thing I would mention also to Hai’s point around leading and lagging indicators, what I've seen work really well is if you embed the targets, that's the synergy, the financial, the deal thesis targets from each transaction into your business-as-usual plans.
Ideally, you don't want to track a lot of the uplifts in revenue and reduction in costs in a separate spreadsheet, but you embed them as part of your business-as-usual plans and therefore, you can also embed them into the performance and incentive plans of the executives of the various business units and therefore, really drive a kind of a focus towards successful execution of these transactions.
Corson
Lots of fantastic insights and I really appreciate you both showing those. If you were to distill down the wisdom you've got from all of these deals you've done, the companies you work for, what advice would you give to our listeners if they're thinking about embarking on a transaction? What will be the key advice that you provide?
Tran
The key advice I would provide would be really push for executive alignment on the integration approach as early as possible and clearly communicate those decisions across the business, the functions, technology. It is critical that we're internally aligned so we can clearly communicate what the integration priorities are to the acquired company. They already have a challenging task of running their business while supporting the integration efforts. Focusing on the wrong things can quickly destroy value.
Corson
Fantastic. Again, really appreciate all of those insights and as we just wrap up, we always like to get a little bit more insight from you and your career journey. So, is there a particular quote that you've found helpful in your career that you'd go back to on multiple occasions?
Tran
One of my favorite quotes is from Thomas Jefferson. I find that the harder I work, the more luck I seem to have. I'm a kind of old school type of person that believes that if you work hard, you were able to accomplish what you set out to accomplish. I saw this pretty early in my childhood with my mother. My grandmother passed away when she was nine and then, she had to drop out of school to work to support the family and three siblings.. So, for me, working hard is something that I always look through as a foundational value that's been with me throughout my career.
Corson
Well, I appreciate the quote and also the personal resonance. That's fantastic. Is there a piece of advice given in your career that's been particularly impactful and helpful to you?
Tran
The advice I've gotten earlier in my career, and it came from my consulting days was build my personal brand. What do I want to be known for, a senior partner basically asking the question and that really launched my career to build a really deep skill set across the entire M&A lifecycle. I spent time on the frontend doing corporate finance and then of course, a bulk of my careers had been in M&A integration for the last 25 years. Now, for those who are early careers and are unsure about what they want to do, really find an area that you're passionate about and invest the time to become really good at it.
Corson
Hai, Lucas, thank you again for joining us. I really appreciate you sharing your insights and perspectives on this corporate M&A environment.
Corson
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