M&A success in Southeast Asia: Repeatable model is the key

This article originally appeared in The Singapore Business Times (Subscription Required).

Strategic merger and acquisition (M&A) activity in the Asia-Pacific region has taken a dip for 2012, dropping by 8 per cent in deal value overall. But South-east Asia is bucking this trend.

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In fact, there's a boom in M&A activity. Dealogic data shows that deal value rose by a healthy 50 per cent in 2012, buoyed by high-profile deals such as Heineken's US$4.6 billion purchase of Fraser & Neave's stake in Asia Pacific Breweries in late September. Shortly thereafter, insurer AIA bought the Malaysian insurance arm of Europe's ING Groep for US$ 1.7 billion.

M&A can deliver great value if it is well-conceived and properly executed. In fact, a recent Bain & Company study of more than 1,600 companies found that M&A was an essential part of successful strategies for growth over the past decade.

The most successful acquirers are those with a repeatable model: The group of companies that built their growth on M&A - those that acquired frequently and at a material level - recorded annual total shareholder returns that were nearly two percentage points higher than the average. But M&A is an area where only companies that have carefully built up the required M&A capabilities and experience routinely succeed.

We have found that M&A winners build a capability for repeatable success that includes five elements.

First, successful acquirers understand their strategy and create an M&A plan that reinforces that strategy. The strategy provides the logic for identifying target companies. For example, some of the best acquirers use M&A to build leadership positions in existing businesses, expand into adjacent businesses, overcome entry barriers in new markets, acquire new capabilities, and take advantage of favourably priced targets with high business overlap. These companies typically have clear guidelines for deal frequency, size, timing and level of ownership.

Consider the approach taken by Indian household and personal-care product maker Godrej. The company has assembled a strong M&A team and developed a playbook including a rigorous screening process to identify the right acquisition candidates. It focuses on three core categories and targets companies with leading positions. This focused approach enables a disciplined screening of potential targets to ensure a strategic fit.

Second, they develop a deal thesis based on that strategy for every transaction. The thesis spells out how the deal will add value both to the target and the acquiring company. In China, the use of a deal thesis has been critical to the success of China Resources Snow Breweries, which has completed dozens of regional brewery acquisitions on a path that has made Snow the world's No 1 beer brand by volume.

Third, they conduct thorough, data-based due diligence to test their deal thesis, including a hard-nosed look at the price of the business they are considering. One successful Singapore-based acquirer has a six-member core M&A deal team that works hand-in-hand with business unit leaders through every stage of an acquisition, including performing due diligence that asks and answers the big questions that will drive most of the business value.

Fourth, successful acquirers plan carefully for merger integration. They determine what must be integrated and what can be kept separate, based on where they expect value to be created.

Finally, they mobilise to capture value, quickly nailing the short list of must-get-right actions and effectively executing the much longer list of broader integration tasks while keeping a strict focus on value creation.

Following a merger, a South-east Asian retailer knew it could build value by closing the most unprofitable retail operations and focusing on two core markets, Singapore and Malaysia. It generated synergies by renegotiating volume discounts with suppliers. And it addressed people issues that could threaten a successful integration. The retailer grew revenues by 15 per cent a year three years after its purchase, three times the market growth rate, and added 13 percentage points to its margins in four years.

A repeatable model for M&A that includes these five elements and is enabled by an institutionalised M&A capability will separate the companies that profit from South-east Asia's growing M&A marketplace from those that are left behind.

The writers are partners at Bain & Co's Singapore office, and heads of M&A practice in Asia and private equity practice in Asia respectively.