Value creation: Laying the

foundation for mergers and

acquisitions

www.pwc.in
 Preface
The anxiety of getting into an M&A transaction and closing successfully looms large before any
conglomerate. This is a debate, often run in the boardrooms of the corporates who, having been part
of one of the world’s fastest growing business environments, and have in general been blessed with
healthy growth often weigh M&A opportunities at any given point of time. This report seeks to answer
few of those concerns by probing into below related issues:
1. How is value creation measured?
2. Does M&A create better value than organic growth?
3. Is M&A a ‘check-in-the box’ guarantee for value creation, or is there more that needs to be done?
Basis data availability, this report measures value creation for public companies - defined by total
shareholder returns (TSR), which accounts for share price movement over time, along with the added
gain from dividends paid.
The findings of this report indicate that M&A is not very effective for certain types of industries -
especially those that have significant regulatory uncertainty or prolonged sector headwinds. For other
industries, this report interestingly notes that it is only some, not all, kinds of M&A behaviour that
generally leads to higher value creation than organic growth.
Lastly, the report notes that M&A is not a destination but a journey. The process and discipline of doing
M&A - in pre-deal, diligence and post-deal stages - is more important than the act of M&A itself.
With this context in mind, we have put together this report on whether M&A is the silver bullet to a
company’s value creation woes.
We hope that you will find this report to be differentiated and useful, especially in the Indian context.

Confederation of Indian Industry

2 PwC
Foreword
India has seen M&A activity in excess of 120, 180 and 345 billion USD1 over the
last three, five and ten years respectively, representing a CAGR of 13.2%, 13.7%
and 4% for the respective periods. At the same time, inbound M&A accounted for
25%, 23% and 29%2 of the overall foreign direct investments into the country in the
same period. M&A in FY18 alone accounted for 6% of the aggregate gross capital
formation.3 It is pertinent to note that the growth in value of M&A deals in Q1 FY19
was nearly tenfold as compared to the same period last year, while GDP registered a
7.3% growth over last year.4
The above statistics clearly establish the relevance and contribution of M&A to
Sanjeev Krishan the growth of India Inc. There are numerous qualitative factors which drive M&A;
Partner and Leader however, very often, the question that is asked is, does M&A really create value? And
Deals and Private Equity if not, then why do we see such sequential growth in levels of M&A activity?
PwC India To answer the question, one needs to assess what ‘value’ means—it could mean
different things for various stakeholders across the ecosystem, but is there one
outcome at which there is value convergence amongst all constituents? Then, quite
certainly, not all attempts at value creation would be successful, but is there a class
of acquirers which has been more successful than others, and if so, why? Is it simply
because of the growth that their respective sectors are experiencing, or is the value
creation a result of the diligent execution of the M&A process?
We live in a volatile, uncertain, complex and ambiguous world, and it will continue
to become more so. This only means that what may seem right today may not be so
tomorrow. These observations also apply to any pre-investment appraisal process,
which has accordingly seen a significant jump in the intensity of efforts in recent
times. But, is this enough, or even after doing this well, can we still lose value?
Over the years, many studies have shown that winning a bid for an asset is not the
end, but just the first step towards goal of creating value. Studies also show that not
many deals actually create value. That being the case, what is the recipe for value
creation? Is there any relevance to what the acquirer communicates on Day 1, or
what it does over the first 100 days, or is all this overhyped?
This report aims to provide answers to some of the above questions. We do hope you
find the analysis insightful.

1. VCC Edge
2. Department of Industrial Policy and Promotion (http://dipp.nic.in/)
3. https://www.ceicdata.com/en/indicator/india/gross-fixed-capital-formation
4. https://www.statista.com/statistics/263617/gross-domestic-product-gdp-growth-rate-in-india/

Value creation: Laying the foundation for mergers and acquisitions 3

4 PwC
 Contents
1 What does value creation mean and how can it be measured? 6

2 Did M&A activity during the last decade create value? 10

3 What are the safeguards for successful M&A and value creation? 16

4 What are the potential challenges to value disruption across the deal
cycle and what can be done to preserve and enhance value? 22

Value creation: Laying the foundation for mergers and acquisitions 5

 What does value creation mean
and how can it be measured?

6 PwC
The primary aim for which any business is set up is to create
value. Value creation can have multiple definitions for owners
Measuring value creation
or shareholders and for other stakeholders. Typical measures of a company’s performance include
financial metrics such as operating margins (such as earnings
Owner returns: At a fundamental financial level, an before interest, depreciation and tax [EBITDA] as a percentage
entrepreneur may seek to create value for himself when he of revenues), net profit margins, return on capital employed
starts a business by generating returns that not only exceed his or return on equity. These are typically computed on a yearly
cost of capital, but also meet his target return on investment basis and are an indication of the current or latest operating
(that is, the opportunity cost). and financial performance of the company.
Other stakeholders: As the business grows, there are other These metrics, however, do not reflect the company’s earnings
stakeholders whose expectations of value creation also potential and also would not adequately reflect the tangible
need to be considered. Strategically, the business strives to and intangible asset base of the business. Further, the
meet its customers’ value expectations and hence achieve value of a business is not driven by its short-term financial
higher sales of its products and services. For example, in performance alone. EBITDA and earnings per share (EPS) are
an upcoming technologically driven segment like robotics, not measures of value by themselves. Ultimately, returns to
value creation can be achieved by focusing on innovation, investors or shareholders would be generated if the business is
investments in research and development or tie-ups with able to grow in value over time, as a result of efforts to provide
technology partners. Such strategies enable the business sustained value to all its stakeholders.
to provide its customers with the latest in technology and
products with superior features. In a mature sector like Figure 2: Measuring value creation
retail, customers may look for consistent quality, product
and process innovation and an enhanced ‘brand experience’,
and the company’s value may be driven by factors like brand
strength, market presence, revenue growth, productivity or Total shareholder
stability of margins. Operationally, the business also needs returns
to meet other stakeholder expectations, including those of
its employees, regulators and society at large. Understanding
what drives value will help a business deploy its financial and
human capital in a focused manner, to achieve profitable and Stock prices
sustainable growth.

Figure 1: Interconnected stakeholders for value creation

Intrinsic value

Customers Employees Investors

Value-creating
activities

Society Regulators

Stock prices are considered to be a transparent benchmark of

value, and represent the market’s expectations of the present
Of the three basic categories of stakeholders within an value of the company’s future earnings potential. Thus, the
organisation—that is, customers, employees and investors— stock price should arguably track the company’s intrinsic
no stakeholder’s interests can grow in isolation at the expense value over time, allowing for short-term adjustments resulting
of those of others. Investing in employees, technology and from market sentiment or the availability of information. The
other intangible assets, or a well thought-out marketing intrinsic value would, in turn, reflect the company’s efforts
strategy, can create a ‘win-win’ situation wherein short-term at value creation for all its stakeholders, as reflected in its
expenditure results in higher long-term returns that support tangible and intangible asset base, its strategies and decisions,
higher valuation for the business. its near-term operating performance and its future outlook.
Conversely, a short-term focus on maximising net profits, Based on this logic, changes in a company’s stock price over a
or returns on equity to shareholders, may have negative period of time should be a good indicator of value creation.
consequences. For example, ignoring aspects such as quality Taking this a step further, the best external measure of a
of products and services, employee satisfaction, fair trade company’s performance would be the relative shareholder
practices and environmental sustainability can result in returns over time. Tracking the total shareholder returns
short-term cost savings and higher margins, but will inevitably (TSR) of a company relative to those of its peers over a
impact the organisation’s performance in the medium to period of several years would be an important indicator of its
long term, thus creating a negative cycle which ultimately strategic and operational success.
destroys value.

Value creation: Laying the foundation for mergers and acquisitions 7

Defining TSR TSR can be a powerful tool for value creation if viewed in
a holistic fashion, as shareholder returns are primarily a
TSR is widely used to measure the performance of different reflection of the overall health of a company and its ability to
companies’ stocks and shares over time. It combines share create value for all its stakeholders. While the formula is based
price appreciation and dividends paid to show the total return on historical stock price and dividend data, it reflects not only
to the shareholder, expressed as an annualised percentage. past performance but also market expectations of the future
TSR is calculated based on the growth in capital from performance of the company.
purchasing a share in a company, assuming that the Earnings growth from activities that have the potential
dividends are reinvested each time they are paid: to generate higher returns on investment would result in
greater shareholder returns, for example, investment in a new
technology or process, or inorganic growth that is expected to
deliver synergies to the acquirer. On the other hand, activities
TSR = (Priceend - Pricebegin + Dividends*) / that are potentially not value-accretive, such as diversification
Pricebegin, into a non-core business or acquisition of a target at a high
valuation and/or with significant goodwill, may be viewed as
where Pricebegin = Share price at the beginning of having a lower potential for generating returns, and may thus
the period, negatively impact the share price.
Priceend = Share price at the end of the period, In order to assess value creation by the business, TSR should
Dividends = Dividends paid over the period and ideally be examined over a longer period of time. A company
that delivers consistent or growing TSR to its shareholders
TSR = Total shareholder returns.
is likely to be doing something right, whether it is having a
consistent strategy for value creation for all its stakeholders
*While this is the basic formula, there may also be or efficiently managing the relationships between its assets,
other returns, such as shares received in a spin-off/ processes and operating environment.
demerger after the stock was acquired, and dividends A business can add value organically (by focusing on product
or distributions received on such spin-off shares, innovation, growth in market share or productivity) or
which should be added to arrive at the aggregate inorganically (with acquisitions that help it to add market
shareholder returns. share, new products or capabilities). The following chapters
examine value creation by companies in India through deals,
specifically M&A, by analysing data on M&A over the last 10
years, and also the TSR of BSE 500 companies based on their
M&A behaviour.

8 PwC
Value creation: Laying the foundation for mergers and acquisitions 9
 Did M&A
What doesactivity
value creation
during the
mean
and decade
last how cancreate
it be measured?
value?

10 PwC
M&A has always been viewed as a crucial tool for companies PwC’s analysis indicates that more than 3,400 Indian
to drive growth. Whether it is gaining access to a new market, companies (public and private) have been active in M&A5 over
technology, customer set or product, or simply adding the last decade (FY10–18). Around 600–750 companies have
complementary products and services, the role of M&A cannot been acquired annually over the last decade with an average
be downplayed. transaction size of 2 billion INR (Figure 3).

Figure 3: Indian companies – M&A deals

FY105–18, units, billion INR

2.8 2.5
Average transaction

2.4
value (billion INR)

2.0 2.0 2.1 2.1 2.1

1.7

1,920
1,701 1,745
1,642
1,487 1,415 1,321
1,174
1,047

755 782
690 687 729
669 630
609 576

FY10* FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Number of transactions Total transaction value (billion INR)
Source: CapitalIQ, Bloomberg, PwC analysis

Large companies pull more M&A …but overall, M&A is linked to

weight… macroeconomic and sector winds
Of the more than 6,000 M&A transactions (cumulative, FY10– What is also interesting to note is that M&A trends (number
18), 900 have been done by the current BSE 500 companies and average value of transactions) have been similar for BSE
(Figure 4).6 While transactions by BSE 500 companies account 500 as well as other companies, indicating a close linkage of
for only 15% of total M&A volume, they comprise more than M&A with macroeconomic and sector trends.
52% by value. This indicates that larger companies have been
acquiring larger targets (3–5 times the average deal size)
compared to the overall group.

Figure 4: BSE 500 Companies – M&A deals

FY106–18, units, billion INR 12.5

10.1 9.1
9.0
7.5 6.9 6.3
(billion INR)
transaction

5.8
Average

4.7
value

1,149 1,133
1,020

704 653 678 684 712

128
122
379 108
98 101
91 87 81 78

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Number of transactions Total transaction value (billion INR)

Source: CapitalIQ, Bloomberg, PwC analysis

5. Includes all completed and effective deals from 1 January 2009 till 31 March 2018. Only M&A deals have been considered and our analysis
does not include the acquisition of assets or purchase of stakes less than 100%.
6. BSE 500 companies which were a part of the index as of 31 March 2018 and 1 January 2009 and which have been acquirers

Value creation: Laying the foundation for mergers and acquisitions 11

Valuation multiples in India have …but larger companies are more
not significantly increased in the last discerning of value
eight years… However, for BSE 500 companies, median EBITDA multiples
have been in a wider range of 8.0–11.7 times and median
While EBIDTA and revenue multiples have been on an
revenue multiples in the 1.4–2.3 times range, indicating that
upswing recently (barring a dip in FY18), our analysis
larger companies are more discerning of deals, and are willing
indicates that median EBITDA multiples for all transactions
to pay a premium for attractive targets.
have remained within a tight range of 9.5–10.4 times
over FY10–18, belying the belief that deals are getting
more expensive.

Figure 5: Overall and BSE 500 deal multiples

FY10–18
14

12

10

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

EV/revenue overall EV/revenue BSE500 EV/EBITDA overall EV/EBITDA BSE 500

Source: CapitalIQ, Bloomberg, PwC analysis

There are four kinds of growers 3. Transformative acquirers (TAs) – those with at least
1 large7 deal – 3% of companies
Over two-thirds of the surviving (FY10–18) set of BSE 500
4. Organic growers (OGs) – no M&A activity – 30%
companies have pursued M&A during our analysis period.
of companies
While some BSE 500 companies may have made large bets
on a few large targets, others have been either prolific or Our analysis of TSR for the 291 surviving BSE 500 companies
selective acquirers. indicates that not all M&A transactions are equal or value
creating (see Figure 6). Until 2016, HAs consistently delivered
We have classified the current set of 291 surviving BSE 500 higher returns than all other groups, while OAs have surged
companies (from FY10) into four categories: ahead since 2016. Interestingly, OGs have also managed to
1. Opportunistic acquirers (OAs) – those with less than deliver TSR that are second only to those delivered by HAs,
five acquisitions – 50% of companies thereby indicating that M&A is not the only path to glory. TAs
2. Habitual acquirers (HAs) – those with more than five have consistently lagged behind other groups on TSR, which
acquisitions – 15% of companies raises the following question: What differentiates an HA
from a TA?

Figure 6: BSE 500 TSR

FY10–18 (index rebased to 1) CAGR

FY10–18
M&A strategy classification
14 Habitual acquirers >5 deals
12 Opportunistic acquirers <5 deals 28%

10 Transformative acquirers 1 or more large deal 26%

8 Organic growers No deals 24%
BSE 500 Index Benchmark index
6
18%
4
14%
2

0
Jan-09

Jul-09

Jan-10

Jan-10

Jan-11

Jan-11

Jan-12

Jan-12

Jan-13

Jan-13

Jan-14

Jan-14

Jan-15

Jan-15

Jan-16

Jan-16

Jan-17

Jan-17

Jan-18

Habitual aquirers Opportunistic acquirers Organic growers Transformative acquirers BSE 500 Index

Source: CapitalIQ, Bloomberg, PwC analysis

7. Large deals are defined as marquee deals in each sector and deals with sizes greater than the average deal size.

12 PwC
We also analysed profitability differences across the four
kinds of growers, measured by the median EBITDA margin for
Practice makes perfect…
each category of grower. HAs and TAs delivered significantly HAs, through their experience with multiple M&A situations,
higher profitability margins than OAs and OGs, with the seem to have a more planned approach for dealing with
latter two trailing the median BSE 500 companies’ EBITDA acquisitions. This expertise may vary from one company to
margin (see Figure 7). This may be because TAs and HAs are another, but these acquirers appear to have better managed
more accustomed to M&A and model/deliver better synergies the deal lifecycle—from target identification to integration.
through M&A. This is also evidenced by the relatively higher EBITDA margins
of HAs.
On average, HAs have completed one acquisition every
other year, and seem to have done better at identifying the
right targets, being diligent about diligence, and having
planned for and delivered synergies and integrated acquired
companies better.

Figure 7: BSE 500 EBITDA%

FY10-18
M&A strategy classification
Habitual acquirers >5 deals
Opportunistic acquirers <5 deals Average
Transformative acquirers 1 or more large deal FY10–18
26% Organic growers No deals
BSE 500 Index Benchmark index

22%

20%
18%
18%
14%
14%
13%
13%
10%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Habitual acquirers Opportunistic acquirers Organic growers Transformative acquirers BSE 500 Index

Source: CapitalIQ, Bloomberg, PwC analysis

…but the story is different across For the above categories, we note the following findings in the
delivery of excess TSR:
industry sectors • Local market innovators: Organic growth is often very
Our analysis (see Figure 8) also indicates that HAs and OAs effective, especially when combined with opportunistic
have significant differences in performance (TSR) across acquisitions.
sectors. In our analysis, we have classified industry sectors8
• Uncertain underperformers: Pursuing M&A is better
into three categories:
than organic growth, but an inorganic strategy almost
1. Uncertain underperformers – industries such as never negates the underlying industry challenges which
telecom, utilities, energy and real estate, which have gone lead to poor TSR, though M&A does improve relative TSR.
through extended ‘down’ cycles or have faced regulatory
• Globally linked outperformers: Pursuing organic
headwinds
growth, along with either habitual or opportunistic
2. Local market innovators – industries such as financial acquisitions, leads to superior TSR.
services, healthcare, industrials, materials and consumer,
which have significant domestic growth/penetration, Our findings generally indicate that, for Indian
change or innovation potential companies, an M&A strategy of pursuing opportunistic
acquisitions is better than habitually acquiring or effecting
3. Globally linked outperformers – industries such as IT/
transformative acquisitions.
ITeS and pharma which have significant global linkages

8. Industry sectors are defined as per the BSE classification: xonsumer – automobiles, consumer durables, household products; textile and
apparels, food, beverage and tobacco, FMCG, retailing; energy – oil and gas, coal; financial services – banks, insurance, other financial
services; healthcare – healthcare, healthcare equipment and supplies; pharma – pharmaceutical and biotechnology; industrials – capital goods,
general industrials like plastic products, transport infrastructure; IT – software and services, hardware technology and equipment; materials
– steel, non-ferrous metals, chemicals, fertilisers, cement, construction materials, paper and paper products; real estate – realty; telecom –
telecom services, telecommunications equipment; utilities – electrical utilities, other utilities.

Value creation: Laying the foundation for mergers and acquisitions 13

 Figure 8: Sector-wise excess TSR growth

% CAGR in excess of benchmark index, FY10–18

Sector Local market Globally linked Uncertain

category innovators outperformers underperformers

Financial Real
Sector Consumer Industrials Materials Healthcare IT Pharma Telecom Utilities Energy
services estate

Sector 14% 13% 12% 15% 2% 17% 12% -14% -1% -2% 3%
total
Strategy category

(201) (126) (116) (88) (21) (114) (116) (30) (30) (41) (19)

Habitual 13% -6% 10% 3% -8% 14% 17% -12% -9% 3%

NA
acquirers (108) (58) (31) (30) (16) (94) (76) (20) (19) (37)

Opportunistic 13% 14% 11% 22% 3% 19% 11% -18% 6% -4% 4%

acquirers (91) (68) (58) (50) (5) (20) (15) (10) (11) (4) (9)

Organic
19% 14% 14% 7% 7% 24% 3% -11% -10% -10% 5%
growers

Transformative 5% 14% 1% -4%

NA NA NA NA NA NA NA
acquirers (27) (8) (25) (10)

(x) denotes no. of deals

=>5% TSR CAGR than 1-5% TSR CAGR than <0% TSR CAGR than
benchmark index TSR benchmark index TSR benchmark index TSR

Source: CapitalIQ, Bloomberg, PwC analysis

We also analysed EBITDA margin differences across the four M&A in most other sectors generally leads to higher margin
kinds of growers, across sectors, and note that, barring some gains than organic growth (see Figure 9).
sectors such as financial services, healthcare and utilities,

Figure 9: Sector-wise EBITDA%

% EBITDA in excess of benchmark index EBITDA%, FY10–18

Sector Globally linked Uncertain

Local market innovators
category outperformers underperformers

Financial Real
Sector Consumer Industrials Materials Healthcare IT Pharma Telecom Utilities Energy
services estate

Sector
7% 7% 8% -4% 1% 8% 7% 11% -127% 25% 5%
Strategy category

total

Habitual
6% 7% 2% -10% -2% 11% 13% 26% 31% 20% NA
acquirers

Opportunistic
7% 9% 8% -5% 4% 3% 10% 3% -307% 48% 3%
acquirers

Organic
7% 4% 10% -2% NA 9% -17% 18% 12% 8% 3%
growers

Transformative
NA NA 7% -10% NA NA 19% NA NA NA 14%
acquirers

(x) denotes no. of deals

=>5% EBITDA% than 1-5% EBITDA% than <0% EBITDA% than

benchmark index EBITDA% benchmark index EBITDA% benchmark index EBITDA%

Source: CapitalIQ, Bloomberg, PwC analysis

14 PwC
Industry cycles/performance
overrides potential M&A success
In general, uncertain underperformer industries
underperformed in M&A value creation (negative deviation in
TSR CAGR from the BSE 500 Index CAGR: Telecom at -14%,
utilities at -1% and real estate at -2%), indicating that overall
industry headwinds can offset M&A gains.
Local market innovator industries generated a positive value
through M&A (positive deviation in TSR CAGR over the BSE
500 Index CAGR: Financial services at 15%, consumer at 14%
and materials at 12%).
Globally linked outperformer industries have exceeded or
closely followed local market innovators (positive deviation
in TSR CAGR over the BSE 500 Index CAGR: IT at 17% and
pharma at 12%).

The extent of habituality varies by

industry
Each industry has between 1–3 HAs, but the degree of
habituality has been vastly different. This implies that it is
not necessary to only engage in transformative M&A to create
value. In fact, our findings indicate that, more often than
not, transformative acquisitions result in the destruction of
shareholder value.

Conclusion: Globally linked

outperformers and local market
innovators are more likely to benefit
from M&A than through organic
growth
It appears that globally linked outperformers and local market
innovators are more amenable to value creation through
M&A than through organic growth, though the type of M&A
strategy (HA, OA or TA) yields different results within each
category and sector. However, industry headwinds seem to
override M&A value creation potential in the case of uncertain
underperformers, irrespective of the M&A strategy.
The variation in performance does give rise to the following
question: What differentiates one acquirer from another in
terms of its ability to deliver value, apart from the overall
sector performance and choice of M&A strategy?

Value creation: Laying the foundation for mergers and acquisitions 15

 What
What
aredoes
the safeguards
value creation
for mean
successful
and howM&A
can itand
be value
measured?
creation?

16 PwC
M&A has always been viewed as a crucial tool for companies
Figure 10: Defining M&A Strategy
to drive growth. Whether it is gaining access to a new market,
technology, customer set or product, or simply adding
complementary products and services, the role of M&A cannot
be downplayed.
PwC’s analysis indicates that more than 3,400 Indian
Evaluate and
companies (public and private) have been active in M&A over Understand
choose from
the last decade (FY10–18). Around 600–750 companies have the objectives
strategic alternatives
been acquired annually over the last decade with an average
transaction size of 2 billion INR (Figure 3).
With the pace of organic growth slowing down, M&A has been
Consider
on an upswing. Much of the M&A that we are seeing today decision factors
looks beyond straightforward consolidation or acquisitions. (objective and
Accelerated technological disruption, coupled with healthy subjective)
equity and debt markets, continues to provide companies
with the confidence to pursue innovative and transformative
M&A transactions.
The key focus of transformational deals is bringing in new
capabilities, enabling a business to access fresh revenue
streams or even overhaul its entire business model.
In addition, the focus of Indian banks and financial Choice of strategy
institutions on recovering debts from stressed assets and
the constantly evolving debt recovery process have led to
increased M&A activity, with buyers looking to acquire assets 1. Understand the objectives: The whole idea of M&A
at attractive valuations. strategy planning is to achieve certain predetermined
A lot of deals are also opportunistic—for example, a target objectives at the corporate enterprise level, ranging from
becomes available and the prospective buyer moves in. orderly redirection of the firm’s activities to deploying
This reactive approach lacks the firm strategic foundations surplus cash from businesses to finance profitable growth,
essential to make a success of transformational M&A. This to exploiting the interdependence between present or
brings us to the first and most important point of any M&A prospective businesses within corporate portfolios, and
transaction—defining and putting in place the M&A strategy. risk reduction.
2. Evaluate and choose from strategic alternatives:
Based on the nature of an organisation’s competitive
strength, its financial strength, industry strength and
Defining and putting in place a environmental stability, the organisation may choose
from various strategic alternatives. The selected strategy
sound M&A strategy may be aggressive, conservative, defensive or competitive.
A company’s M&A strategy should be a subset of its overall 3. Consider decision factors: A variety of factors may affect
corporate growth strategy. This includes assessing the need the choice of strategy. These may be grouped in two broad
to acquire or divest; how the M&A alternatives align with categories—objective and subjective factors. Objective
the company’s vision, objectives, and strategy to enhance factors are those which arise from a rigorous analysis
its competitive advantage; and management’s capacity and of various strategic alternatives (as discussed in point 2
ability to execute an M&A strategy. above), while subjective factors include an organisation’s
Every deal should be linked to strategic goals, such as: past strategies, personal factors, attitudes towards risk,
internal policy considerations, timing considerations and
• Transferring core strengths to the target business(es)
competitive reaction.
• Acquiring or expanding products or markets Thus, the choice of an M&A strategy is a trade-off between risk
• Transferring skills to new or non-core business(es) and opportunity.
• Consolidating products or markets consolidation Defining the M&A strategy as early as possible in the process
enables the development of a clear M&A blueprint, and
• Building new capabilities
sets out what capabilities the company can look to acquire
It has become more important that a company’s M&A strategy and how.
and integration plan are in sync with the disruptive business
models and the changing mechanics of value creation, like
shifting customer demands, interaction models and the
economic logic for transacting.
In other words, companies need to transform their strategic
business plans into a set of drivers, which the M&A strategy
should address. The selection of a strategy depends on the
organisational objectives, in the light of the opportunities
presented by the environment and the strengths, weaknesses,
opportunities and threats for the organisation. The M&A
strategy-making process is a decision-making process which
passes through various stages:

Value creation: Laying the foundation for mergers and acquisitions 17

Figure 11: Factors impacting strategic choices

Competitive advantage Industry strength

• Market share • Profit potential

1 2
• Product quality/life cycle • Growth potential
• Customer loyalty • Capital intensity
• Capacity utilisation • Ease of entry into market
• Technical know-how • Productivity/capacity utlisation
Factors
impacting
strategic
Financial strength choices Envioronmental stability
• Return on investment • Technological changes
• Leverage • Rate of inflation
• Liquidity
• Cash flow
3 4 • Demand variability
• Price range of competitive products
• Ease of exit from market • Competitive pressure
• Risk involved in business • Price elasticity of demand

Identifying the right targets Step 1: Develop M&A rationale

The key to effective target search is to pursue a strategy such The first step in conducting a successful target search exercise
that the identified target company can immediately discern is obtaining clarity about the strategic rationale for making
the strategic benefits of the business combination. the acquisition. Assessing how M&A is likely to create value
helps to identify potential opportunities and risks and, in
An effective target identification process originates from turn, dictates the criteria for screening targets. Potential
recognising an appropriate M&A approach. Companies usually opportunities for value creation in M&A may be the following:
pursue M&A in one of the following three ways:
a. Synergy in cost: These may be in the form of reduced
• A proactive approach – identifying the most effective costs as a result of operational synergies, elimination
alternative which aligns perfectly with the M&A strategy of redundant administrative activities, benefiting from
• A reactive approach – responding to an outside increased scope and size of branding, marketing activities,
opportunity which has already been identified to be in line better development process due to broader research and
with the M&A strategy development activities.
• An opportunistic approach – responding to an outside b. Synergy in revenues: These may be in the form of
opportunity which has not been identified as an attractive increased revenue from existing product improvements/
option in the M&A strategy efficiencies through the introduction of new products to
existing customers, the introduction of existing products to
A proactive approach, which involves identifying targets new markets/geographies or through the introduction of
through a strategic search process, has the highest probability new products to new markets.
of success as compared to a reactive or an opportunistic
approach. The key reason for this is that proactive companies c. Strategic synergies: These can be in the form of
are not completely dependent on investment bankers or improving the current positioning of the company to
advisors to identify targets or bring them deals; rather, they create potential for exploiting new markets/new segments
conduct the strategic target search process thoughtfully, and in the future, better flexibility currently to derive value
with immense due diligence. This results in the identification from the exploitation of assets acquired in the future or
of potential targets which are in line with the company’s alleviating current risks for a company to enable a hive-off
overall business strategy. in the future.
d. Other values: These include internal restructuring or
The strategic target search process is a subjective concept financial engineering to bring in management/ownership
since every deal is different and unique. However, there are changes, leading to improved performance.
certain essentials to finding the right targets for any deal. We
define a four-step process for target search:

18 PwC
Step 2: Develop screening criteria Due diligence is needed to validate the reasonableness of
the financial results disclosed by the management and put
Screening criteria vary depending on the M&A rationale.
business sense behind each number. The process can provide
These should be a comprehensive list of questions or
detailed insights into business, quantify adjustments and
categories to ensure that the company does not waste time
synergies to be factored in by potential investors in their
on targets that do not fit within the M&A rationale. These
valuation of the business. The findings from due diligence also
categories include the size range of the target, its geographic
help identify items for which protection needs to be sought by
location, valuation, market standing, potential synergies,
potential investors from vendors in the transaction, by way of
quality and condition of assets (including tangibles and
indemnities, representations and warranties.
intangibles), the quality of the management team, ownership
structure, customer loyalty and concentration, product In the dynamic world of deals, the scope of due diligence is
specifics, past profitability, structure and quantification of ever evolving. Today, investors look at a 360-degree due
debts and integration mechanics. diligence process. This process typically covers the following
categories; however, many other categories of due diligence
Step 3: Identify potential targets may require focus in the case of certain unique transactions.
Based on the screening criteria defined, the company needs to Figure 12: 360-degree due diligence
develop a broad-ranging list of all possibilities/alternatives for
potential acquisition targets or merger partners. For example,
companies may list down all the relevant competitors from
the same as well as other geographies; or for revenue growth,
companies may consider new products and/or new markets. Commercial
Multiple stages of research and analysis need to be applied due diligence
on the universe of targets to shortlist the most appropriate
potential targets.
Environmental Financial due
Step 4: Prioritise targets due diligence diligence
After shortlisting the most appropriate potential targets,
the final step is prioritising which targets need to be
approached and ranking them in the order in which they
will be approached. This step involves a rigorous analysis 360-degree
due diligence
of all the facts gathered from various sources, to avoid bias.
It is also important to analyse the extent of value creation
offered by each of the potential targets shortlisted, and
Forensic and
continuously tracking all events/market updates impacting Tax due
integrity due
the attractiveness of the potential targets. diligence
diligence
This marks the end of the strategic target search process and
the beginning of the process of due diligence, negotiation and
Legal and
integration planning. regulatory due
diligence
The importance of 360-degree
due diligence
Value creation in a deal depends on knowing the
opportunity well before buying and buying at the right price. • The due diligence process usually starts with commercial
Understanding upsides and risks can help in making the right due diligence (also known as market due diligence).
decision and create the maximum value on a deal. It can help Commercial due diligence can assist in understanding
a bidder bid higher for a desired asset with upside as well the competitive landscape from a top-down or a build-
as help negotiate or even walk away from a deal with risks up approach. This knowledge can help measure the
outside the comfort zone. Due diligence, the cornerstone of attractiveness of an industry or a target. Commercial due
planning and execution of a deal, equips a bidder to develop diligence plays a vital role in deciding whether to enter a
his bidding strategy. new market or launch a new product.
Each investment is different—with its own characteristics • Once a target is identified and deal execution starts,
and objectives—and there is no ‘one-size fits all’ appraisal thorough financial and tax due diligence on a target can
framework for appraising investment opportunities. The due assist in validating historical financial performance and tax
diligence process evaluates all the critical aspects of a target attributes and, more importantly, proposed adjustments
to be acquired in the context of the specific deal drivers and to deal consideration which can help in valuation and
deal rationale for assessing the potential risks and upsides of determination for pricing a deal.
a transaction. Although due diligence is mostly commissioned
by the acquirer, in certain cases, to avoid multiple occasions
of due diligence, the process can also be commissioned by
the target or the vendor (known as vendor due diligence or
sell-side due diligence).

Value creation: Laying the foundation for mergers and acquisitions 19

Key aspects to focus on in financial due diligence are quality In summary, a successful due diligence process is one which
of earnings, debt and debt-like items, cash flow, capex and confirms the expected valuation of the target and gives a
normalised working capital used in a business. Tax due multifarious and accurate understanding of the target’s
diligence ensures tax compliances, tax exposures of the risks and potentials, which is useful for effective integration
target and contingent tax liabilities. Often, financial and tax planning of the target’s business. It bridges the gap between
due diligence also reveal positive adjustments in a business expected value and real value.
which can help potential bidders to bid higher and still
generate value through a deal. On the other hand, negative
adjustments highlighted in financial and tax due diligence can
Regulatory and tax aspects
help negotiate with the vendor. With a strong growth impetus in most of the developed
markets, India’s emergence as an investment hotspot and
• Legal and regulatory due diligence is often carried out consolidation in the domestic markets driven by stressed
alongside the financial and tax due diligence, which covers assets are some of the key drivers for M&A. The fast-changing
a review of material contracts, assessment of ongoing regulatory and tax ecosystem continues to impact M&A
litigations, compliance with regulatory environment participants. From running as a parallel activity on the
and inputs for transaction documents. Comprehensive sidelines of an M&A deal traditionally, tax and regulatory
legal due diligence would usually also cover areas such aspects have now become a crucial governing and value
as corporate, contracts, labour, insurance, regulatory, creation factor in M&A deals.
real property, environmental, intellectual property and
litigation. Legal reviews can often reveal latent legal issues Depending on the transaction and the way it is structured, the
and contingent liabilities which can impact the contours of following are the areas which may lead to value creation:
a deal. a. Step-up in cost basis: An increase in the tax cost basis of
• Forensic and integrity due diligence covers background tangible and intangible assets may help in reducing the tax
checks on promoters and business processes to identify outflow, thereby improving the return on capital employed
corporate governance related aspects. It also helps to in the business.
identify beneficial ownership of the companies and b. Recognition and amortisation of intangibles: The ability
unearth hidden aspects about the business or persons to recognise intangible assets which were self-generated
who own or run the business that are generally not visible by the target entity in the financial statements allows
through the information disclosed by the target. Acquirers amortisation over the period during which the economic
rely on forensic due diligence to avert any post-investment benefits are derived. Further, eligibility to claim allowance
or acquisition disaster. for depreciation may lead to early realisation of the value
expected to be created as a result of the said acquisition.
• Environmental health and safety due diligence includes
assessments which can protect a buyer from potential c. Preservation of tax attributes: The continuity of tax
environmental liabilities under the regulations of the losses, foreign tax credits and incentive entitlements of
country post the deal. It includes a review of compliances the target need to be carefully evaluated as the buyer can
with national and state regulations with respect to air, generally carry these forward for potential utilisation in
water and environment protection laws. Procedures for the future subject to certain conditions, thus considerably
handling, storage and disposal of hazardous waste are also optimising his existing tax structure. Reverse mergers are
covered along with compliance to conditions for managing often pursued with the rationale of carry-forward of losses
a safe workplace. of a loss-making company by merging a profit-making
company with such company.
Figure 13: Key considerations of 360-degree due diligence process d. Finance costs: In instances where the acquisition is funded
out of borrowings, deductibility of interest on the funds
borrowed for such expansion reduces the cost of capital
A skilled and experienced team of representatives in all key and improves the returns from such acquisition.
functions with the ability to look under the hood for relevant Greater public focus on the use of aggressive tax planning
details
has increased the exposure to reputational risks, especially
for consumer-facing businesses. The potential result can
be damaging media coverage and even boycotts. Further,
with the introduction of the General Anti-Avoidance Rule
(GAAR) regime, establishing that a transaction is structured
Focus on the non-financial factors also –
target’s corporate culture, people, etc.
for genuine commercial purposes and not with the purpose
of obtaining a tax benefit is one of the key steps to avoid any
impediments to value creation from a tax perspective.

Concentrate on forward-looking due diligence – understand the

target’s future prospects and alignment with the acquirer’s strategy
rather than only validating historical performances

Insights obtained from 360-degree due diligence process integral

for effective integration planning and making the most out of the
first 100 days post-closing

20 PwC
Further, governments across countries are trying to devise With the increased adoption of technology, the regulatory
provisions to ensure that companies pay the fair share of taxes oversight of data and data protection have gained importance,
attributable to the economic activities conducted by them with countries seeking to frame laws to ensure the protection
in the respective countries. With the objective of taxing the of citizens’ data. Any failure or lapses to comply with such laws
value created, governments have introduced several changes may have far-reaching consequences for the company, which
in the tax laws which have disrupted the business models can range from financial penalties to shutdown of business.
developed by companies. Key notable changes include the levy One of the most notable changes was the introduction of the
of digital tax, indirect tax provisions introduced by the Indian General Data Protection Regulation (GDPR) by the European
government and Global Intangible Low Taxed Income (GILTI) Parliament. This is a borderless legislation which implies that
introduced by the US.9 no matter where a company is located in the world, if it offer
At the same time, considering that companies today operate goods or services to EU-based customers or collects their
in a global economy, governments across the globe are trying personal data, the GDPR is applicable to such a company. With
to become competitive by reducing effective tax rates. These penalties as high as 4% of the annual worldwide turnover or
shifts are game-changing from an M&A perspective, in terms 20 million EUR (whichever is higher) for non-compliance,
of not only higher tax liabilities but also their knock-on impact this regulation is likely to have a profound impact on the
on strategy, operations and talent management. operational and control environment of all organisations,
especially those in the technology sector, companies that use
ERP solutions and global in-house centres (GICs).

9. GILTI is a tax imposed, in the hands of US persons who own 10% or more of the controlled foreign corporations (CFCs), on the income
of CFCs.

Value creation: Laying the foundation for mergers and acquisitions 21

 What are the potential challenges
What does value creation mean
to value disruption across the deal
and how can it be measured?
cycle and what can be done to
preserve and enhance value?

22 PwC
Balancing integration between securing the new value (to • Developing a decisive change leadership/management
make 1 + 1 > 2) and protecting the old (to ensure 1 + 1 = 2) changes – involvement of top management as change
is imperative for continued success. sponsors to generate and drive the momentum;
The success of a deal is defined by the achievement of • Ingraining financial discipline and accountability in the
strategic, financial and operational objectives. However, the business by putting in place financial and operational
integration process—an important lever to achieve these metrics and tools;
goals—often does not find adequate space in the priority • Ensuring availability of adequate technology infrastructure
calendars of dealmakers, thus resulting in less-than-optimum to implement the necessary financial and operational
value realisation. discipline to measure the change and performance.
Thus, developing and supporting the first 100 days of
Planning for Day 1 and Day 100 an integration is a vital component of any post-merger
‘As is the case in marriage, business acquisitions often deliver integration and the success of the M&A transaction as a whole.
surprises after the “I do’s”’ – Warren Buffet
The above statement conveys the importance of integration Imperatives to making deals
planning in an M&A transaction in a lighter vein.
successful
With the information obtained through the due diligence, an
Some of the key challenges and imperatives for making deals
acquirer should formulate a sufficiently detailed picture of
successful are discussed below:
the target company to understand the priority issues that are
likely to have a fundamental impact on the success of a post-
merger integration. This demonstrates the need for creating 1. Deal success measures should be clearly
a comprehensive integration roadmap to successfully realise defined and tracked
the expected synergies and value while minimising the risk Often, dealmakers consider their deals to be successful once
of business disruption in an M&A transaction. Detailed Day the strategic objectives are met, even though operational
1 and 100 day plans provide a framework for identifying the objectives lag behind. However, can a deal really be
key milestones for each functional area across the targeted termed successful in such cases? Not realising operational
timeline for integration. The first 100 days of a merger have a objectives implies leaving behind value on the table and,
disproportionately higher impact on the overall success of an thus, not achieving the full potential of a deal. Dealmakers
integration. The goal of the first 100 days should be to ensure need to adequately assess, analyse and determine synergy
business continuity, confirm synergy expectations and define levers as well as the factors that may erode value. Once the
the target operating model while following a critical path identification process is complete, concrete steps need to
to best mitigate integration risks. The existence of multiple be taken to realise synergies and streamline operations, to
concurrent functional work streams and the interdependency avoid pitfalls.
on each function on the other requires these plans to be
highly explicit.
A Day 1 plan should work more like a guidance on what
2. Early and thorough planning, supported
is to happen post-closing of the transaction and serve like by rigorous execution and continuous
a control mechanism for execution of various activities. monitoring, leads to deal success
It should include an extended or detailed list of essential
This is an area which is often neglected and which, in the
tasks organised f0r each independent function with the
end, causes the most damage to a buyer’s value creation plan.
processes and system to perform the same along with the
Typically, corporates start thinking about integration only
relevant timelines.
when the deal has closed or, in the best case, when the deal
is nearing signing/closing. Ideally, integration work begins
First 100 days plan – key long before negotiations close, and even before due diligence
components and success factors starts. Understanding the differences between the companies
involved in a merger, anticipating the issues, uncovering
The first 100 days plan should consist of five core further challenges through the diligence process, and drawing
components, with each component entailing an analysis up a detailed, prioritised and time-bound execution plan
and an implementation phase. Each core component should is the mantra for success. Moreover, many companies still
be assigned a specific set of activities and deliverables to be look at diligence with a traditional lens. For most acquirers,
achieved by a specific deadline. diligence is used for value negotiation or as an input in legal
These key components are: documentation. Our experience from successful deals is that
360 degree 3D (especially combining financial, commercial
1. Realignment of the organisation structure; and operational due diligence) can provide valuable inputs
2. Process integration; for drawing up an integration plan, identification of one-
3. Systems integration; time costs and firming up synergy assessment. For example,
4. Tracking of synergy and product; and in one of the deals that we advised on, IT integration was
5. Customer realignment. a major challenge as the acquirer had to comply with data
protection laws and guidelines, which entailed heavy capital
The success of the first 100 days plan would depend on the
expenditure. This issue was not identified in the diligence
following key factors:
phase and came as a major surprise, post the execution of
• Developing a clear and comprehensive communication the deal.
plan to address the anticipated concerns of key
constituents – customers, suppliers, employees and
financial stakeholders;

Value creation: Laying the foundation for mergers and acquisitions 23

3. Cultural issues and lack of communication are Evaluating synergies
major challenges in the deal process Synergy, from an M&A perspective, signifies the positive net
Understanding the anxieties and concerns of different incremental gain associated with the combination of two
stakeholders and enabling them to see the benefits of the firms through a merger or an acquisition. The development
transaction differentiate successful acquirers from ‘also- of disruptive business models and emerging technologies
ran’ acquirers. In the case of cross-border deals, further like artificial intelligence, software-defined everything,
understanding the cultural nuances in India, both professional open source, Internet of things, cloud and blockchain are
and personal, is critical. Building on the target’s organisation significantly impacting the conceptualisation and execution
culture and leveraging formal and informal channels to deploy of an M&A strategy. Consequently, the concepts of assessment
the ideal communication plan helps in disseminating a strong and maximisation of potential synergies to create value
message. This also aids in building a transparent, friendly and through M&A are undergoing transformation. Synergies are
trust-driven work environment. This, however, is certainly often used to justify an M&A transaction’s success or failure.
easier said than done, as we have seen so many acquirers However, determining the actual role of synergies in the M&A
doing a mediocre job of recognising cultural differences and outcome in numerical terms becomes extremely difficult.
communicating effectively to the wider employee group. Hence, value creation in M&A requires discipline in the
Rumour mongering is very common in the run-up to deal assessment, valuation, and delivery of synergies.
closure and even post-deal closure.

4. The integration team should involve the Identification of synergies

leadership and dedicated resources On the basis of their impact on cash flows, synergies can be
classified into cost, revenue, financial and market synergies.
Operational teams are often stretched by their day-to-day
responsibilities. Having a core, dedicated integration team • Cost synergies refer to a reduction/elimination of
to drive the cross-functional process is critical in ensuring administrative and overhead costs as a result of the
that integration initiatives get adequate focus. Further, consolidation of operations of the combined companies.
senior leadership participation in the integration process is Cost synergies are often achieved through a reduction in
important to bringing focus and drive to this cross-functional the number of employees, elimination of excess resources
initiative. The integration team needs senior leadership due to integration processes, economies of scale, etc.
sponsorship as well as a mandate to take timely decisions.

24 PwC
• Revenue synergies indicate the enhanced ability of the However, realising synergies and meeting deal objectives
combined company to sell more or generate more revenue requires focus and structured planning.
through cross-selling, gaining access to new markets, What do dealmakers have to say?
selling and distribution of similar or complementary
products, reduction of competition, integrated distribution In order to gain key insights into (1) how dealmakers are
channels, etc. driving M&A success, (2) the top challenges they face and
(3) the best practices to effectively address those challenges,
• Financial synergies are represented by better profitability PwC India conducted a Post-Merger Integration Survey. As
emerging as a result of lower costs of capital, improved part of the survey, we discussed these three aspects with
cash flows, higher revenue of combined companies, CXOs and M&A, strategy and operations heads of companies
improved capacity to handle debts/liabilities, a better risk- across various industries (IT, pharma, healthcare, industrial
taking ability and probable tax benefits. products, financial services, energy and infrastructure, etc.)
• Market synergies through M&A are achieved by way which have undergone a merger or acquisition in the recent
of enhanced negotiation/bargaining abilities, increased past and who had played a key role in integration efforts. The
recognition and market standing of the combined entity at key findings are discussed below.
the industry level, etc.
Defining deal success
Valuation of synergies While deal success can be defined in multiple ways, synergy
Post identification of the synergies, the next most important realisation, return on investment and gains in market share
milestone in the process of value creation is the estimation of emerged as the top three measures. Figure 14 sets out
the expected synergies. This process involves the computation various KPIs/metrics applied by organisations in measuring
of various multiples to compare the estimations made with deal success.
the industry benchmarks. For a proper synergy valuation, the
traditional discounted cash flow (DCF) approach can be used
by taking into consideration the specifics of each transaction.
Thus, the objective of value creation will be accomplished only
if the realised level of synergy is sufficient enough to justify
the invested amount and risk associated with the M&A.

Value creation: Laying the foundation for mergers and acquisitions 25

Figure 14: KPIs/metrics used by organisations to measure deal success

Synergy realisation 62%

Return on investment 50%

Gains in market share 46%

Smooth integration process 31%

Continuity of key management personnel 31%

Cost savings 15%

Other 8%

0% 10% 20% 30% 40% 50% 60% 70%

Source: PwC India’s Post-Merger Integration Survey

Synergy achievement One of the key reasons for early realisation of cost synergies
is that cost synergies also involve initiatives which are less
While the synergy numbers are at times highlighted and baked dependent on the external environment, while revenue
into the business plans, the actual realisation of these numbers synergies are typically dependent on the market and, hence,
leaves a lot to be desired. The revenue synergies—focused on are less predictable. For example, in one of our deals, where
new markets, products and distribution—are given significant the dealer/distributor network was a key driver of the deal,
importance but are typically more difficult to achieve and the acquirer failed to rationalise dealer margins, which
require a longer time period to achieve. Compared to this, adversely impacted synergy realisations.
cost synergies—like procurement and logistics—are often the
low-hanging fruits that can kickstart benefits realisation at an
early stage. Various components of revenue and cost synergies
as well as their degree of importance vs. achievement are set
out in Figure 15.

Figure 15: Importance versus achievement of synergies

Revenue synergies Important Achievement*

New market segment 63% 58%

Product enhancement 52% 63%

Expanded distribution network 57% 75%

Cost synergies Important Achievement*

Production cost 26% 67%

Logistics cost 18% 71%

Sourcing cost 39% 73%

Source: PwC India’s Post-Merger Integration Survey

26 PwC
Key challenges a variety of operational challenges, including poor planning
and communication, unstructured execution and inadequate
While overall strategic alignment often defines the benefits monitoring. Figure 16 showcases the key reasons behind to
realisation pace and success, organisations fall short on challenges in meeting synergy targets.
synergy realisation forecast at the beginning of the deal due to

Figure 16: Challenges faced by respondents for whom synergy realisation was the key deal success factor

53% 33% 27%

Complexity in execution due Delays in execution Insufficient data in due
to factors like culture and diligence
communication issues

20% 13% 13%

Lack of planning and Negotiations with customers Others
accountability and suppliers

Source: PwC India’s Post-Merger Integration Survey

Structured process Achieving deal success

Establishing a structured and formal process for synergy A key reason deals fail to achieve their potential is inadequate
realisation is often key to ensuring that operational issues preparation and planning for the post-merger phase. While
are highlighted and addressed. Organisations often let the deal negotiators in a complex transaction focus largely on
achievement of synergy realisation be driven solely by the closure, anticipating bumps after the deal and planning
operational teams, where the focus on ensuring ‘business- appropriately for mitigation are what truly determine whether
as-usual’ activities is often considered much more important integration teams have prepared for the rocky road ahead.
than synergy initiatives. A structured programme should Integration starts at the word ‘go’: Early involvement
include leadership involvement and focus on driving these gives integration teams time to understand the target and
initiatives and giving them adequate priority among the its challenges. It also enables the team to rope in additional
plethora of business-as-usual activities being taken care of by members in a timely manner, thus facilitating speedy
the operational teams. execution and making the best resources available internally.
With mega deals involving large organisations coming In hindsight, most dealmakers state that the probability of
together with their own distinct cultures, a structured achieving deal objectives increases when integration planning
synergy realisation process becomes all the more starts earlier in the deal value chain.
important. A structured process helps not only in the Figure 17 ndicates that going forward, 70% deal practitioners
realisation of benefits earlier but also in improving the would like to involve integration teams at an early stage as
quantum of benefits realised. opposed to 40% at present.

Value creation: Laying the foundation for mergers and acquisitions 27

Figure 17: Starting the integration process – pre-deal or post-deal?

Involvement of integration teams

Actual involvement Desired involvement

in past deals going forward

Deal screening/post term sheet 20% 40%

Early stage

During due diligence 20% 30%

Deal signing
Late stage

After deal signing 60% 30%

Source: PwC India’s Post-Merger Integration Survey

Due diligence can provide the right impetus for diligence on targets, strategic and operational areas such as
integration: Due diligence can often uncover issues that commercial, HR, IT, sales and operations are typically covered
become the base for an integration plan. When not identified only at a high level, if at all (Figure 18).
early enough, smaller concerns become critical issues and While deal and operational challenges will differ, certain
leave the team ‘firefighting’ to reach resolution—and this critical areas are common across all deals and addressing
often requires more time, resources and efforts. While these correctly can be the differentiators in determining
dealmakers conduct thorough legal, financial and tax due deal outcome.

Figure 18: Types of due diligence typically conducted

9%

32% 33% 30%

39%
57%

91%

68% 67% 70%

61%
43%

Financial Sales and marketing Operations Human resources IT Legal and regulatory

Comprehensive due diligence conducted No comprehensive due diligence conducted

Source: PwC India’s Post-Merger Integration Survey

28 PwC
Figure 19: Target time versus actual time taken for integration

Source: PwC India’s Post-Merger Integration Survey

In our experience, organisation culture, employee expectations and IT integration are the top factors that drive
integration complexity.

Figure 20: Factors driving the complexity of integration

Employee expectations

Cultural differences

Integration of technology/software and hardware

Legal regulations

Sales and marketing integration

Complex business models of the entities

Finance integration

Operational integration

No clear integration governance or project

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: PwC India’s Post-Merger Integration Survey

Organisation culture Companies that have conflicting cultures and leadership

styles are at risk of losing their top talent, having stretched
integration periods and, ultimately, of failing to capture deal
Often, at the negotiating table, dealmakers underestimate the
value. Some companies also struggle to re-align cultures and
importance of cultural integration. The overriding sentiment
values in the case of large and complex mergers. We have
is that the companies involved are largely similar and hence,
seen two diametrically opposite approaches—both not ideal.
there will be no issues in integration.
One approach is to ruthlessly thrust the acquirer’s culture
However, companies are seldom culturally similar. A onto the target company, which creates short-term resistance,
company’s work culture, which includes its leadership style, resentment and even anxiety. In the other approach, the
talent management, degree of autonomy, decision making, acquired company simply does not do anything to integrate
the extent to which it holds employees accountable or its cultures due to the fear of a ‘revolt’-like scenario, which means
approach to innovation, employee engagement, building and that both companies never share common values and cultures.
maintaining internal or external relationships and other such They continue to work in a disjointed manner.
parameters, defines and shapes its performance.

Value creation: Laying the foundation for mergers and acquisitions 29

Figure 21: Top integration focus areas identified by respondents

~68% ~64% ~61% ~64%

Communicate clearly Involve senior Have a dedicated Establish a faster
and regularly with management in the integration team pace of integration,
internal and external integration team defined roadmap
stakeholders Keeping track and achievable
Senior management is of progress and milestones to
Transparency and often not involved in coordinating with build momentum
highlighting the impact integration activities multiple teams ensure
of a transaction to and is hence unable to that management is Setting targets,
internal stakeholders, provide direction to the aware of roadblocks prioritising tasks,
including employees integration exercise. and can take course identifying areas for
and board members corrective measures quick wins and allocating
as well as external when required. responsibilities
stakeholders, go a long are essentials of
way in building trust. integration planning.

Source: PwC India’s Post-Merger Integration Survey

Employee expectations While communication through formal channels such as

emails, town halls and notices/posters helps in publicising the
In today’s knowledge-driven economy, people are often the leadership’s vision and strategy, informal communication/
biggest assets. Hence, managing the transition from a people grapevine exchanges should be leveraged to further instil
expectation perspective assumes utmost importance. Further, key messages.
expectations are often interpreted as being monetary only.
However, often, ensuring that employees are aligned to a In this regard, aligning the acquired company’s leadership
common purpose and have clarity on where the company and, with the deal rationale, vision and goals is paramount.
thus, their employment and career, are headed as a result of This alignment is achieved through regular and clear
the transaction is very important. Lack of information often communication. Through its role in achieving the vision,
creates unnecessary speculation, resulting in anxiety. the acquired company’s leadership lays the foundation of a
successful integration.

IT integration Anticipating and understanding the anxieties, fears and

beliefs of all stakeholders and addressing them through clear,
IT standards across companies can vary vastly, which only comprehensive and timely communication will have a lasting
increases the complexity of bringing different platforms impact in aligning organisations. Apt communication not only
together. In addition, the extraction and verification of data, inculcates the desired culture but also helps keep stakeholders
buy-in required from multiple stakeholders, and technical engaged in and motivated towards achieving the overall
complexity and cost of implementation make systems deal vision.
integration a herculean task.
Successful integration needs to happen quickly and
systematically. A faster pace, combined with a defined plan
The right way to integrate and achievable milestones, builds momentum and confidence
Integrations can seem overwhelming, with conflicts of among stakeholders and helps dealmakers integrate smoothly.
opinions, cultures and personal incentives, surrounded A well-selected integration team orchestrates the pursuit of
by uncertainty. However, focusing efforts on the right value creation opportunities, manages the deal complexity
fundamentals can help streamline the process and drive the and builds robust, yet simple, processes that resolve sticky
team to success. issues. In fact, it can serve as the litmus test to reveal the
Appropriate and timely communication can kill uncertainty. ‘leadership of tomorrow’—one that is capable of dealing with
Companies need to communicate clearly and regularly with tight timelines, tough decisions and conflict management.
employees and external stakeholders. Indian organisations, Thus, the emphasis on having a dedicated integration team,
especially mid-sized promoter-driven companies, are which runs the integration as an independent business
vastly different from larger companies. In these mid-sized process, is absolutely essential.
organisations, relationships, respect and loyalty can be far To summarise, creating value through M&A is more
stronger incentives than monetary gains. Understanding these ‘science’ than ‘art’. Well-thought-out target identification,
unique virtues, listening to stakeholder questions, concerns comprehensive due diligence and structured integration
and issues, and proactively addressing those in thought and processes are the critical elements that lead to value creation
action go a long way and are instrumental in cementing a in deals.
productive, trusting and encouraging workspace.

30 PwC
Glossary
BSE Bombay Stock Exchange

CAGR Compound annual growth rate

CFC Controlled foreign corporations

DCF Discounted cash flow

EBITDA Earnings before interest, depreciation and tax

EPS Earnings per share

FY Financial year – 1 April to 31 March

GAAR General Anti-Avoidance Rule

GDPR General Data Protection Regulation

GICs Global in-house centres

GILTI Global intangible low taxed income

HA Habitual acquirers

OA Opportunistic acquirers

OG Organic growers

TA Transformative acquirers

TSR Total shareholder returns

Value creation: Laying the foundation for mergers and acquisitions 31

Acknowledgement
For a more detailed discussion on any of the above subjects,
please contact:
Sanjeev Krishan Neeraj Garg
Leader and Partner, Deals and Private Equity Partner, Valuation Services
PwC India PwC India
Email: [email protected] Email: [email protected]

Hiten Kotak Falguni Shah

Leader and Partner, Mergers and Acquisitions Tax Partner, Mergers and Acquisitions Tax
PwC India PwC India
Email: [email protected] Email: [email protected]

Sankalpa Bhattacharjya Anuj Madan

Leader and Partner, Deals Strategy Partner, Transaction Services
PwC India PwC India
Email: [email protected] Email: [email protected]

Yashasvi Sharma
Leader and Partner, Delivering Deal Value
PwC India
Email: [email protected]

Contributors
Madhavi P Namrata Gada
Director – Valuation Services Manager – Deals Strategy

Tanmay Gupta Saurabh Pareek

Director – Delivering Deal Value Manager – Deals Strategy

Akshay Shenoy Sue Ellen Pereira

Director – Mergers and Acquisitions, Tax Assistant Manager – Deals and Private Equity

Manpreet Kaur Dhanoa Karan Misra

Associate Director – Deals Strategy Associate – Deals Strategy

Kanchana Ramamurthi Meera Panchal

Associate Director – Deals Analyst – Deals Strategy

Pooja Walke Nehal Thakkar

Associate Director – Brand Marketing, Tax Associate– Mergers and Acquisitions, Tax

Manish Gupta
Manager – Mergers and Acquisitions, Tax

32 PwC
Notes

Value creation: Laying the foundation for mergers and acquisitions 33

About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India,
partnering industry, Government, and civil society, through advisory and consultative processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India’s
development process. Founded in 1895, India’s premier business association has around 9000 members, from the private as well as
public sectors, including SMEs and MNCs, and an indirect membership of over 300,000 enterprises from around 265 national and
regional sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency,
competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also
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with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains
including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of
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As a developmental institution working towards India’s overall growth with a special focus on India@75 in 2022, the CII theme for
2018-19, India RISE : Responsible. Inclusive. Sustainable. Entrepreneurial emphasizes Industry’s role in partnering Government
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Singapore, South Africa, UAE, UK, and USA, as well as institutional partnerships with 355 counterpart organizations in 126
countries, CII serves as a reference point for Indian industry and the international business community.

Confederation of Indian Industry

The Mantosh Sondhi Centre
23, Institutional Area, Lodi Road, New Delhi - 110 003 (India)
T: 91 11 45771000 / 24629994-7 * F: 91 11 24626149
E: [email protected] * W: www.cii.in

34 PwC
About PwC
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