With a clearer view of U.S. federal policy into the future, many companies are accelerating their pursuit of M&A deals.
“M&A activity is picking up,” said Grant Thornton Transaction Advisory Services Managing Director Jigna Shah. As the volume of deals grows, so will the competition for the best opportunities. In this competitive market, some organizations are looking at transaction incentives that can inspire their dealmakers to find and close the best deals.
However, incentives that are not properly developed can point dealmakers at the wrong targets — organizations need to align their incentives to the factors that ultimately pay off. “The main reason to provide deal incentives is to encourage deal value realization,” Shah said.
Align behaviors
“If corporate development is just being paid for every deal that comes in the door and gets closed, you're going to get a higher volume of deals that have a low volume of success,” said Grant Thornton Transaction Advisory Services Managing Director Angela Nalwa.
Deal value can be different from business value, and it’s easy to lose that distinction. Since M&A can drive business value in many ways, businesses need to be clear about their ultimate goal for each transaction. “To define that, the organization needs a clear understanding of what their deal thesis is, meaning why they are considering an acquisition in the first place,” Shah said. “What is it going to do for them? Is it going to help them expand into a new market? Is it going to help them obtain key talent? What are those synergies that the company is trying to achieve and how will it know it has achieved them?”
“That goal, that vision, should be fully understood and communicated to the people involved in every stage of the transaction, pre-close and post-close, so that they remain focused on the right priorities and are incentivized to see the transaction through to the end,” Shah said. “If you don't know how to measure success against the value of the deal, then how would you incentivize the right people, in the right way?”
What makes incentives work?
As organizations consider whether and how to reward M&A professionals, they should weigh multiple factors:
Incentive types
M&A incentives may take monetary or non-monetary forms that vary by an employee’s job level or role in the deal. Incentive types can include equity, cash, employee scorecard impacts or a combination of these and other factors.
Some of the most common non-monetary incentives relate to career progression. “In the corporate world, your title is often based on the amount of revenue you manage in your P&L,” Nalwa said. “If you have an add-on that's successful, that leads to promotion activity or title changes.”
Organizations can reward a range of activities that work together. To make incentives as motivational as possible, you need to clarify the structure of rewards — including the activities and roles that will be rewarded.
M&A stakeholders
It’s important to think about the various stakeholders who are responsible for delivering on a deal. In addition to the corporate development deal teams, the due diligence and integration teams are responsible for identifying risks and opportunities, and executing on plans — and the business leaders who will ultimately be owning or overseeing the target company are essential to the success of the deal.
“A common challenge we see on deals is that it’s not the same people who work the transaction from end to end, so things can fall apart in that handover. The person finding the target is not the person that does the diligence, or the person that drives integration, and can't always be as such, realistically,” Shah said. That's why your incentive strategy needs to encompass the full lifecycle of roles. ”It shouldn't simply be the person that found a great company to acquire. It should be all the stakeholders who are critical to the success of that deal acquisition, because there are many operational considerations that could become barriers if not properly assessed and addressed.”
“In corporate strategy, it's been my experience that some people received incentives just for bringing a good deal to the table, once the organization closed on the deal,” Nalwa said. “Then, there are sometimes people who get incentives for actually executing on the deal model.” Multiple roles can — and often should — be incentivized along the lifecycle of one deal. The execution of the deal model cannot happen until deals come to the table, but the table is typically just the starting point to business value. Consider business leaders, too. “If a company is acquiring another business as an add-on to its existing business, the general manager or business leader might be responsible for the execution to really get the true value of the deal,” Nalwa said. “They're often a big missing piece of the people that need to be incented.”
For a deal to achieve its thesis, it needs to follow a deal model that ultimately requires participation from a range of key roles, and over a long range of time.
Incentive timelines
An M&A deal model will take time to reach completion, and it’s important for incentives to span that time. “The deal model often has some dependencies about revenue synergies and cost synergies,” Nalwa said. Typically, a model will outline what businesses can expect to see over the first six months and the first two years. After the first six months, unrealized cost synergies can become very difficult to achieve.
“There is a timeline built into the model because the model has to articulate the values and the value drivers, so it defines the timeline for achieving them,” Nalwa said. Yet, most M&A incentive structures don’t flow throughout that timeline. The result is that the incentives, and the value achievement, often drop off.
At the core of any M&A incentive strategy is the issue of metrics. “Are you measuring the right things when you're measuring the success of a deal? You can't pay for performance unless you know what you're measuring,” Nalwa said.
However, every deal can have different goals, incentive types, roles and timelines along its path to success. Organizations need to consider how incentives can lead to success, as well as how incentives can lead to failure.
What if incentives aren’t aligned?
A comprehensive M&A incentive strategy doesn’t just motivate the stakeholders across the full lifecycle of the deal. It can also help improve the quality of deals that initially come to the table.
Even though deals involve diligence that should determine their quality up front, an incentive structure can be another lens through which the organization can identify risks. “Was the diligence comprehensive enough? Did it identify enough deal factors, and were the right people involved to ensure its achievability?” Shah asked. Every role in the deal lifecycle needs to understand and identify the risks of failure.
Integration
“Integration is a common failure point,” Shah said. “An originator comes in with a target, it gets brought into the organization, and then they're typically hands off. The deal originator is not involved in the actual assimilation or integration of that entity into the acquiring organization — they're moving on to look for the next great opportunity.”
“That’s how they’re often incented,” Nalwa acknowledged. “They already received their incentive.” Shah agreed, “There's no incentive for them to invest in how it goes once the deal is signed and closed.”
Technology
Technology integration can hold hidden dependencies for business value, barriers to deal success and other potential risks. Nalwa recalled a deal where technology became an unexpected expense after close. “They didn't want IT diligence, and they found out after the fact that IT was a huge risk for the acquired organization. Mitigating that risk was not contemplated in the purchase price, so there were many ramifications for the lack of actual diligence up front.”
Sometimes, those ramifications cannot be fully resolved — so, they result in long-term losses. Nalwa cited another situation where dealmakers perceived technology as a straightforward transition. “Both companies did the same thing, but on two different technology platforms. They didn't feel that it was worthwhile to spend the time looking into what it would take to move clients from one technology platform to the other.”
“Ultimately, because of the resources and the cost involved with the platform transition, the business continued to run as two separate companies, on two separate platforms, and never realized the deal value or the deal model,” Nalwa said. “It was a failure of an acquisition because there was nobody incented at the front end to look into those factors and nobody incented at the back end to make integration happen.”
Integrated business diligence
Traditional due diligence might not consider the broader business factors for value realization. “A lot of the times, for a full-on acquisition, diligence starts and ends with the quality of earnings assessment,” Shah said. Quality of earnings is a required part of the process, providing a normalized view of the target’s financial performance. "Pairing quality of earnings with quality of operations diligence provides a complete picture of the viability of the target and the key factors that may help, or hinder, integration and ultimately, value realization.
Similar to the IT considerations mentioned, what do we know about the people who might be critical to driving sales, developing products/services, or retaining the customer base, key suppliers, and/or key members of their teams? Are there regulatory or supply chain risks to consider if the transaction goes through? Is the market for the product/service still viable? Incentivizing due diligence of the integrated business as a whole will not only reveal potential challenges to successfully integrating the target, it will also uncover potential cost and revenue synergies that affect the valuation of the company.
Align your organization
As you form a strategy for M&A incentives, integrate it with your organization’s full M&A lifecycle. “What's the operating model for M&A in your company? How do you pull together target identification, pre-closing diligence, integration and other activities into an M&A operating model, so that they’re not disparate?” Nalwa said that corporate development teams often haven’t developed or executed an M&A operating model, so the discussion about incentives can be another driver for establishing that model and setting expectations with stakeholders.
Ultimately, transactions can be a central part of your organizational profile. Shah explained, “If M&A is a significant part of your growth strategy, then you should also be considering the current culture of your organization in relation to that aim. Is your organization ready to take that on, do you have the right talent in place and are you incentivizing that talent appropriately?”
Leaders might consider these questions in their business strategy discussions, and it’s important to call upon those answers as they consider M&A incentives. That’s because M&A incentives can, in turn, become a critical part of driving your business strategy for growth and success.
Contacts:
Managing Director, Transaction Advisory Services
Grant Thornton Advisors LLC
Angela is a Managing Director in Grant Thornton’s Transaction Advisory practice with over 25 years of experience focused on Human Capital Strategy and the People aspects of Transactions.
San diego, California
Service Experience
- Transaction Advisory
- Human Capital Services
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