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Merger Failures - cogs not fitting together

Buyers, Private Equity

5 Guidelines to Prevent Failed Acquisitions


To say that most mergers and acquisitions fail is not news. It’s well-documented that 70% to 90% of deals fall short of expectations. What’s less documented are the underlying causes for this failed M&A activity. “Integration issues” are commonly cited, but what does that really mean? And how can acquirers structure due diligence to reduce the chance of failure?

A 2014 Deloitte study found the most important component of a successful integration to be “customer retention and expansion.” The same study also found this to be one of the most challenging aspects of integration to manage post-close. Based on our experience conducting customer due diligence on behalf of private equity firms and strategic acquirers, here are five guidelines for improving customer retention and expansion to increase the odds of a successful deal.

1. Don’t assume all of a target company’s top customers are loyal.

 As part of our rigorous customer due diligence process (known as Quality of Customers® or QofC®), we conduct phone interviews with key decision makers at a target company’s top accounts (i.e., the 20% of accounts which make up roughly 80% of total revenue).

One component of these interviews is the Net Promoter Score (NPS) to determine if each customer is a “Loyal,” “Passive,” or “Detractor.”

Our clients are often surprised to find that among the top quartile of customers by revenue, a majority fall into the Passive segment — meaning they are somewhat satisfied but not necessarily loyal or willing to refer the business to a friend or colleague. More concerningly, we also often find a handful of top customers are Detractors; they report serious barriers to satisfaction and are at risk of leaving for a competitor.

The implications for acquirers are two-fold. First, the fact that top revenue generators are at risk of either lower share of wallet (Passives) or pulling their business outright (Detractors) has a material impact on Quality of Earnings estimates, which should make acquirers think twice about the target company’s valuation.

Second, assuming the deal closes, acquirers should immediately address the concerns raised by Passives and Detractors during the diligence process in order to retain these critical accounts post-close.

2. Benchmark a target company’s performance against key competitors.

Quantifying feedback through NPS and other metrics is useful when gauging customer perceptions toward a target company, but it’s easy (and dangerous) to fall into the trap of interpreting data without any competitive perspective.

For example, at face value an NPS of +45 might be considered a “good” score, but if the target company’s primary competitor receives an NPS of +60, then acquirers should be less confident in the company’s position. Having this competitive context is immensely helpful when developing a successful post-close customer expansion playbook.

3. Raise prices… if the conditions are right.

Boosting top-line revenue via price increases is one of the easiest ways for acquirers to kickstart value creation, but this can be a risky decision to make. When considering a price increase, ask yourself the following:

  • Does the target company have a high NPS? Companies with a high NPS are usually able to demand a premium price since their customers see value in the relationship beyond the product or service itself.
  • How do prices compare to competitors? A customer may very well say prices are high, but are prices high relative to competitors? If not, there may be room for an increase so long as a distinct and compelling value proposition exists.
  • Is price a critical influencer in the decision-making process? Price, while always a consideration, is rarely one of the primary factors in the decision-making process — at least in non-commodity sectors. Understanding how customers rank the importance of price relative to the broader hierarchy of criteria helps identify levers that can be pulled to potentially increase the value side of the price/value equation.

If the answers to these three questions are favorable, we tend to find that a price increase rarely leads to an erosion of the customer base.

4. Gather macro and micro perspectives to establish a competitive advantage.

There are plenty of secondary and syndicated sources of research to help predict the direction in which a category is headed, not to mention that acquirers tend to have category expertise in whatever sector the target company lives.

It’s essential for acquirers to have a grasp of potential disruptions — changes to the purchase journey, innovations, new competitors, regulatory pressures, economic conditions, etc. — from a macro perspective. When developing customer retention and expansion strategies for a specific company, it’s equally as important to have a micro, customer perspective as well.

The real value, however, is unlocked when acquirers overlay both macro and micro perspectives to identify gaps which the target company can then fill to establish or enhance competitive advantages.

For example, if customers say a target company is underperforming on purchase criteria that are important at the category level, this indicates a need to shift resources to improve performance on those criteria in order to better service existing customers and to establish competitive parity (or better) when pursuing new customers.

5. Avoid innovating just for the sake of innovating.

Quite often, companies incorporate new features into their products or services and then label themselves as “innovative.” However, customers rarely give companies credit for being truly innovative unless these efforts actually drive value creation.

If having a clearly defined problem is the first step to developing a truly breakthrough innovation, it follows that methods which take the voice of the customer (VOC) into account are more likely to uncover opportunities with a substantive impact on business performance.

Consumer brands have been taking this approach to innovation for years with great success, but in the B2B world innovation is more often than not born in the R&D lab rather than in collaboration with customers.

A recent example: we partnered with a leading manufacturer of specialty chemicals and found that 25% of their top accounts wanted to be involved to some degree in planning the innovation roadmap. And, through the VOC process, over 200 potential new opportunities were developed based on first-hand customer feedback and ideation.

The road to innovation is typically one of the highest economic and intellectual investments a company will make. Adding a first-hand perspective that is gained in a voice of the customer initiative will only improve the odds of success.

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