Established players in just about every industry are losing market share to agile, digital-first competitors and niche, specialized brands. In parallel, activist investors continue to apply pressure on boards and executive teams to transform their businesses, responding to the threat of industry disruption.
Shifting to a zero-based mindset (ZBx) is vital for large enterprises. Taking a clean-sheet, zero-based approach, ZBx helps companies identify non-working money to reinvest in growth. The world’s largest companies using a zero-based approach have shown average annual bottom-line savings of more than US$260 million, according to Accenture Strategy research.1 But, cost savings alone won’t cut it. ZBx also involves reallocating funds to pivot to the New, pursue innovation, drive organic growth and fuel M&A. In the case of M&A, ZBx doesn’t just free up cash to buy strategic assets, it also helps drive better synergy outcomes. Applying the ZBx methodology during the integration planning process helps to drive larger synergies, and sets up the organization to implement them from Day One. It’s actions like these that allow large corporates to take a proactive stand against would-be disrupters.
Inorganic growth, fueled by ZBx
ZBx savings can be reinvested in either organic or inorganic growth, for example through new business models or digital capabilities. Much has been written on driving organic growth using a zero-based approach, but relatively little about how to use ZBx savings to accelerate inorganic, M&A-based growth. This is untapped potential, as currently only 14 percent of companies claim to utilize ZBx in an M&A scenario.2 Yet M&A is clearly a popular growth strategy, with 84 percent of executives indicating their firm has acquired another company in the past two years.3 Accenture Strategy has identified four types of M&A deals being used by large corporations in response to disruption:
- “Out with the old” divesting non-core, non-growth brands to focus time and investment on the core business
- “In with the new” serial, smaller acquisitions to gain operating, channel or business-model capabilities; establish positions in emerging markets; or to add niche or specialist brands
- “Double down on growth” larger, focused deals to rapidly scale specific areas of growth or scale up an undersized category
- “Create scale” mega deals to leverage or build scale, e.g., through cost effectiveness or specific value chain plays to rationalize capacity
ZBx benefits across the M&A lifecycle
No matter the deal type, if a company embeds a ZBx approach into its core, it can drastically accelerate and increase the value created from an M&A deal. Through our M&A client experience, we’ve seen this happen in five areas:
- Deal viability. Simply, there are more opportunities out there for value creation. If an acquiring company has improved EBITDA from 12 percent to 20 percent, companies which were previously in the 12 to 15 percent EBITDA range suddenly become a viable target.
- Target screening. ZBx allows companies to know their own cost structures in great detail. As a result, when they screen targets, they can rapidly spot inefficiencies and therefore opportunities for creating savings and value with more clarity.
- Funding. Releasing funds from non-working spend makes it easier to finance deals, with less reliance on debt or drastic capital structure changes to cover the deal price.
- Synergy/value estimates. ZBx emphasizes “should” costs—what a particular area or activity should clock in at versus what it is currently. When a company has mastered this skill internally, it is far easier to apply it to M&A targets. Not only can they better understand where the potential value lies, they are more accurate in predicting it.
- Integration planning. Using a clean room, companies can harness the period from deal sign to close to conduct detailed visibility and bottom-up value targeting using ZBx, and lock synergies into the company’s budgets. Using this time and approach accelerates production of detailed integration plans, so they are ready to execute and get to growth from Day One.
Powering the M&A machine
Companies who have demonstrated the use of ZBx to improve their own operations have a clear advantage when going into an M&A deal—they are able to see, through a very clear lens, inefficiencies and opportunities to increase value, and they are able to execute at pace from Day One. This muscle builds with each successive deal, creating a repeatable platform—a machine for growth and value creation.
1 Accenture Strategy research, Beyond the ZBB Buzz, 2018
3 Accenture Strategy, M&A: From Art to Science, 2017