Zero-base approach:

Value-oriented decision making in TMT M&A

Scott Jones

Scott Jones

Principal, Advisory, Strategy, KPMG US

+1 408-367-7002

Charles Ramseyer

Charles Ramseyer

Director Advisory, Strategy - PDT, KPMG US

+1 214-840-2000

In 2021, the market for TMT assets was turbo-charged, raising competition for both deals and valuations. The outlook for 2022 suggests another strong year. In a KPMG survey in late 2021, 75 percent of TMT executives said the appetite for M&A is stronger today than before the pandemic.

This makes it essential that buyers have a systematic, data-driven approach to value identification before and value realization after close. For that, a zero-base approach can be very helpful. This process, which began with building a zero-base budget (ZBB) from scratch each year, forces the buyer to interrogate and justify each line item for continued funding.

While zero basing has a reputation for being a clunky tool for making strategic decisions, it can be a powerful method for assessing different parts of a business being considered for acquisition, pinpointing sources of value, and prioritizing integration steps to maximize that value. It can also be useful after a divestiture to help streamline the post-sale business.

Traditional approaches to value capture in M&A are often anchored in the existing operational and cost/investment baselines, rather than the “art of the possible.” As a result, opportunities to truly transform and improve the business are often missed. However, concepts from zero-base planning can be productively used to:

  • Align activity or spend to what drives the most benefit to turn M&A planning into a value-focused strategy. Prioritize higher value-creation synergies and measure results against the synergy plan.
  • Design the organization of the combined business to leverage strengths, scale benefits, and right size to align with go-forward revenue and organization size.
  • Optimize value-focused product and R&D roadmaps by rationalizing where to invest dollars and resources to support higher-value products and programs to drive growth and return on investment.
  • Drive IT roadmaps by understanding transformation value and existing opportunities, ensuring efforts are moving toward a future-state vision.

This framework can provide buyers and sellers with additional tools to make better decisions, enable scenario planning, and provide insights into how capabilities change in different cost structures. This transparency will in turn allow leadership to understand the interplay and trade-offs of decisions and increase coordination across functions.

For example, an e-commerce business backed by a PE firm looking to acquire a competitor being carved out of a publicly traded company applied a zero-based portfolio optimization approach to assess what parts of the target’s business were core and complementary to its own. Furthermore, zero-based principles were deployed to determine how various platforms and functions within its organization could efficiently scale to absorb the target’s operations. By assessing the value and key drivers of activities and estimating potential synergies from the contemplated business combination, this buyer gained better ideas on how to expand operating margins by optimizing synergies.

In another case involving a global cybersecurity business undergoing a major divestiture and transformation process, the zero-based approach was deployed to design the go-forward operating model that was fit for purpose in terms of size and footprint of the post-divestiture organization. This allowed the business to address issues related to stranded costs and misaligned functions and systems, rather than focusing more narrowly on incremental changes and tactical cost reduction as with more traditional approaches.