In part one of this four article series, we explored the landscape of the Merger & Acquisition (M&A) ecosystem and how M&A activity is generally driven by strategic objectives that must form a match between both parties – the buyer and the seller. As discussed in part one of this series, mergers and acquisitions, in some cases, may be required by one or both organizations in order to survive. In other cases, the M&A move be seen as a strategic action that will lead to a leaner, more profitable company once the transaction is completed – one that is better positioned for growth. In the second installment of the series, we will delved further into the points of commonality between mergers and acquisitions and looked at the buy and sell-side perspectives of each in more detail. The third installment examined domestic versus international M&A transactions, then explored the analysis behind selecting another company worth merging or acquiring and discussed how due diligence should actually be performed.
In this fourth and final installment of the article series, we will look into the common issues that occur in Mergers and Acquisitions and discuss some mitigation techniques to avoid them.
More Than 85% of Mergers and Acquisitions Fail. Why?
While there are many compelling reasons to attempt a merger or acquisition, it must be done with a clear and calculated understanding of the risks and challenges the organization is certain to face. Most businesses contemplating an M&A transaction do not realize that over 85% of M&A deals fail, according to a recent KPMG study, and that the total return to shareholders on 115 global M&A transactions was negative 58%, according to another study by A.T. Kearney).
The potential for failure is great. But it doesn’t have to be the fate of your organization.
Why are the statistics are so bad…what goes wrong?
As a means of defining a successful approach to M&A, let us begin with examining what normally goes wrong. There are many factors that lead to mergers and acquisitions that are deemed failures. Some of those include:
- Ill defined M&A key outcomes that are not measurable or quantifiable
- The M&A planning effort was not well defined or executed
- Neglecting core business
- Under estimating people impacts, such as:
- Employee attrition and loss of key management
- Not transitioning core competencies of acquired company properly
- Culture mismatches, not managed properly
- Focusing on terms and conditions and not the logistics
- Poor due diligence
- Underestimating the cost of the merger
Let us now explore some of the reasons M&A deals go bad in more detail and discuss some mitigation techniques to avoid them.
Ill defined key outcomes that are not measurable or quantifiable
Before proceeding with plans to acquire another company, the intended outcomes of the acquisition must be defined. There are a number of dimensions the key outcome analysis should examine.
- What is the definition of success?
- Is it a merger or an acquisition?
- If it is a merger, who will be a dominant company?
- How will the acquired company add to the acquiring company’s overall value proposition?
- What will be gained as a result of the acquisition?
- How much overlap in product and geography?
- How much duplication in staff will occur?
- Will there be common customers?
- What if the acquired company is in a different line of business? Will there be sufficient understanding of the new organization to really manage their business?
- Will the acquired company be integrated into the organization or left to operate independently?
The planning process should identify clear answers to these and otherquestions in order to define the desired future state of the post M&A business. Taking a top-down / bottom-up approach during the analysis along with the utilization of a clear RACI model will help manage the risk of missing key information.
The M&A planning effort was not well defined or executed
There are countless places for M&A transactions to go off track. We have reviewed many of them and could go on and on as to the possibilities and permutations for problems to crop up. So what can be done?
The planning process for M&A is an absolute imperative to ensure successful outcomes. A structured planning process will help properly identify and mitigate as much business risk as possible in advance of treading too deeply into M&A waters. The process will address human capital issues such as union negotiations, pay-scales and benefit plans, residual management structures, cultural match-ups and organizational structures. The M&A planning effort will also address technological integration, financial consolidation and reporting, sales, marketing and legal ramifications. None of these areas are trivial to analyze, therefore a holistic and structured M&A planning approach must be followed.
Neglecting the Core Business
M&A transactions are huge distractions to the top executives of the acquirer and the acquired. Months or years can go by in the largest and most complex of these situations. During the period of planning and executing a M&A deal, business must go on as usual. Spinning so many plates at once and not breaking one is of course very challenging, but it must be done. Slip-ups could damage the core business of one or both organizations, undermining the deal before it even happens, or weakening the post M&A company.
Maintaining energy and focus on the core business during this period, while difficult, is essential. Careful planning and execution of the M&A will make that process run smoother, producing fewer distractions to core business. The buying company executives must maintain a sense of internal urgency to keep the due diligence process advancing towards complete.
Under Estimating the People Impacts
Even when M&A transactions are carefully planned and orchestrated beautifully, employees and managers of both organizations will be impacted. In the less dominate of the two organizations, a common fallout of the M&A is the loss of key management and employees. Of course, this occurs due to fear and uncertainty of the future.
Attrition can be mitigated with a change management program that communicates the intention of the M&A and the planned approach for integration of the two companies (see the article, “The Change Management Process: Accomplishing Change and Making it Stick”). If layoffs or terminations are in the game plan for the post acquisition entity, a communication plan must be created that spells out clear instructions and timelines for managers to follow. An integration governance office can be established to oversee change management, communications and risk management.
Failure to Properly Transition the Core Competencies of the Acquired Company
Another factor in M&A transactions that leads to failure (or at least under achievement of intended results) is the process of assimilating the acquired company’s core competencies into the new organization’s portfolio of talents. Even very small companies, when acquired, should yield expertise in products and/or services that can be harvested for enrichment of the new overall organization.
Even if the M&A deal is communicated as a merger, most transactions actually work themselves out to be a selection of competitive capabilities from both companies.
Regardless of whether there is an intended full integration of the two companies, cross-selling opportunities, vertical integration or brand integration might be missed if a core competency analysis has not been completed and utilized (see “Align Your Strategy and Operational Plans to Core Competencies”). An seller organization’s core competencies rest in the people who will put their knowledge, abilities and expertise to work. If leaders of the buyer organization fail to understand how current core competencies being acquired / merged will relate to the new organization’s future goals – strategic and operational plans may be seriously flawed. Only with a deep understanding of the competencies required to accomplish strategic goals can the organization implement successfully.
Culture Mismatches are Not Managed Properly
M&A transactions are always prone to have issues in the area of mis-matched cultures.
The prevailing culture usually comes from the acquirer however, the culture itself can be a target, and then the acquired company’s culture needs to be pushed throughout the new company – obviously with blessing and leadership of the new board.
Within a single organization, there may be one or possibly multiple cultures. To understand the match-up of culture(s), cultural mapping can be done, using the common corporate culture heuristics, which we have broken down into one of four models:
Cooperative: The organization or team focuses on the customer and delivery to the customer, resulting in customization and tailoring to customer needs.
Merit Focused: The organization or team focuses on how it can organize and create predictability, reliability, low cost and structure.
Actualized: The organization or team focuses on fulfilling the human potential, helping create better lives for its customers and offering self-actualization.
Creative: The organization or team focuses on creating superiority of product or service, uniqueness, one of a kind value-add service and product.
Associated with these four distinct culture signatures are corresponding organizational hierarchies. The differences in culture and hierarchy relate back to the “how” the organization works and “how” work gets accomplished. Aligning strategy, tactics and governance to address these dimensions will greatly affect the outcome of the M&A efforts.
Management is Focused On the Terms and Conditions and Not the Logistics
An enormous amount of time gets spent reviewing the fine details of purchase agreement wording, often to the exclusion or minimization of actual logistical plans related to the M&A. While the contractual arrangement is critical, no doubt, the terms and conditions of the M&A deal is a means to an end and planning carefully to achieve the intended outcome for buying the company in the first place needs to remain the primary focus.
Executives on both the buy and the sell sides should approach M&A deals in an organized fashion, dividing specific areas of the workload among teams, and meeting to review progress and obstacles frequently. The executives working on the terms and conditions should strive to come to agreement on terms prior to drafting a contract and paying expensive attorneys representing both sides to tangle over minutia. Reaching agreement on the spirit of the agreement allows for the contract process to run smoother and end successfully sooner.
Poor Due Diligence Prior to the Merger or Acquisition
Earlier in the article, we covered the importance of due diligence, as it represents a large risk to the two companies involved in the M&A transaction if not done well. As stated before, the executives of the acquiring firm typically develop only a partial understanding of a target firm and fill in information gaps with hopeful strategy and wishful thinking.
Review each functional area of the target company (e.g. Information Technology, Human Resources, Finance, Accounting, Sales, Marketing, Distribution, etc.) looking for risks and potential pitfalls. Take care to also review customer agreements, supplier contracts, credit issues, security, personnel issues, lease agreements, legal entanglements, pricing strategies, value proposition, culture match and management business acumen.
The Cost of the M&A is Underestimated
Mergers and acquisitions are expensive to complete, and not just because of the purchase price that must be paid for the target company. Prior to the deal closing and the purchase price being paid, expect to pay dearly for costs associated with:
- attorney fees
- IT reviews
- HR reviews
- client satisfaction reviews
- sales pipeline due diligence
- market analysis
Due diligence cannot be skipped, so do not contemplate undertaking a merger or acquisition without budgeting for the costs and planning to spend the dollars it takes to get the deal done. Some amount of travel might be saved by doing some meetings as video or phone conference, but most of the work will require people on the ground doing the detailed analysis.
Determine your basis for measuring the success of a merger or acquisition. Define your process to ensure:
- hitting key outcomes
- enhancing value
- preserving or enhancing brand equity
- increasing productivity
- long term strategic financial stability …and short term
Always remember that the M&A transaction must be undertaken for strategic reasons (as opposed to solely financial or tax reasons) such as to improve or develop competitive capabilities (e.g., lower costs through economies of scale or better technology, enhanced differentiation through better product design), to expand products, customers served, or geographic presence. More specifically, M&As must be viewed as means to achieve strategic outcomes rather than ends in themselves. In fact, they should be considered as just two such means, much like internal development, joint ventures, and strategic alliances. When M&As are driven solely by opportunism (i.e., “a good deal”) or the desire to “do a deal,” rather than sound strategic reasons, they are less likely to succeed.
The final purchase price of a merger or an acquisition typically reflects both the inherent value of a target business and its value to the buying or merging firm (i.e., combination value). The latter value is greater because of strategic benefits that a buying or merging firm anticipates it can obtain after a change in ownership. However, when the purchase price exceeds either the inherent or combination value (due to overestimation or poor negotiations), M&As are also less likely to succeed.
The value of M&As will ultimately be determined by the extent to which they can be effectively implemented. In spite of a “reasonable” purchase price and sound strategic reasons, M&As are less likely to succeed if the merging organizations are not effectively combined after the closing of a deal; i.e., strategic benefits are realized in practice. There are many examples of M&As that looked good prior to the closing of a deal, only to have failed after the deal because the challenges and difficulties of implementation were underestimated.
Lastly, if your organization is acquiring another company, then having experience (either internally or from an outside consultant) will help greatly in making the process go smoothly and ultimately in getting the benefits. Consider the size of the organization you are targeting when determining the level-of-effort due diligence will take. All facets of the merger / acquisition ecosystem must be examined for the organization to be merged or acquired and the re-examined in the context of the new organization.
—Article by Joe Evans of Method Frameworks—-
Joe is a published author, frequent speaker and recognized expert in corporate strategic planning . Contact Method Frameworks about scheduling Mr. Evans about an upcoming speaking engagement or email requests to firstname.lastname@example.org