M&A as a tool for growth if conceived & executed properly can deliver far greater value than projected.
Companies pursue M&A to drive value, but for a variety of reasons, the result may not always meet expectations. According to 2018 Grant Thornton survey, only 14% of M&A deals exceed their initial expectations for income or rate of return.
Companies continue to stumble in many areas of due-diligence, integration planning and post-merger integration. These failures are attributed to lack of strategy & poor implementation resulting in loss of business, reputation, share-holder value, employee morale and other essential aspects of business operations. However, risk of failure can be tackled throughout the deal process by adopting measures early in the deal process to avoid these known pitfalls:
- Due-diligence process
Substantive due diligence is essential for understanding big picture and evaluate an M&A deal. One of the key reasons is failing to create a competitive due diligence process, robust plan, guidelines, time-table & accountability for stakeholders to manage M&A
- Focus on Fundamentals, approach M&A strategically based on 5 Key pillars – Purpose, Principles, Processes, People & Performance.
- Prepare thorough opportunity & risk assessment of the target company’s financials, personnel and cultural compatibility
- Investigate customer, contractual, legal, IP & financial obligations of the target company to assess liabilities
- Focus on objective performance of the deal pursuing each task with defined metrics & keep schedule of M&A ready far in advance
- Furthermore, the potential gains that can be accrued through a deal can quickly be lost if they are not reaped in time, hence fast decision making & action on time is crucial for success
- Strategic rationale for M&A
Companies deploy M&A as a strategic tool for transforming business by creating new avenues of revenue growth, gain market share, improve competitive positioning & enable new ways of doing business. The simple fact that no two deals can be integrated in the same way, with the same priorities, or under the same timetable, not having clear visibility of synergies & absence of credible financial metrics is the biggest pitfall companies face every time –
- The first rule is to determine both operational and commercial synergies by combining two complementary business and clearly articulate the financial and non-financial results expected
- Capture optional synergies separately. It’s important to distinguish between integration & business optimization goals. The latter should be put off until the integration is completed
- Break key decisions down to the bare essential objectives necessary to deliver one integrated company & targeted outcomes
- Determine scale & scope of final integration including what you choose to integrate and what you will keep separate
- Leadership & Structure
Most M&A transactions & due diligence is performed by small armies of functional experts with fewer people having appropriate M&A skills, and these M&A experts are expensive resources. Inadequate expertise & structure to control the decision making from the beginning of M&A process can be blinding by having short term focus on deliverables, deal dynamics and cost of M&A. Failure to create ‘Decision Authority & Action’ driven M&A structure for deal making can lead to uncontrolled execution of entire M&A process
- Build centralized Integration Management Task Force dedicated for defining goals, plan & challenge and work out day-to-day activities
- Assign strong leadership team for driving the key decisions with overall responsibility of business & people integration aspects
- Structure integration workstreams around the key decisions that drive value
- Dedicate 90% of time on the integration planning & execution following established goals & guidelines
- Assign decision rights and roles for workstream leaders to triage important decisions, align and coordinate activities
- M&A tools & resources
Typical M&A deals require analysis & handling of huge amount of data in a relatively short span of time. Legacy, manual & distributed systems makes it challenging for companies to cope with dynamic business environments, faster transaction speeds and to handle surging data volume. All these issues impact entire deal process & decision making, leading to increased financial strain on buyers and sellers.
“Digitalizing M&A is the game-changer” Companies are increasingly turning to technology solutions which can alleviate some of the stress of a deal management to build a repeatable integration model
- Deploy M&A platforms that provide unified capability for e2e visibility of deal process – enabling pipe line management, electronic data storage (VDR), project & workflow management (PMI), auto playbook creation, online templates, identity & access management, dashboard, analytics & real time reporting to manage key issues, identify cross-stream dependencies and inbuilt collaboration
- Review the M&A process and evaluate how well it worked for both buy-side & sell-side and what can be done differently next time. Digital tools help teams to manage tasks & record best practices throughout the due diligence, negotiation, execution, signing & closing phases more effectively
- Digitalizing M&A leads to cost optimization by taking out transactional work out of the hands of highly skilled & expensive resources
- People & Cultural issues
Cultural influences have far reaching impact on creating beliefs and assumptions that influences the behavior & attitude of entire organization. Lack of attention to address these issues right from the start of deal process impacts employee motivation, productivity & churn. According to research 30% of M&A fail due to the disparities in organizational culture. Therefore, it is crucial to adequately consider cultural shift post combined organizational structure and to overcome people issues, dispel fears, winning hearts and minds during the M&A process
- Conduct culture surveys to determine the norms within both organizations
- Engage timely with rest of the organization and people who make the business work
- Provide guidance on new goals & values for the combined entity from cultural stand point
- Take every opportunity to role-model the desired behaviors
- Create an organizational structure and decision-making principles that are consistent with the desired culture
- Communication & transparency during M&A process
M&A investment & deal making process starts much earlier than consummation of the deal, whereas integration & execution phase is different, Inadequate communication & transparency leads to speculations & misinformation, effecting business momentum, lack of support and execution delays. Planning communication for a business going through an organizational change is vital to its success
- Prepare a sound, authentic & transparent internal & external communication strategy to reduce anxiety & confusion and maintain smoother road to integration
- Do not lose sight of internal communication. Keep employees informed about the progress of the integration, high-level metrics and timelines through different communication channels (emails, intranet, etc) for effective change management
- Plan for personalized communication that provides tailored messages targeted to individual employee groups & roles.