Professor Scott Moeller, director and founder of the M&A Research Centre at Cass Business School, advises on leadership, and how to get mergers and acquisitions right
There’s no silver bullet, unfortunately. Talk to 100 M&A dealmakers and you’ll get 100 different answers. Analyse 100 different M&A deals and you’ll find 100 different reasons.
The $50,000 question, or because we’re talking M&A, it can easily be the $500 million or more, is what should a company look for in an M&A deal?
This right answer is critical. Chief executives have been fired for getting it wrong. Shareholders have suffered. Employees, suppliers and customers have too. Acquiring companies have gone out of business or themselves been bought because they couldn’t get it right.
The conventional wisdom is that 60 to 70 per cent of all M&A deals fail in some way or another. Fortunately, this is “old” data based on deals from the 1980s and 1990s, but the current data on deals since the turn of the millennium shows only a moderately better rate of success of the order of 50 to 60 per cent. Not much better than flipping a coin. So what’s required to “beat the odds” and have a successful M&A deal?
Deal success depends on a large number of factors. M&A deals are like a complex engine with hundreds of moving parts that all have to work together precisely in order for the engine to run smoothly. When one part breaks, the engine freezes up. And fixing it can be both expensive and time consuming, not to say distracting.
Nevertheless, based on interviews conducted with hundreds of dealmakers, there is some guidance on what’s required to get it right.
FOCUS ON STRATEGY
First, focus on strategy. Understand how the target will contribute to the company’s future success. Acknowledge there rarely is only one possible target so that when negotiating, alternatives exist if the preferred option is no longer available or too expensive.
There’s no shortcut to strategy; it must be credible and, although led from the top, the entire organisation must be aligned with it. Consider strategy to be the fuel that feeds the complex engine. Despite numerous press announcements, never believed by the markets, that their M&A deals were based on an underlying deeper strategic plan, AOL Time Warner, RBS, Daimler Chrysler and others were driven by a strategy of “if big is better, even bigger is even better”. They failed to get the strategy of their M&A deals right and the deals subsequently failed.
There’s no shortcut to strategy; it must be credible and, although led from the top, the entire organisation must be aligned with it
Second, make sure the price and terms are correct. Most dealmakers do focus properly on price, but this is the time to make sure you actually know what you’re buying, so don’t skimp on due diligence. Overpaying – just look again at RBS’ 2007 purchase of ABN Amro – doesn’t mean the deal can’t be successful, but it certainly does make it much more difficult.
Third, the point in M&A where “the rubber meets the road” is during the post-deal integration. Get this right and you have a great deal. Get it wrong and there’s no way for it to be successful. This is when value will be created, over the long term.
Integration doesn’t start when the deal closes. The deal process should anticipate the needs of this integration period. There should be an explicit strategy about what needs to be done once the two companies become one. The pricing should take into account the considerable costs of integrating the target. The chief executive should not immediately move on to the next deal, but should stay firmly engaged in the integration. Although each deal is different and therefore the timing of integration will vary, it is clear from looking at most deals that this is a process which takes years to complete, not weeks or even months.
Thus an M&A deal is not to be entered into lightly. Not that many are, of course, but the amount of time to be spent on the deal in planning, execution and then implementation can be considerable and should usually be considerably more than often allotted. This time-consuming process will distract large parts of the company who may be focused on getting the deal done, but who should instead have maintained focus on the ongoing existing businesses as well.
KEEP EXISTING CUSTOMERS
Thus a critical success factor too frequently overlooked is to make sure existing customers are retained. They pay the bills. Experienced acquirers realise this. For example, over a decade ago, Oracle acquired PeopleSoft. As a hostile deal, the market predicted that many employees and clients would depart. And although some did, according to its public statements, Oracle was able to retain 95 per cent of its customers after the merger by taking active measures to listen to its customers. It took similar steps to retain key staff in areas, such as sales and the research and development department.
The blueprint for M&A success thus must include a clear and clearly communicated strategy, strong and consistent leadership starting with the chief executive, right pricing based on an expert understanding of the target, and a detailed plan for the long-term integration of the buyer and target, which focuses on the revenue side of the business and key staff throughout both organisations.
Nothing should be left to chance. Change will occur. Unknown unknowns will arise. The designers of the deal should not assume the rest of the company will just intuitively know how to do the integration – this requires specificity.
Indeed, one chief executive told me: “If the business case is wrong, the post-merger integration can hardly overcome the situation. Reality is always more challenging than the business case and you cannot expect the integration team to make miracles.”
Expect bumps along the way and plan accordingly but, to come back to the original question, look for a company that can be integrated well with your own. Then, you increase the odds that the M&A engine will run smoothly.