M&A is often a key part of the company’s growth strategy: a fast way to grow the top line, improve economies of scale, bring in new capabilities and technologies, and establish presence in new markets and geographies. But, as we all know, around 80% of mergers and acquisitions fail to deliver the intended value. And some end up destroying value.
MCE Senior Associate Ramesh Fatania shares his advice on creating value through Mergers and Acquisitions, based on Ramesh’s own years of experience of strategy and operations at BP, including post-merger integrations of BP/Mobil JV and BP/Amoco, as well as extensive work with MCE clients.
Why do so many Mergers and Acquisitions fail?
Even the smartest executives tend to underestimate the complexity of the M&A. They are smart, they are successful, they think it will be easy. They focus and rush into the deal without thinking ahead, and they often tend to gloss over important challenges of integrating the merged companies. Most of the failures are not due to strategic rationale, but more due to poor integration planning & preparation, and to the integration process itself.
What should they pay attention to in order to have a successful M&A?
Start with your strategy. What companies fit into your strategy and what are the sources of value? These are more likely to be value-creating acquisitions. There is an enormous temptation to make acquisitions based on what is available or is selling for cheap. But this is a value-destroying mistake in the long run.
You always pay a premium over the current market value of an acquisition. So the longer term value you get out of the company should work out to be higher than the premium you paid for it. If it isn’t, then the acquisition will have destroyed value rather than created it for your company.
You should use a strategic framework to judge the overall value of each acquisition target…what will it bring your company in the long run, and how does this help you to achieve your strategy?
Clear understanding of the sources of value drives integration planning, priorities and processes, which leads to successful delivery of the benefits.
Merger and Acquisition Planning
It’s important for the management team to keep in mind that the merger or acquisition is not just an event – making a deal – but an entire process. The process involves strategic rationale, due diligence, negotiation, finalizing the deal and post-merger or acquisition integration. The process and planning need to be thought out from the beginning, already back in the due diligence phase, not after!. Overfocus on the deal - making the acquisition first and thinking about what you will do with it afterward - is a recipe for failure and destruction of value.
You have to plan ahead what kind of business model you want to build. Are you building a core company with a constellation of acquisitions that are complementary to your core competencies? Will you integrate the acquisition fully or take a hands-off stance? Not all acquisitions need to be fully integrated – this depends on sources of value. What fits best with your strategic intent?
Failing to plan is planning to fail.
If you want your acquisition to generate value in the long run, you have to invest up front in resourcing the project. This sounds obvious, but many executives consider the purchase as the only investment that needs to be made. They underestimate the resources that are required to integrate the acquisition in terms of people, money and management attention. You should put your best people on the integration, just as much as you put your best people on shaping the deal.
Consultants are a good resource to help you through the process, but with several caveats. You don’t want to go with the cheapest consultant just to save money; you should invest in a competent consultant. Remember also that you are buying the individual consultant, not just the company they work for. If you go with a big name consultancy, make sure you work with the best consultants in the company, rather than accept being given a junior inexperienced team. Remember also that some consultants are not likely to have direct experience in M&A, but rather textbook knowledge. Experience often comes in limited involvement with the client, more on the advice side than the implementation side. Here I would say, take the consultant’s advice as a starting point, but make decisions based on your own strategy, and your own knowledge and experience.
Integrating the business processes of different entities is another area that needs to be thought through. Sometimes value is destroyed when the acquiring organization wants to impose its processes on the acquisition, without thinking about the effects on operations. It’s really important to think up front. What are the core processes that are sacrosanct and must be preserved? How should the new business model work? Which processes of the acquired company might you consider adopting in the larger organization? I have seen tremendous value created in cases where the two organizations looked through their processes, took the best of both, and spread them across the merged organization. This can take time – but can generate lot of value. It also facilitates cultural integration (which often is a source of failure) as it shows respect for the capabilities of the acquired company’s people.
Go slow here to go fast in the long run.
“People” is an area that gets consistently underestimated, from lack of cultural due diligence up front, to lack of proper integration and change management after the deal. Emotions are important and too often not taken fully into consideration.
Cultural integration is not easy and takes more than two or three years, it does not happen in an instant. It can of course go faster, if the acquiring company respects the brand, the culture, the practices, and the people in the acquisition. This needs Leadership, not just once up front, but throughout the integration processes. Paradoxically, while people and culture require the most management attention, they usually receive the least. And in too many cases, they receive no attention at all.
Leadership starts at the top. Who you put in charge of your mergers and acquisitions is a critically important consideration. Too often, companies put financially-savvy people on the deal-making part – which is great and absolutely necessary. But, these people may not take into consideration some or all of the integration issues. Then companies leave integration to someone with softer skills, but little power to push through needed changes. If you really want the deal to bring value, you will put a heavyweight on it; a well-rounded, experienced, and respected executive with clout in the organization, and of course with good diplomatic skills. This person will manage the process from beginning to end. You want someone who has already led a business and has “gravitas”.
Here again, I repeat, you should put your best people on the integration, just as much as you put your best people on shaping the deal. This is a strategic leadership issue!
Make M & A a core competence
If growth by acquisition is your strategy, you need to make it a core competence in your organization. This is the way to sustain growth, as GE or P&G have done. It is always more complex than you thought it was going to be. Managing acquisitions is an excellent “school” for those who have already run existing businesses, to sharpen their skills in change management, financial value creation, and diplomatic leadership. You should put your best people through it, and you will indeed build a competence in M&A that can serve as a competitive advantage for your organization.
For more on how MCE can help companies with M&A, please visit our section on Mergers and Acquisitions.
Ramesh Fatania is part of an MCE team of Senior Associates with long, high level experience in mergers, acquisitions, and post-merger integration in major global companies. MCE can consult with your senior management team on M&A and integration issues. We provide business transformation and strategy implementation services.
We can also develop the skills of your managers at all levels in the organization to build their capabilities to implement strategy, manage integration, work across organization lines, working with your corporate learning and development team. Mentoring and coaching services are available for managers struggling with a particular issue.
Finally, MCE runs a series of open enrolment workshops for individual managers to develop individual competence in M&A. For details, please visit Mergers and Acquisitions open enrolment workshops.