Mergers and Acquisitions (M&A) have always been an attractive way to grow businesses, and this has never been truer than today in the coronavirus (and hopefully soon-to-be-post coronavirus) environment. M&A can be seen as a lower risk strategy to growth, and it is easy to see the attractions (depending on the specifics of the deal) which can include:
- Rapid growth
- Quick gain in capability and/or capacity
- Increased market share and/or geographic territory
- Removal of competition
- Greater economies of scale and market capitalisation
- Rationalisation and greater efficiency.
Bought at the right price, few other ways of growing a business can offer the same advantages. Seen at face value, M&A can appear to be the obvious and preferred approach to grow a business, provided suitable organisations can be found. So, logic would suggest that the M&A track record will support the apparently overwhelming advantages and benefits. However, history contains a significant warning.
Studies over the last decades have consistently revealed that M&A has a very poor record of delivering the expected benefits. So much so that in more than 50% of cases, the combined organisation created through M&A activity has a lower market valuation than the ‘donor’ organisations combined. It turns out M&A is actually one of the most reliable ways of destroying value.
But how can this be? It is understandable that in the past the challenges of combining two organisations were significant. In today’s environment surely it is different? Again, there are sound logical reasons to expect this to be true:
- The technical challenges of combining IT systems and technologies should be reduced as the technical landscape has been rationalised and barriers overcome
- Regulatory and legal requirements are better defined for all concerned and can be factored into planning
- Market alignments across borders have been increased, at least within large economic blocks such as the EU
- Lessons must have been learned and experience gained, with better methodologies developed to de-risk the post deal environment.
Yet despite all of these and other reasonable assumptions, the rate at which M&A results in a net reduction in value remains high. The evidence shows that whilst M&A can be a highly effective business development strategy, as demonstrated by some of our most successful companies, it is still fraught with dangers.
So, should M&A be left to those few companies who have successfully made acquisition a principal part of their business planning and strategy? Can we learn the lessons of the past, look beyond the asset register, P&L accounts or DD report, and develop a better understanding of the risk and challenges of M&A in order to make better-informed decisions and more effective plans?
Experience from across previous M&A projects shows some consistent themes in terms of lessons learned and issues which are likely to occur again.
The first and most significant is ‘The Outside will always look better than the Inside’. No matter how carefully a prospect company is examined, there will be details and information which you are not aware of. The devil is, as they say, in the detail, and that detail will add complication, cost and extend timescales.
This truth of M&A is compounded by the realisation that ‘M&A Change Programmes’ are more difficult to deliver than expected. Change programmes, by their nature, flatter to deceive. Change can appear simple, self-evident, and easy to implement. However, they can very easily become complex, slow moving and able to pull in seemingly endless amounts of time and effort. This is only exacerbated by a post M&A change programme being a specialist project. The skills and experience needed to deliver these programmes are not the same needed to manage either company before the M&A occurred, and are therefore often lacking in the combined new organisation.
Systems, technology and processes are some of the most common areas to be tackled in a post M&A environment. Modern IT architecture has reduced barriers between individual systems and can support an easier path to migration or integration. The biggest process risks are much more likely to come from data. Complex data and high levels of historical data increase the likelihood of complications. As an experienced M&A consultant put it “At the end of every project, we will look back and say we should have allowed for more problems with data”.
Equally the old adage “You can buy a company, but you can’t buy the people” holds true. An M&A programme is likely to impact people in both organisations, positively and negatively. Building a positive view of the future will be key to bringing staff with you in the journey. Even if that journey could be a painful one for some employees. If support is lost, staff members and stakeholders in both organisations can cripple even the best designed post-M&A planning. The term ‘death by a thousand cuts’ could not be more apt.
Is the conclusion that Mergers and Acquisitions are a bad idea, best avoided, or left to companies who make a deliberate effort to build M&A skills? This would seem too pessimistic. But it is true to say that if you approach M&A with the thought that it will be easy, or that it doesn’t require the application of specialist skills and experience, there is a good chance you would be destined to become one of the 80% which fail to achieve the expected value.
However, with care, realistic planning and reaching out to external specialist help as necessary, you can beat the odds and be in the 20% of success stories. The fact that it is hard also means that an organisation which is capable of being a successful practitioner of M&A can have a powerful strategic advantage over its competitors.