08 May 2015M&A: Adding Value to a Transaction
Mergers and Acquisitions are an integral part of the growth strategy for any business and can dictate the fortunes of the company for years to come. It is a way of restructuring an organization with an aim to improve growth and add value.
Companies can grow in two main ways: either organically or by merging with, or acquiring other companies. Companies often prefer to take the inorganic route as it is seen as a faster way to grow compared to organic growth, especially when companies have excess cash at their disposal.
However, majority of the deals end in failure due to operational and cultural disconnect between the acquirer and target. In the following sections, we discuss how an M&A deal creates value for investors, why maximum deals end in failure and what steps should be taken to make a deal successful.
Creating Value: When strategic and operational drivers are compelling enough, companies buy other companies to grow in scale and scope i.e. they acquire either horizontally or vertically in order to enhance their positioning in the diverse market place, grow revenues or realize cost synergies. Cost Synergy is created if the acquisition is strategic and results in cost savings from the elimination of redundant personnel or overlapping R&D efforts. Revenue Synergy is created with increased revenues from cross-selling opportunities.
Why Majority Deals Fail: The sad fact is that most deals look great on paper, but only few organizations pay proper attention to the integration process—that is, how the deal will actually work once all the paperwork is signed. What ensues is failure of the combined firm in achieving the desired value creation.
Major reasons that lead to failure are:
Lack of cultural integration.
Difference in strategy and growth models of target and acquirer.
Overpaying for an acquisition while being caught up in a bidding war.
Inability to realize the synergies that were expected prior to the acquisition.
However, this does not mean that companies should not attempt to grow inorganically. As a matter of fact, companies which have grown in this fashion have had higher shareholder return than the bystanders.
Keys to a successful M&A integration:
• Clearly Defined M&A Strategy: Acquirer should understand its strategy and create an M&A plan fitting to its own strategy. Successful acquisitions focus first on articulating the reasoning and objectives and then managing the tactical and functional activities to achieve those.
• Committed Leadership: A very important factor determining the success of the deal is the extent to which the senior management teams of both organizations align and commit to the strategy and objectives of the deal.
• Managing people and culture: To achieve the objectives of an M&A, it is critical that people are managed through the cycle of change, from where the organisation is to where it needs to be. It is key to deal with people issues before an attempt is made to address the integration issues, as the cultural differences can impact business operations and destroy value.
• Adopting Large-scale Change Framework: A merger or an acquisition is a large-scale change that cannot be handled by the existing hierarchical organization. Large-scale, strategic change, requires a more transformational process. Project management is rarely sufficient to make acquisition integration successful. Financial executives can benefit from understanding the principles that underpin a large-scale, strategic change approach.
• Conducting proper Due Diligence and testing against Conventional Wisdom: Do close analysis of the business you are buying and have a hard nose look at the price you are paying. Prices paid with the motive of being one up against a competitor in a bidding war are always difficult to justify later.
To conclude, M&A can be a very powerful tool to propel growth and add value for shareholders. It helps the company to enter new markets, expand their horizons and develop new capabilities. However, to achieve this, the management must pay heed to the above mentioned key points regarding successful post M&A integration.
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