The mysterious world of Mergers & Acquisitions, Part 2

As one might remember last time I have introduced some definitions and players in M&A world. I have also talked about the motives of the acquisition. As I have promised I continue now with some aspects of why M&A can fail and I mainly stress what key points one should keep in mind in order to have better chances of a success!

The reason for M&A to fail

Despite the fact that M&A is widely practiced, it has been found that between 60% and 80% of business combinations ended up as failures.
M&A often fail because of the failure of filling the transaction and transition gaps. Transaction gap relates to the fact that most mistakes are made before the deal is closed. Transition gap on the other hand relates to the fact that most mistakes are committed after the deal is closed.

The problems with transaction gap

The transaction gap can be addressed by better negotiation and carefully considered valuation.

  • Negotiate the right price, and do not overpay
  • Apply realistic parameters in valuation
  • Use multiples within comparable ranges, (I will elaborate on this in the upcoming third and fourth part of this blog-theme)
  • Ensure reasonable synergy expectations
  • Go for friendly and not hostile acquisitions

As the investment guru Warren Buffet puts it: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The problems with transition gap

Business risk to the newly merged entity is particular high at the beginning of its life. The failure of managing it often results in widening the transition gap. Therefore post-merger integration is key to making the new entity a success. There are many reasons for the poor management of business risk and hence the transition gap. M&A can also fail because of problems within the two merged firms (e.g. poor external communications, systems disconnect etc.) and changes in the environment and context (e.g. technological change).

Post-merger integration is about taking the newly merged company from transaction through the transition, which leads to the eventual transformation,  in other words managing the change.

To do so, actions must be taken by the top management and integration teams.

Top management:

  • Establish clear leadership and vision about where the organization is headed
  • Remove the obstacles to the new vision
  • Establish a sense of urgency for change
  • Create a new identity and a set of core messages
  • Communicate clearly to all stakeholders of the firm
  • Make tough decisions
  • Deal with resistance

Integration team:

  • Create project plan and assign ownerships of different workstreams
  • Ensure regular contacts with workstream and project leaders
  • Attain quick-wins to maintain momentum
  • Ensure clarity and frequency of communication with all stakeholders of the firm
  • Implement the post-merger integration plan within the first 60 to 100 days
  • Respond and amend the post-merger integration plan as situation develops
  • Anticipate problems and risks of integration continuously
  • Maintain “business as usual”

Next time I cover the valuation of firms by discounted cash flows and multiples, stay tuned!

To be continued…