Secret Sauce for M&A Success

Big Merger & Acquisitions are ubiquitous even in times of economic difficulties. Be it the acquisition of Wyeth by Pfizer Inc for $ 64.5 Billion or Rio Tinto’s acquisition by the Australian mining behemoth, BHP Billiton for $58 billion, M&A deals are part and parcel of the corporate strategy to grow at breakneck pace as companies look to grow inorganically. Almost 60% of all M&A’s fail. Here in this article, I try to dig deep to understand the reasons behind such a high failure rate and unearth the main factors required for an M&A to succeed.

Strategic Planning

Even before contemplating sending the first proposal to the target, a company must develop strategies to conjure a value creating plan that aligns with the company’s overall business objectives. Glamour deals are a recipe for disaster and activities that are undertaken to satisfy the gargantuan egos of the top management or to build an empire due to self-serving desires are doomed to fail! All the critical factors such as post merger integration, culture shock, and shareholders’ interests must be considered in detail to create discerning reasons for the M&A.

Even a broad due diligence is not enough

Amid the frantic pace and the hodgepodge of post merger integration, most managers make the mistake of identifying the synergies estimates calculated during the pre-deal analysis as the performance targets. The correct approach is to take due diligence as the foundation for post merger and managers should, normally, draw on these documents before the starting the integration process. Even a broad due diligence process with all its advantages is only so good. Most of the time, the entire concentration is on whether the cost synergies alone can justify the deal by placing more emphasis on removal of pedant functions and less emphasis on how much future growth Mergers and Acquisitions can bring.

Companies, which have succeeded in M&A have always taken the pre-deal due diligence estimates not as performance targets, but as the bottom line which must be achieved if the value has to be created or conserved. Furthermore, successful acquirers re-define their estimates of synergies to identify opportunities and then do whatever is necessary to support those opportunities. For instance, if the post merger analysis shows that the target company’s human resource strategy is better than its own then it is in the favor in post-merged entity to embrace this in such a manner that it brings about synergies much higher than the pre deal estimates.

Leadership through Communication

A survey conducted by Mckinsey Co., involving 413 HR directors of companies with 2000 or more employees, found that majority of correspondents pointed to lack of communication at all levels of the acquiring and target organisations as one of the most critical reasons behind M&A failures. When a company has plans to merge or acquire another company, it becomes top management’s incumbency to enunciate its plans clearly and concisely to avoid any kind of confusion, uncertainty, loss of trust and loyalty on part of employees.

The employees are a company’s greatest assets and are considered as the pillars of any organisation’s success. By conveying information, companies can keep the employees engaged. An engaged employee will contribute extra effort, stay connected, remain positive, weather the change with resilience and become an advocate for the organisation. Furthermore, engaged employees will be more than willing to go the extra mile in helping the company in the Post Merger integration by helping the new representatives in getting acquainted with, not only the working culture, but also the day to day operations of the business.

Finally, it is really important to be really clear and consistent with the communication, even if the messages are not always positive for everyone. One of the advantages accrued from M&A activity is the increased size of the talent pool at the top management’s disposal and it should decide on the critical question of “Who to keep” depending on their long term contribution to the well being of the company. Immediately after the M&A process, top management needs to have only the right people on the bus because once you have the right people, the problem of how to motivate and manage people largely goes away. Besides, it also gives companies the pliability that they require in the aftermath of the M&A deal.

Importance of understanding the Culture differences

Every organisation has a culture, which gives employees directives to other employees in order to act and interact on a day to day basis. One of the biggest snags in every merger and acquisition deal is determining what to do about the culture. Most of the time, the acquirer tries to perpetuate its own culture and try to change the values and principles of the acquired company. Occasionally, acquirer might also look to inculcate the acquired company’s culture into its own. No matter which direction the acquirer wants the post integrated company to go, it is essential to commit to the culture and put it into practice. A cognitive analysis can help reveal the gaps between two different strategies, provided acquirers identify their potential biases and work diligently without any prejudices.

After that, all top executives need to manage and encourage the culture actively. Compensation and benefits must be designed to reward the behaviours you are trying to encourage. Furthermore, in order to encourage the new culture, the leadership should role exemplify the desired behaviour; and those who do not chime in well with the new culture should be asked to leave the bus as soon as possible.

The example of Daimler-Chrysler goes a long way in explaining the importance of culture for a successful M&A process. The two organisations were indispensably different. Daimler-Benz has always been known for its centralised decision making and high reverence for good quality. Chrysler, on the other hand, had flamboyant, risk taking management style which encouraged equality, empowerment, flexibility, etc. In a nutshell, two organisations had completely different culture. Daimler Benz CEO, Jurgen Schrempp, famously proclaimed it as “the merger of equals” but it turned out to be a complete failure because no effort was being made to define the culture that needed to be followed by the post merger entity. The results were so catastrophic that Daimler had to sell Chrysler within 8 years of the acquisition at a considerable loss.

The Crux

It is very important to understand that there is no magic formula for a successful M&A process. Furthermore, the list of points mentioned above is not exhaustive and several points could be added depending on the situation and the industry. After having said that, all these points only provide a framework and must be considered carefully by companies to increase the probability of having a successful M&A.

Photo by Jordon

About karan Mehta

A future Business Developer

Posted on March 27, 2012, in BizDev, Management, Private Equity, Strategy and tagged , , , , , , , . Bookmark the permalink. 1 Comment.

  1. Thanks for sharing your Secret. I think Employees of a company plays the vital role in M&A.

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