70-80% of all M&As fail to achieve their financial goals
As stock prices and corporate cash levels continue to be close to record highs, and interest rates stay near historic lows, M&A activity over the coming year is set to remain high.
For CEOs and private equity executives with ambitious growth targets, acquiring another company can be a very attractive proposition. Yet survey after survey reports that as many as half of all mergers and acquisitions concluded don’t achieve their financial goals, and between 70-80% don’t create significant value. In the face of these disappointing statistics it’s an imperative for executives to change the way they approach transactions.
Why do so many deals fail?
Numerous experts have tried to come up with an answer to this question. Try typing it into a search engine and you'll find yourself buried beneath an avalanche of articles, surveys and reports all attempting to pinpoint exactly what goes wrong and why it happens so often. There is, however, a good deal of consensus about some of the most common reasons for post-merger failure:
1. Insufficient due diligence
In a highly competitive deals market, opportunistic buyers may feel under pressure to seal the deal fast. In the rush to complete, it’s all too easy to bypass the careful investigation that should take place before any acquisition decision. Alarmingly, many buyers seem quite prepared to complete the deal with only limited knowledge of exactly what it is they are getting. It may sound basic but, if you don’t want any nasty surprises when the deal is done, you simply can’t afford to view comprehensive due diligence as an optional extra. Companies recognize this, but are slow to change. A recent Maine Pointe Operational Due Diligence Survey in the PE market revealed that 80% of PE executives see an increased need for deeper operational due diligence, yet only 38% view it as a requirement on their deals.
2. Lack of preparation
When time is of the essence, it’s never too early to start the integration process. With the right preparation you can be ready to hit the ground running on day one. To do this you need to have your integration team(s) set up and ready to go. Unfortunately, companies often underestimate the time it can take to pull together experts (both internal and external) and set up an infrastructure.
Most acquisitions have a 90 or 180-day plan post closure, yet few companies dedicate resources to achieving those goals, often relying on the existing management team to deliver improvements. As a result, the initiatives rarely get the attention needed to ensure success and the 90 and 180-day improvement plans are often not realized. Not only that, but many buyers start building their integration team months after the deal and, as a consequence, lose precious time and momentum post deal closure.
3. Weak data analytics
Many organizations are not yet aware of the vital role intelligent data analytics can play in a successful M&A. Most M&A deals involve some form of data room, often containing hundreds, if not thousands of different documents in disparate forms (PDFs, MS Word, PowerPoint & Excel documents etc). The file structure of these documents is often poor, making critical documents difficult to find. Few companies have the data analytics skills or tools required to quickly assimilate, interpret, cleanse and visualize this data into real business insights. Consequently critical missing data is not identified, or requested from the target company until too late in the deal.
Information in the data room is rarely combined into a single data warehouse to provide “one version of the truth”. Without deep data insights and visualization, improvement hypotheses are often developed in a vacuum and are not fully validated or pressure tested prior to making and negotiating bids. Big data and advanced data analytics tools and capabilities offer a way to quickly analyse these disparate data sets in days, not weeks and provide actionable insights to develop post-merger integration improvement plans.4. Incompatible company cultures
In the rush to complete, it’s easy to make mistakes in the people category. Leaders often focus too much attention on the financial components of the deal, and not enough on its impact on people and culture. Yet so-called ‘culture clash’ is one of the key reasons why M&As fail. Before the deal is done, it pays to figure out what the newly merged company will look like, how it will operate, what’s going to change and why. Without clearly articulated answers to these questions, the two companies will never successfully merge.
A well-documented example of the damage a clash in cultures can cause was the 1998 merger between car producers Daimler-Benz and Chrysler. The goal was to become the world’s third largest car producer, yet combining different knowledge background, work processes, product portfolios and last but not least, completely different corporate cultures, proved disastrous. Less than a decade later, Daimler-Benz sold its interest in Chrysler due to “irreconcilable differences” in the organizational cultures.5. Disregarding the critical 'human factor'
Keeping your best employees is key to a successful merger yet the very mention of the word puts employees on high alert. 20% leave the company soon after an announcement is made, taking with them their knowledge, experience and the relationships they have built over the years. A study by HR consulting firm, Aon Hewitt, found that, when a company is acquired, even if there is no significant impact on people’s jobs, the number of actively disengaged employees increases by 23%. Low morale has far-reaching effects on employees’ reliability and productivity, which ultimately impacts the customer experience in a negative way.
To counteract this and minimize the risk to the newly formed company, you need to communicate. Even when there is nothing new to say, share the dates when information will be available or when decisions will be made. In a merger situation, there’s no such thing as too much communication. That extends to your customers, who will undoubtedly be wondering just how this merger is going to affect them.Beating the odds
It may look like the cards are stacked against successful M&As but it’s not all doom and gloom. A carefully prepared, well-executed deal can re-energize both companies and deliver the exceptional growth opportunities many CEOs are looking for, relatively quickly.
We recently worked with a global manufacturer of commodity chemicals that had merged the businesses of two companies into one multibillion-dollar organization. The new company combined two very different cultures and supporting operating models. Company executives needed to quickly capture value to deliver the synergy targets committed to investors. To do this, they embarked on a cross-functional transformation project which, in addition to $112M of benefits realized, also achieved the following:
- Aligned leadership and teams behind a common goal
- Established the foundations for a culture of innovation to drive Total Value Optimization™
- Aligned and infused sound practices across logistics, procurement and operations
- Utilized advanced data analytics to gain first-time insight into procurement spent
If would like to discuss any of the points raised in this article or would like to find out about Maine Pointe’s pre and post-acquisition due diligence offerings and implementation services, please email [email protected] or [email protected]
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Maine Pointe is a global implementation-focused consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in both EBITDA and cash across their procurement, logistics and operations to enable growth. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.
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