Disappointed with your company’s earnings performance since your last acquisition? Worried that the next acquisition or merger will have a similar affect? You’re not alone! Study after study has demonstrated that mergers and acquisitions are a risky business. In spite of the fact that a lot of M&A advisors rake in substantial fees each year, almost every major review of companies completing Merger and Acquisition transactions shows that most of these transactions fail to deliver on promised financial performance. Like every other investment, the biggest risks yield the biggest results – whether they’re good or bad. One way to improve your odds is to study the methods of the most successful Merger and Acquisition companies.
As an industry executive, Ive encountered Merger and Acquisition challenges many times over the course of my career. I have also recently interviewed numerous C level executives from some of the worlds largest and most successful companies across several industries about this topic. I also conducted an internet-based survey of senior managers with extensive Merger and Acquisition experience. Seven winning characteristics emerged among the few truly successful Merger and Acquisition companies:
Characteristic #1: Successful companies follow a proven path of general acquisition and mergers. First, they do meaningful strategic planning. This practice enables acquisition targets to be identified which are excellent strategic fits for the corporation, rather than mere opportunities for getting bigger. Second, they perform thorough due diligence work. Their due diligence differs from poor performers because they plumb the depths of business processes and information systems capabilities and capacities in the acquisition target to ensure appropriate valuation and strategic fit. Third, they negotiate terms and conditions for the transaction that avoid overpayment. They accomplish this by making certain that management does not become enamored with the target company. Fourth, they plan for post-merger or post-acquisition integration. That plan includes a comprehensive communications plan, alignment of objectives and performance measures, and integration of processes and systems. Fifth and finally, after the deal is closed, the most successful companies relentlessly execute the planned business assimilation and integration activity. M&A requires detailed planning, rigorous management, and aggressive execution to succeed.
Characteristic #2: Successful companies use initiatives or projects to perform integration, and fundamental project management techniques to manage each of the initiatives. Every company, including yours, has a unique combination of strengths and weaknesses, and market-facing strategies. The combination of these factors dictates what specific initiatives your company must use to assimilate the new business unit. In some cases, the most urgent needs will revolve around rationalization of staffing, facilities, and capital equipment. In other cases, achieving commonality in information systems to enable cross-selling and rebranding will be most important. Whatever the combination turns out to be, your company must lead these initiatives effectively through a formal program management structure. Formally structured and carefully managed initiatives are a strong characteristic of the most successful Merger and Acquisition companies. Formal program management requires such elements as a detailed project plan, discrete milestones, defined performance measures, designated responsibilities, risk management and change management processes, and so on. Initiative based integration rooted in sound market-facing strategy will improve the odds of successful Merger and Acquisition performance.
Characteristic #3: Successful companies pay meaningful attention to the match of cultures, organizations, and HR matters such as management retention. If your company has been through an acquisition or merger, you already know that the different cultures of the companies involved always make the situation challenging. In hostile takeovers, it can prove devastating. Employees often find that the behaviors previously rewarded by their company can sometimes result in demotion or dismissal. Performance criteria change, as do the people measuring the performance. When this happens, management in the acquired company, as well as many of the employees, becomes threatened, defensive, and resentful. The loss of key leadership in critical transitional periods can ruin the deal, and even when the entire deal remains intact, the resulting organizational instability often drains so much energy and time from remaining managers that it costs the new enterprise more time to achieve expected financial performance goals. Some Merger and Acquisition advisors report that as many as 72 percent of key managers head for the door within three years of an acquisition or merger. Almost all successful Merger and Acuisition companies incorporate a formal culture management structure into their integration planning. Some even put specific performance measures in place to monitor the success of melding the cultures following their formal public merger or acquisition announcement. The HR details, from communication to compensation, are make-or-break elements of Merger and Acquisition success.
Characteristic #4: Successful companies ensure that the acquisition is an integral part of overall business strategy. Have some of your company’s acquisitions turned out to be a poor fit with the rest of the business? Responses to my recent survey of senior managers with extensive M&A involvement indicated that the targeting of acquisitions which are a good strategic fit was the third most critical issue to M&A success. Strategic fit implies a close alignment of markets served, technologies owned, Research and Development direction, financial position (revenues, market share) between the companies involved. It also means that there is a real and quantifiable set of synergy related opportunities between the two companies. The best Merger and acquisition performers maintain a strong strategic plan with market-facing strategies, internal operating strategies, specific performance targets, and performance metrics linked from top to bottom throughout the enterprise. They incorporate the alignment of those elements of the acquisition target into integration planning for their transactions, and pull the trigger on them soon after the deal is consummated. Effective planning is a fundamental element of successful business. In Merger and acquisition situations, it must also be the basis for every major decision.
Characteristic #5: Successful companies have full-time time resources assigned, and strong lines of executive accountability for the success of the acquisition. Does your company assign full-time teams to acquisition pursuits, or rely on part-time efforts from people who also have a day job? The pressures of day-to-day job responsibilities for key staff members make it incredibly difficult for them to focus on a part-time assignment related to Merger and Acquisition activity. The early assignment of skilled full-time resources to these tasks as early as possible in the due diligence phase of the acquisition or merger process is often critical to success. General Electric, arguably one of the best acquirers in the business (certainly one of the most prolific) recognized that management experience made a huge difference in the success of their endeavors, and as a result, decided some years ago to designate integration management as a full-time role in their company. Studies of GE and others show that companies who assign full-time teams have better Merger and Acquisition track records.
Characteristic #6: Successful companies have discrete targets for integration activities, and relatively short-term financial objectives that are quantitative. In your company’s last acquisition, were specific performance targets published and widely known? While goals such as “become accreted within a year” are quantitative enough, they must be broken down into a set of initiatives and accompanying performance measures in order to be useful. The best companies understand not only what the top-level goals are in quantitative terms, but also what specific actions will be taken, by whom, and by when, to achieve that desired result. Hence the detailed project plans around a defined set of initiatives described in Characteristic # 2, above. Initiatives can relate to revenue growth, market share growth, or operating cost reduction. They can involve a wide variety of actions such as establishing strategic partnerships for marketing or distribution, efforts around cross-selling or re branding, facilities rationalization, new Research and Development initiatives, organizational restructuring, and information systems upgrades. Those companies who are most successful march through discrete initiatives toward quantitative goals. Achieving those discrete goals enables the newly merged company to hit specific financial objectives at designated times. The most successful Merger and Acquisition companies are those who most discretely define what success means.
Characteristic #7: Successful companies move assertively to get the newly acquired business entity onto common business processes and information systems early on. One of the C-level executives I interviewed (this one was a Financial Services executive) in preparation for my book said: “We have three top priorities in these transactions: gain market share, grow assets, and reduce operating costs in proportion to the assets we manage. Getting the acquired entities onto common processes and systems is strategically critical for us in achieving that third goal. But beyond just our financial performance, it impacts the morale of our employees, our ability to present a consistent face to our customers, and our efficiency in employee training. When a company like ours is systematic in their approach, they can bring new acquisitions onto common processes and systems in six to nine months.” Most of the leading companies in this area, including companies like GE and Cisco, exhibit this characteristic. Unity and consistency produce and exhibit strength to customers and shareholders. The strength of unity and consistency is never more important than the period immediately following a merger or acquisition.