You would be hard pressed to find a more depressing financial literature than that of mergers and acquisitions (M&A), the London School of Economics’s Professor Paul Willman says. Depending on who you listen to, mergers have a failure rate of somewhere between 50 and 85 per cent. One KPMG study even found that 83 per cent of merger deals did not boost shareholder returns.
But success can be lucrative – both financially and in terms of prestige – so these facts won’t get in the way of these ambitions. Willman cites eight reasons M&A negotiations can be tricky, including failing to have an established M&A process, issues with public accountability, having contestable future benefits or a high cost of failure. Notably, the other four – not knowing the counter-parties well enough, one party being more committed than the other, diverse shareholder pressures, and sides publicly setting ‘red lines’ – are all centred around communication and relationships.
“The people part can be particularly tricky,” says Professor Willman. “If you don’t anchor the consultants, you don’t anchor the clients; you can suddenly find that you’ve created your own competition.” Andrew Rimmington, Corporate and M&A Partner at Mishcon de Reya, agrees: “Put people at the heart of the deal. The difference between success and failure is often connected to how you deal with people.”
You also might find yourself falling into the trap of over-escalating your commitment, whether that is because of the sunk cost fallacy, or lack of accountability, or because of damaging bonus incentives based only on the deal going through.
In order to process and evaluate new information about the M&A as it comes in, “it’s important that you have the discipline in place to make sure you’re not succumbing to these cognitive biases,” says Professor Willman. He recommends using soft as well as hard due diligence, ensuring the interests of managers and investors are aligned, and establishing contract, competence and relationship trust. Professor Willman also stresses the importance of properly engaging the senior management team. A recent Mergermarket report called Creating Value Beyond the Deal found that 89% of sellers believed they could have derived more value from a sale by engaging the management team more closely.
So how do you give your company the best shot at a successful merger or acquisition? “Focus on value creation from the start,” says Rimmington. “Acquirers need to be ready with a comprehensive value creation plan well ahead of signing the deal. Key assumptions should be tested and validated through diligence so the plan can be implemented straight away", he adds.
As the EY Global Capital Confidence Barometer report published earlier this year showed, the old one-size-fits-all approach to integration just doesn’t work anymore. Value creation plans are no longer just about operational efficiencies and economies of scale, but they now also include the expansion of customer relationships and the acquisition of new technology, talent, product and services.
“The challenges of M&A are significant, but failure isn’t random,” says Rimmington, and that is true especially in regards to having a value creation plan. The importance of a clear and comprehensive plan was highlighted in Mergermarket’s report, which found that of the buyers whose deals lost value, 63 per cent didn’t have a technology plan in place at signing, 70 per cent didn’t have a synergy plan in place at signing, and 79 per cent didn’t have an integration plan in place at signing.
If there’s one word of wisdom Professor Willman would impart to anyone looking into doing a merger or acquisition, it’s that if the cultures of the companies are fundamentally different, the deal will be a lot trickier (65 per cent of acquirers say cultural issues hampered the creation of value, especially in the cases of “asset light” or “people-centric” deals.) Professor Willman recommends asking the two management teams to write a scorecard listing the key performance indicators for the merged organisation. “If they can’t agree on this,” Willman says, “the deal is destined to fail.”