M&A deals have seen a very promising amount of activity in 2014 which has restored much needed confidence back into the global markets. Deals involving the likes of Jim Beam, Unilever and Google early in the year lent credence to predictions made late in 2013 by those in the financial sector that a return to higher levels of activity could be anticipated. With this positive outlook on deal activity combining with numerous bid announcements, there is real potential for resurgence in the M&A market this year.
In the US alone Thompson Reuters reported January’s M&A activity as significantly higher when compared with the first month of 2012, rising threefold from $46bn to $156bn. A recent report by KPMG into the outlook for M&A in 2014 highlighted that 63 percent of respondents said that they plan to be acquirers in 2014, with one corporate development officer at a diversified industrial company stating he was planning for an increase in M&A because of the existence of “better economic conditions and less uncertainty”. Many analysts have similarly suggested that signs of the good old days have returned, but when comparing this latest activity to January 2000, when deals worth $279bn were announced, it is clear that we still have some way to go before we can truly state that we have moved from bust to boom.
However, owing to the recent high profile deals that have taken place, we can be sure there is a hive of global activity currently taking place, ensuring these and other deals are secured and executed successfully. Indeed, a recent report from Credit Suisse highlighted an increased budget available to executives for corporate takeovers, with buying being highlighted as a far cheaper option than building. With cash flow looking likely to increase, that growth could become a reality over the next few years, resulting in the long awaited growth in M&A.
Yet these figures do not necessarily tell the whole story of the M&A market. The success of the deal being realised cannot, on its own, be a measure of success. Often it is only once a deal has been agreed that the real work begins and the gains can be weighed. However, the work of integrating two different companies with potentially different structures, processes and cultures is no easy task. Beyond the actual deal itself, there is an incredible amount of planning, senior-level management and overall organisation involved in carrying out a successful merger or acquisition. Yet all too often the deal itself becomes the focus of attention, detracting from the all-important work of ensuring a smooth transition is carried out once terms are agreed.
During a deal process, execution is key. Having all the parties engaged in the deal able to access specific, pertinent information expediently aids the decision-making process and ensures that actions are taken based on full visibility and accountability. This should be of the highest priority during the actual takeover or merger; without, it can be all too easy to lose track of developments and greatly hinder activity. Virtual data rooms as collaborative workspaces have certainly enabled investors, advisers and companies to make decisions based on the most recent and germane information, to the extent that this level of data and insight is now a ‘must-have’ when the due diligence stage is reached within a transaction.
According to KPMG, creating shareholder value is a notoriously challenging process. According to the largest percentage of their respondents (38 percent), the most important factor for deal success is a well-executed integration plan. Respondents also highlighted having the correct valuation and deal price (29 percent) and effective due diligence (20 percent) as other key factors.
In terms of due diligence, respondents to KPMG said their greatest challenges were presented by the assessment of volatility for future revenue streams (34 percent) followed by assessing a target’s quality of earnings (19 percent).
So if these ‘must-haves’ are (and have been for at least a decade) an established protocol in the M&A sector, why is a sense of underachievement commonplace after a merger? A study by the Bureau of Economics showed that a startling 53 percent of deals analysed had not met expectations. Furthermore, 47 percent of those deals examined in the report had also failed to attain the objectives stated in the merger announcement.
So how is it that these deals can go wrong so quickly? Of those questioned in the Bureau of Economics report, the firms that had placed their focus on choosing a strong deal management team and undertaken an in-depth integration plan were more likely to succeed. More recently a whitepaper by KPMG stated that the majority of companies reporting an M&A deal failure felt that “people and organisation issues” were to blame. Among the pitfalls mentioned were a lack of shared vision, leadership clash, cultural mismatch, loss of key talent, misaligned structures, lack of management commitment on top of reduced employee motivation, poor communication and poor change management; a worryingly long list of potential major internal issues. While some may say that businesses undergoing a merger should have fairly similar working standards and cultures – after all, it makes sense to purchase or incorporate a company that shares the same goals and values – even a slight difference in any of the mentioned issues can create fractures.
Therefore to avoid the development of these fractures, ensuring careful forethought is given to every area of the integration is the difference between a good deal – one that has gone through the motions – and a successful deal. Setting and communicating clear goals for the vision, mission and business objectives is key, in addition to ensuring these are aligned with the views of key stakeholders, staff and any other pivotal members. This is often the first step that should be undertaken. Clear communications is so important during times of change and this should always work both ways. While it is important to highlight business aims, listening to each of these stakeholder groups will create an atmosphere far more conducive to successful integration.
Such an environment will naturally lead to the creation of an agreed structure and set communication channels, facilitating and expanding this two way dialogue and ensuring it remains a core part of the merger process at all times. This is best achieved through making the most of the technology available, whether that be through in-house resources or an outsourced partner. As mentioned, VDRs and collaborative platforms have a set communications process in place, allowing two-way dialogue throughout a merger. It could well be worth taking a lead from this and establishing a two way forum that similarly allows for contributions of staff at all levels. While employee issues during a merger or acquisition can easily surface during the early stages of a deal if not properly accounted and planned for, such a system will allow them to be dealt with effectively and the impact minimised. Without this, mismanagement of post merger integration can easily occur, a situation that can lead to a loss of key talent, employee disengagement and culture misalignment, all of which can have serious repercussions with regard to the ongoing success of the new venture. Without key talent involved, how will the company be able to win new business, or spearhead its ongoing strategy?
While the need to integrate is paramount, often the requirements of the core day-to-day business of each company to continue ‘ticking along’ can be overlooked in the haste to manage the merger. Relatively simple procedures, such as making sure information and file structures are shared, and that their integration is planned for to maintain the integrity of sensitive or business critical information, can often be disregarded in the rush to merge. In reality, this could actually provide the perfect opportunity to review and update such infrastructure. This is just one example in which the wider benefits of a post-merger integration process can be lost amid the excitement of making new ground. It is well worth taking a step back and reviewing existing protocol and seeing if it can be improved. Reporting, managing, hiring – the list is extensive, as are the benefits, so ensure that adequate time is set aside for such process reviewing. In fact, separating the merger process and the teams managing these plans from the core business activity day-to-day will help to facilitate this, ensuring that long term visions and business objectives are met successfully, while also keeping and improving the day to day operations effectively.
Businesses should remember the stark facts that highlight the failure rate of so many of these deals at all stages of the process. The deal is not the be all and end all of the process. Keep front of mind the underlying reason behind it and the growth of business that is to be achieved. If undertaken properly thanks to preparation, communication and speed, a post-merger strategy will ensure a smooth transition to a more successful organisation that fulfils and exceeds expectations. With an economy moving towards growth, ensuring a streamlined business post-merger will put it in the perfect situation to take advantage of the wealth of opportunities potentially coming into the market.
KPMG concludes its report by stating that “as the M&A market improves, acquirers still face due diligence challenges in assessing targets’ volatile revenue streams, quality of earnings, and quality of assets. Therefore, a robust due diligence and integration process is needed to ensure these acquisitions add stakeholder value”.
Torgny Gunnarsson is CEO of Imprima.
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