Making successful deals – when the deal is done, the work begins
June 2015 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Soft M&A capabilities involve good feedback and feedforward processes, so that knowledge can be gathered and transferred effectively. This will ultimately enhance M&A governance and the quality of future acquisitions. Traditional M&A capabilities, meanwhile, are process-driven and relate to the implementation of deals.
The majority of dealmakers understand their own M&A capabilities, and their weaknesses. But interestingly, those who lead the M&A process do not always benefit from the tacit knowledge that has been gained from past experience. This is because deals are, by definition, complex and heterogeneous. Learning the right lessons from past experience can be a perilous exercise.
An active approach is essential. Improving M&A capabilities requires an ongoing and systematic effort in the form of formalised feedback and feedforward processes. Then buyers can reap the rewards of better-value deals and, ultimately, improved corporate performance.
Deals are increasingly complex in nature. These days, they often involve wide geographical areas and significant regulatory and cultural challenges. Deal teams are fully aware of the need to keep the strategic rationale for the deal in sight at all times if value is to be achieved. Part of this process is finding ways to transfer knowledge and experience from past deals.
Hitherto, most buyers have proven adept at the ‘traditional’ M&A processes: strategy, execution and transaction management. However, they are weaker in post-acquisition integration and review, support processes and knowledge management. The general consensus is that companies do not build up an institutional memory of their experience in acquisitions. As such, they have to reinvent the wheel for each new acquisition and, at worst, the success of the deal may be jeopardised by a failure to learn from the past.
Indeed, it appears that although buyers may expect to use the experience they have built up, they are often unable to do so. Such knowledge may be shared on an anecdotal basis within the organisation, but not in a formalised manner.
So the critical question is: why do companies fail to codify, retain and share their knowledge of acquisitions when they are fully aware of the benefits of doing so? Experts are unanimous about certain impediments to organisational learning in relation to M&A.
An in-depth discussion
Active M&A players are likely to have M&A governance systems in place to reduce the risks associated with deals and promote consistency. Acquisition knowledge is the sum of lessons learned by companies while handling acquisitions. Specifically, learning can occur through feedback and feedforward processes.
These aspects of learning were explored using a survey, interviews and an expert panel made up of C-level managers and M&A directors in the Netherlands. The participants are employed by companies (excluding banks) that mainly handle deals above €50m.
It generated a number of compelling findings.
Deals vary widely in terms of size, structure, geography and culture. As such, capturing knowledge becomes a difficult trade-off between providing a broad-brush procedural description and a very detailed description of the risks and choices involved. Information can easily become too vague or too detailed, and in both cases it may become obsolete very rapidly. If M&A knowledge management tools do not contain enough information, they are much less likely to be consulted for subsequent deals.
The M&A process is undermined when individuals rely exclusively on internal tools and processes to assess deals. When learning is not structured, there is a risk that unsound parallels will be drawn with previous transactions. On the other hand, following procedures over-scrupulously or without sufficient reflection can lead to overgeneralisations and cause critical details to be overlooked. The fear of these extremes means that buyers may choose simply not to draw on formalised organisational acquisition knowledge at all.
Lack of incentives is another issue. Many staff do not feel rewarded for making additional effort, and oversight of the process is lacking. M&A deals are fast-moving and demanding, and those involved usually prefer to focus on the high-priority items that they are expected to deliver on. Typically, knowledge management is not one of these aspects.
M&A teams generally withdraw from the deal in the closing phases or after signing, leading to a lack of responsibility and accountability among those involved. The M&A team may only feel responsible for the transactional decisions made, and the businesspeople involved are often appointed on a temporary or ad hoc basis. In the end, nobody feels genuinely responsible for making the extra effort required to gain acquisition knowledge, and the absence of a clear system for assigning roles and responsibilities to those involved can encourage organisational ‘free-riding’.
Deal teams are volatile. The average tenure of M&A workers is just three to five years, which clearly also affects the quality of organisational knowledge. Even when staff stay put, recollection of past deals is invariably poor due to the diversity, complexity and sheer number of deals done. Again, this underlines the importance of formalised learning systems.
Insufficient investment in training means that it is difficult to develop tools to retain and share knowledge. The buyers with whom we spoke were generally ambivalent about investing in acquisition knowledge management tools, and do not train their staff in this. Even when senior managers were interested in such initiatives, they were unsure how to select a tool and put it in place.
What does this mean for us?
The message of these findings is clear: buyers need to develop proper feedback and feedforward processes. This will enable knowledge to be captured effectively, and ultimately enhance the quality of future acquisitions.
Most active M&A players already have decent IT systems in place. The solution lies in leveraging these existing IT capabilities, and combining these with social media to develop a simple yet effective platform for sharing experiences. Social media can make the platform accessible to users, who are already used to sharing experiences and views online. Additional ‘official’ content can then be added by ‘deal committees’.
Incentives and rewards go hand in hand with responsibilities and must be designed to suit the company’s wider remuneration policy. Careful alignment of roles, responsibilities and rewards will ensure organisational fairness and increase staff commitment to managing acquisition knowledge.
Rewards do not have to be monetary, however; they can take various forms. What is essential is that management acknowledges the importance of learning from dealmaking and provides suitable training. This will allow a wide range of people to improve their M&A skills, demonstrating the importance of managing acquisition knowledge and its potential benefits for the company.
Results must be shared within the company, positive outcomes encouraged and excellent performance rewarded. Companies can identify their weaknesses and focus on improving these in future deals.
Rick van Dommelen is a partner and Hind El Gaidi is a manager at PwC. Mr van Dommelen can be contacted on +31 887 926 476 or by email: firstname.lastname@example.org. Ms El Gaidi can be contacted on +31 88792 4551 or by email: email@example.com.
© Financier Worldwide
Rick van Dommelen and Hind El Gaidi