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Connecting the Dots

Why most M&A continues to underperform, and an approach for today’s business climate that helps you beat the odds

Alsopublishedby:

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GettingM&Atodeliverhasalwaysbeenhard.Theenticingpromiseofnewcustomers,enhancedcapabilitiesandofcourseincreasedprofitsisallthereforthetaking,butthetakingisrarelyaseasyasoriginallyhoped.Mostwhohaveseenevenafewacquisitionswillrecognisesomeoftheclassicsymptomspost-close:operatingcoststhatstubbornlygoupinsteadofdown;painfuljagsasnewprocessesandsystemsareintroduced;chronicmanagementdistraction;andlossofsomeofyourbestpeoplejustwhenyouthoughtthedusthadsettled.That’snottosaythatallM&Aencounterssuchturbulence,buteventhosethatdon’tstillfrequentlyfailtodeliverallthatwaspromised.AccordingtoarecentpaperbyHarvardBusinessReview,studyafterstudystillputsthefailurerateofmergersandacquisitionssomewherebetween70%and90%1.

Andhere’sthething:Despiteyearsofacademicstudy,corporateexperienceandmaturingbestpractice,formostfirmsthissituationisclearlynotimproving.Currentstudiesoflong-termM&Asuccesslargelymirrorthoseconductedadecadeormoreago.Despitetheyears,theresearchandmultiplecyclesofM&Aboomandbust,whyhassolittlechanged?

Underneaththispicturesomethinginterestingemerges:Whilethemajorityoftoday’sorganisationsstillfindM&Asuccesselusive,somehavemanagedtobreakfromthepack,turningacquisitionandintegrationintoatruecompetitivedifferentiator.OrganisationssuchasMicrosoft,GECapital,Xstrataandotherskeepacquiring,andconsistentlygeneratelong-termvaluefromthesedeals.WhatmakesthesefirmsconsistentlysuccessfulatM&A,andwhatcanthe1TheBigIdea:TheNewM&APlaybook;HarvardBusinessReview,2011

occasionalacquirerlearnfromthem?

Dozensofpapers,articlesandbookspublishedoverthelast10-15yearsdescribebestpracticesinacquisitionintegration,andweagreewithmuchofwhattheysay.Dealobjectivity,financialmodelling,comprehensivecommunications,afocusonpeople,cleardefinitionofvisionandrisk,structuredplanning–theseandmorearevitaltoasuccessfuldeal.

Butacrossallthese,twothingsarerarelymentioned,twoinconvenienttruthsabouttheM&Aindustry,businesspracticesandculturesthatunderpinmostM&Aunderperformance:

§ Acquisitionandintegrationareviewed,plannedanddeliveredastwodiscreteactivities.Thepre-closecommunity–bothin-houseandexternal–generallysupportsthisdivide;

§ Likeanygooddiet,followingM&Abestpracticeisharderthanitlooks.Mostfirmsunintentionallyencouragetheirownmanagerstoavoidit.

So,therealquestionis:AreyousatisfiedwiththecurrentperformanceofyourM&Astrategy,andisitimprovingasquicklyasyouneeditto?Ifnot,thismaybethebesttimetotakeaction:Thepost-recessionclimateisnolongergivingfirmstheluxuryofgrowingtheirwayoutofabaddeal,oronethatispoorly-integrated.Thisimpactsdealsponsorsasmuchasbusinesses:Evenduringthe‘goodtimes’ofthelastM&Aboomofthe1990s,47%–almosthalf–ofCEOsinacquiringbusinesseswereactivelyreplacedbytheirBoardswithinfiveyearsofdealannouncement2;aswitnessedbyseveralrecenthigh-profiledeals,thistrendwillonlycontinue.While

2CEOTurnoverafterAcquisitions:AreBadBiddersFired?;JournalofFinance,2006

Study after study still puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.

Some however have managed to turn acquisition and integration into a true competitive differentiator.

What makes these firms consistently successful at M&A, and what can the occasional acquirer learn from them?

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customersandinvestorsrewardsuccessfully-executedinorganicgrowth,theyalsopunishsignsofbusinessinertiaordistraction.

AconnectedapproachtoM&A:walkingthetalk

Abilitytobuydoesnotguaranteereadinesstoown:Neverhasitbeenmoreimportanttoensurebeforethedealisclosedthatintegrationcandeliverthegoods,anddosoquicklywithoutdisruptingorburdeningthewiderbusiness.

Anobviousstatementperhaps,butinourexperiencemoreoftenunderstoodinprinciplethanrealisedinpractice.Inourworkwithorganisationsacrosssizesandsectors,thisdisconnectremainsthesinglebiggestreasonwhyM&Afailstodeliver.

Whatpreventsfirmsfrombridgingtheoryandpractice?Partispureemotion:DoingadealisformanysimplymoreexcitingthanworryingaboutlifeafterDay1.PartisdrivenbythestructureoftheM&Aindustryitself:themajorityofdealadvisors(brokers,banks,corporatefinancehouses)areincentivisedtogetthedealdoneasquicklyaspossible;evenwiththehighestlevelsofethicsandprofessionalism,theirinterestinmakingsurethebenefitscanbedeliveredpost-closeisacademicandcommerciallyimmaterial.Asindividualstheymayunderstandtheprinciples;asorganisations,theircollectivemindset,capabilityandexperiencewilltendtorelegateanythingbeyondthedealtothesidelines.Thiscanequallyapplytoin-houseStrategyandM&Agroups,whooftenseeeverythingpost-closeas‘thejobofoperations’,intellectuallyandmateriallydistinctM&Aitself.

Successfulacquirersseeanddeliveracquisitionandintegrationasasingleinitiativeinvolvingthesamegoals,informationandpeople.As

apparentasthismayseem,thisrepresentsagenuineparadigmshiftformanybusinesses,especiallylargerorganisationswheretheremaybeastructural,processorevenculturalseparationbetweenacorporatecentreresponsiblefordoingthedeals,andoperatingunitsresponsibleformanagingthebusinesspost-close.

Largeorsmall,thosewhoconnectthedotsbetweenacquisitionandintegrationhardwirethisapproachintotheirpre-closeprocess.Stepsinclude:

§ Translatingacquisitiongoalsintomeasurablepost-closeobjectivesandinitiativesup-front.Werecognisethedifficultyindevelopinganaccuratepictureatearlystagesofthedeal,butitispossibletodevelopa‘roughsketch’,theresultsofwhicharethenusedtodrivethepre-dealprocess,andimprovedalongtheway.

§ Beginningpost-dealbusinessdesignandintegrationplanningearly,andusingbothtodriveassessmentandduediligence.Successfulacquirersseepost-closeintegration/improvementasaunified,cohesiveinitiativethatestablishesthebusiness’newoperatingmodel,inturndeliveringdealobjectives.Workingonthesetwoitemsup-frontletsyouconductatargetassessmentandduediligenceprocessthatteststhefutureabilityofthecombinedbusinesstodeliverdealbenefits,notmerelythepastperformanceofthestand-alonetarget.

§ Usingthisdetailedviewofpost-closetoinformdealvaluation.Therightacquisitionvalueisonebasedonapictureofthecombined,improvedbusinessperformance,notonaviewof‘stand-alone-plus’.Alongsidesynergysize,valuationalso

Ability to buy does not guarantee readiness to own. Never has it been more important to ensure before the deal is closed that integration can deliver the goods.

The majority of deal advisors may understand the principles; however, their collective mindset, capability and experience will tend to relegate anything beyond the deal to the sidelines.

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needstoconsiderthepotentialtimingandlikelihoodofkeypost-closeobjectives,andtheexerciseshouldinvolvethoseresponsiblefordeliveringthem.Why?Becausesynergyassumptionssetpre-closebecomepost-closeoperationalexpectations.Itisthislackof‘post-close’thinkingthatcausesproblemstimeandagain:costsunexpectedlyrisingpost-close,frustratedmanagement,and‘corporateknee-jerkintegration’whenthingsstartdrifting.Thatdeeperunderstandingofoperationaldrivers,financialimpact,andprioritiescanalsoprovideacquirerswithadditionaloptionsatthenegotiatingtable,e.g.whenagreeingTSAsorretainedmanagementincentives.

§ Ensuringastructuredprocesstoavoiddealmomentumordealphobia.Firstandforemost,successfulacquirersinvariablyhave,shareandfollowawiderstrategyagainstwhichtoformallyscreenopportunities.Moreover,theyinsiston‘moderating’mechanismsalongtheirpre-closeprocess:Balancingenthusiasticdealsponsorswithcautiousdetail-observersacrossthetable;takingameasuredpacewithformalstage-gates;andensuringpost-closechallengesandrisksareformallyconsideredateverystepalongtheway3.Aboveall–andperhapscounter-intuitively–theyensureexternaladvisorsstaywithintheirroleofadviceandsupport,anddonotbecomesurrogatedecision-makersonbehalfofthebusiness.

Ultimately,itistheinvolvementandcommitmentoftherightpeoplewithinthebusinessthatmakesanyofthesepracticeswork.This3MoreonthistopiccanbefoundinGettingM&AontheRightTrack,BeyondtheDealLLP,2011

involvementwillalsobuildcommitmenttotherealworktofollow;theirownapproachtothisexercise(especiallydevelopmentoftheassociatedpost-closebusinesstargets)willspeakvolumesabouttheirlevelofbeliefandengagementinthedealrationale,andgiveinsightintotheirownabilityandwillingnesstodeliverit.

Aconnectedapproachtointegration:settingthestagefordelivery

Thedealissigned,post-closeplansareapproved,andintegrationbegins.Seniorexecutivesintuitivelygettheneedforaco-ordinatedapproachandstrongcommunicationstoensurerapidintegrationandareturntobusinessasusualasquicklyaspossible.Inpracticehowever,whetheritstartsthedayaftercompletionoryearslater,integrationistypicallypainful,distractinganddemotivating,leadingtopersonal,organisationalandfinancialunderperformance.

Overtheyearswe’vesupportedover50acquisitionsandintegrationsandhaveobservedamyriadofsymptoms,butinfactonlyafewrootcauses:

1. Insufficientfocusontheinitiativesthatdeliverdealbenefits–andthedelayorexclusionofallothers;

2. Lackofmaterialaccountabilityandsupportfordeliveringtheseinitiatives;

3. Notenoughpeoplewiththerightexperiencetaskedandavailabletodeliver;

4. Properco-ordinationoftheend-to-endprogrammepost-close–softandhard;integration,operationalimprovement,communications,andtherest–toensuresmoothdeliveryandminimumbusinessdistraction.

Ultimately it is the involvement and commitment of the right people within the business that makes these practices work.

Line management involvement from the very start of the process builds commitment to the real work post-close; their own approach to this exercise will speak volumes about their level of belief in the deal itself, and their own ability to deliver it.

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Whilesomedealsultimatelyfailevenwiththeseinplace,we’veneverseenonedealsucceed–objectivesmetandsustained,ontime,onbudget–unlesseachofthesefourareproperlyadopted.

Sowhatpreventstheserelativelysimplesuccessfactorsfrombeinginplace?Inshort:Thebusinessitself.

Beforeembarkingonanyacquisition,askyourself:

§ Doesyourorganisationencourageandmateriallyrewarddeliveryofbusinesschangeandimprovement?Whatmotivatesyourleaders?

§ Areyourpeoplegenuinelyexcitedabouttheirroleinmakingnewacquisitionsalong-termsuccess,oraretheyuninterestedtouristsorunwillingpassengers?

§ Doesyourorganisationalcultureexpectandencouragepersonalaccountabilityalongsidecollaborative,apoliticalteamwork?

§ Manyofyourpeopleprobablyhaveintegrationexperience.Aretheyinapositiontoleadorcontributetotheeffort,bothpre-andpost?

§ Areyougenuinelygivingyourleaderstimeandspacetodeliverintegrationalongsidetheirdayjob,orwillintegrationbesqueezedintothecracksbetweenthe‘realwork’?Whoistakingsomeoftheday-to-dayloadoffyourmanagersduringthisperiod?

§ Whoisensuringthattherightthingsaregettingdoneattherighttime,andthatallthestrandsacrosstheworkstreams–milestones,risks,impacts,processes,communications,systems,structures,people–are

known,understoodandtiedtogether?Ifyouransweris‘no-one’orworsestillthe‘CEO’,you’relikelytofail.Nominatinganexistingmanagertodothisasasecondaryrolerarelyworks:Thisindividual–internalorexternal–musthavetheexperience,time,andtoolstodothisproperly.

§ Areyourpeoplereallylearningandimprovingfromonedealtothenext?Howisthislearningactivelyappliedtonewopportunitiesandnewpeople?

ABOUTTHEAUTHOR

CarlosKeenerisaspecialistinM&AIntegration,andthefounderofBeyondtheDeal,abusinessthatprovidesacquisitionandintegrationstrategy,planningandexecutionsupporttoclientsworldwide.InadditiontoleadingM&Aandintegrationprogrammes,Carlosadvisesbusinessesoncorporateandacquisitionstrategy;enterpriseoperatingmodeldesign;integrationstrategy,planningandexecution;andturnaroundofpoorlyperformingacquisitions.

BeforeestablishingBeyondtheDealin2001,CarloswasaseniorconsultantatPricewaterhouseCoopers,andaseniormanagerwithinAccenture’sCorporateStrategyandM&Apractice.BasedintheUK,Carlos’workhastakenhimacrossEurope,theUS,Africa,LatinAmerica,theMiddle-East,andtheFar-East.

Hecanbecontactedatcarlos.keener@btd.consulting

BTDisanindependentspecialistfirmprovidingmerger,acquisitionandintegrationsupporttobusinessesaroundtheworld.

www.btd.consulting

ACQUISITION & INTEGRATION FOR THE POST-CRUNCH ECONOMY: A CONNECTED APPROACH

§ Develop post-close objectives alongside acquisition goals.

§ Develop your post-close Business Model & Integration/Improvement Plan iteratively during due diligence.

§ Engage line management early in the process as designers of the future, not just advisers.

§ Use Due Diligence to test these objectives and plans – can you deliver post-close?

§ Include detailed integration & improvement assumptions into your valuation model – synergy scale, timing, likelihood.

§ Build and follow an objective pre-deal review process to encourage objectivity and avoid deal momentum.

§ Shape and prioritise your post-close programme to focus on acquisition goals.

§ Incentivise your leaders to take accountability for delivering acquisition, integration and improvement targets.

§ Assign experienced people to co-ordinate integration, and give them time and space to be effective.