SHAKING hands is the easy bit. The real challenge is getting the integration right and this is where many deals, big and small, go pear-shaped.
A staggering 70 per cent of mergers and acquisitions typically fail to deliver the synergies and shareholder value they promised - an alarming and expensive margin of error which is attributed variously to poor systems integration, clashing egos, fla
wed intentions, insufficient planning and bad - or non- existent - communication.
"You'll get the announcement that there's been an acquisition and then just silence," explains Pat Tomlin, below, director of troubleshooting and change management consultancy Wildcat One. "There may be very good reasons for that, but unfortunately it just unsettles people. Good people are always going to be able to find positions elsewhere so they're the ones you're likely to lose, but much more likely to miss.
"Often the focus is on keeping senior executives, but don't forget about the people with key skills and expertise elsewhere in the business, who are equally critical. If they don't understand early enough about what the deal means for them, they could well get restless and leave."
Research suggests about 47 per cent of acquired company executives leave in the first year following the deal and 75 per cent leave within the first three years. If the exiting team includes your top sales manager or biggest account handler, the result can be disastrous. Good communication and strong direction, especially explaining to staff what's happening, why it's happening and where they fit into the picture, is key to halting such an exodus. Tough decisions should also be made quickly.
"It's important to identify what needs to be done quite quickly, then just get on with it," says Tomlin. "It may be painful to restructure after acquisition, but it's better in the long term because people have real clarity. The same goes for your product or service portfolio. If something's not working or doesn't meet the acquirer's value-adding blueprint, then it's usually better to divest and focus on what you acquired the company for."
Mary Campbell of corporate finance boutique Blas believes lack of cultural fit is the most common reason for deals turning sour. "Classically, what happens is that you end up with people in organisations where they would never have applied for a job," she says. "They've been running their own business for years and would never look at a job advert and say, 'That's the job for me.' Yet when they or the management team go on to sell their business, they end up in an employee relationship that they hadn't expected or hadn't thought through. They may be very entrepreneurial people, but if it's a big company there may not be a great deal of demand for flair. Right up front you've got to think about who's going to thrive in that environment and who's not."
Campbell's approach is to get her clients to write their ideal job description right at the start of the process so that, for example, the management team being acquired knows exactly what they'll be doing during any earn-out period.
Cultural incompatibility is consistently rated as the most significant barrier to successful integration. Yet organisation and culture are often at the bottom of the list during the planning and due diligence stage, when gathering information on financial and strategic development tend to take priority.
In a survey of more than 100 corporate deal-makers and 20 private equity houses earlier this year entitled The Morning After, big four accountancy firm KPMG ranked cultural difference as the second-biggest deal-breaker, but found 80 per cent of companies were ill-prepared to handle this. When asked what they would do again, respondents said they would spend more time on cultural assessment as part of their top three actions.
Michael Polson, head of corporate at blue-chip law firm Dundas and Wilson, suggests management teams need to keep reminding themselves why they're doing the deal in the first place and what they want to get out of it.
"People often lose sight either before or after completion of why they were doing the deal in the first place and what the key drivers were," he says. "Sometimes you don't have continuity between the decision-makers at a strategic level, the project team doing the deal and the change management or integration team putting it in place. Unless you join these three bits up there's the risk that you lose focus and lose critical reasoning. Once you're into the deal process, the deal can become self-fulfilling and it's important to have the ability in there somewhere to step back and test again why it was you entered into this and whether that's still valid."
Polson believes issues related to pensions, particularly pension fund deficits, and specialist areas such as environmental management are growing in status as potential deal-breakers. "Pensions are causing a lot of deals to happen or not happen," he says. "Although there can be a bit of argument over terms of agreement or other aspects of the corporate part of the deal, it's these specialist areas that are becoming increasingly important. It's better trying to bottom these things out right up front before you get into the whole deal fever and deal process."
KPMG points out that, as the M&A market becomes more competitive, the margin for error gets slimmer, meaning deal makers are under more pressure than ever to extract maximum value from the marriage. "Winning the deal is only half the job," says John Kelly, head of KPMG's Integration Advisory practice. "Waking up on the morning after clinching the deal, the chief executive is going to be worried about how to make the deal value stick and the finance director will want early assurance on exactly what he has bought. The deal celebration party should wait until the benefits that motivated their actions are delivered."
The full article contains 1016 words and appears in The Scotsman newspaper.
