Yesterday the WSJ published a great article by Dr. Sydney Finkelstein professor at Tuck School of Business at Dartmouth College explaining four common merger problems.
I’d like to summarize the key points made and add to that discussion with my own experience as an ex-investment banker, C-suite executive within public companies and our work at The Portfolio Partnership, covering the last 30 years. My points are in italics.
Problem #1 -Previous experience gives you a leg up
- Each merger is different. Even within an industry, each company is different. Experience can cause execs to over-generalize from small sample sizes. Basically the merger team become complacent and over confident.
- Solution proposed by Dr. Finkelstein – Rotate in new team members to create fresh thinking. Review what went wrong and what went right. Learn from your experiences.
I would add the following points. First, the research done by Heimeriks, Gates, and Maurizo as highlighted in my book The Acquirer’s Playbook, suggests post-mortems are essential to improve your M&A capability. As the research states, maintaining a body of M&A knowledge, organizing it into lessons and making it easily accessible are key to developing and leveraging a company’s M&A capability. Without such a framework, companies can slip into applying general types of strategies developed in prior acquisitions that are inappropriate to the one in hand.
Secondly, it might not be practical in a small public company to switch out the team and bring new faces to the table. Instead I recommend building an integration mindset right up front. Not on page 25 but on page 2, just after the strategy and types of targets have been decided. Bringing the potential post-acquisition integration fit to the table early, ensures only priority targets are reviewed. Remember you only want to buy what you want to buy, not what’s up for sale.
Problem #2 – The high price of going with the crowd
- The relationship between high stock prices and high M&A activity is undeniable. High stock prices equates to money burning a hole in your pocket. However target prices are also higher. Add to this the actions of your competitor peer group to buy targets, and then momentum kicks in.
- Solution, stick to analytics and logic. How will we create value? How will we manage the downside?
I would add, this speaks to the need for a rational process map, anchored in the strategy of the business. Just like recruitment, you should always be on the acquisition trail. You should know which companies in any given market are attractive and fit your strategic goals. And by the way it’s not the price that will kill you (although I’ve never overpaid), it’s the post acquisition integration failure. Look at the graph in the article. Barely a third of Fortune 1000 companies claimed operational M&A success!
Problem #3 – Not all synergies are created equal
- Basically cost synergies are much easier to pull off than revenue enhancements e.g cross-selling after the deal. But also all synergies are not free. There is always a cost to achieve them.
- Solution suggested by Dr.Finkelstein involves potentially not counting revenue synergies in pricing the deal and being cautious on building in the true net benefit of cost synergies.
These are all fair points. But here is the problem. If you don’t build into the pricing some of the benefit that you bring to the party, there is a great danger the sellers aspiration on price (sellers aspire to price, buyers perceive value) will never come close to your perception of value as the acquirer. Now let’s be clear, unless you can convince me that someone is accountable for why, when and how synergies will be achieved, then you are day dreaming. Discount for risk but don’t miss opportunities by ignoring why the deal makes great strategic sense.
Problem #4 – Integration mistakes can be killers
- Never wait for the deal to close before devising a detailed integration plan.
- Study your target long before you make a move.
- Don’t miss the first payroll, make sure integration plans are ready to go on day 1.
- Stay on top of talent and make sure people are clear on roles.
- Consider appointing an integration leader to drive through the integration and to support the CEO of the acquired company.
I feel quite strongly about this point. It is totally reckless for an acquirer not to have an integration plan prior to contacting the target. That’s right prior. An acquirer should have a good feel of how the target will fit into their group. When I sit on the target side (30% of the time), I ask that question in the first meeting. As in, “So given your interest in Target Inc, perhaps you could explain to Frank (owner), how this would work in practice from an operational point of view”. Integration needs to dominate all aspects of M&A. Use the potential integration fit to inform your short-listing of targets, use post-acquisition integration strategies to inform deal structures, use your integration plan to inform the due diligence checklist and of course post-acquisition integration actions are the key to the success of the deal (not price according to the research by Cass Business School).
I’m a big fan of an accountable integration manager. What gets measured gets done!
Good luck with your acquisitions.
Related Post: M&A – The Horrible Habits of Most Acquirers
Our simple 100 page playbook is available on Amazon – The Acquirer’s Playbook.
The Portfolio Partnership continues to offer practical operational support to leaders who wish to scale their businesses both organically and by acquisition. We offer complimentary, strictly confidential, “surgery hours” most weeks to help you create a remarkable business. Ian@TPPBoston.com or call 978 395 1155.