Disappointed with your company’s earnings performance since your last acquisition? Are you worried that the next acquisition or merger will have a similar effect? You’re not alone! Study after study has shown that mergers and acquisitions are risky business. Despite the fact that many M&A advisers charge substantial fees each year, nearly all major reviews of companies that complete M&A transactions show that the majority of these transactions do not deliver promised financial returns. Like any other investment, the greatest risks generate the greatest results, whether good or bad. One way to improve your odds is to study the methods of the most successful M&A companies.
As an industry executive, I have faced M&A challenges many times throughout my career. I also recently interviewed numerous C-level executives from some of the world’s largest and most successful companies in various industries on this topic. I also conducted an Internet-based survey of senior managers with extensive M&A experience. Seven winning characteristics emerged among the few truly successful M&A companies:
Trait #1: Successful companies follow a proven path of acquisitions and general mergers.First, they do significant strategic planning. This practice allows one to identify acquisition targets that are excellent strategic fits for the corporation, rather than mere opportunities for growth. Second, they do extensive due diligence work. Their due diligence differs from underperformers because they plumb the depths of the business processes and information systems capabilities and capabilities at the acquisition target to ensure proper valuation and strategic fit. Third, they negotiate the terms and conditions of the transaction that prevent overpayment. They accomplish this by making sure management doesn’t fall for the target company. Fourth, they plan for post-merger or post-acquisition integration. That plan includes a comprehensive communications plan, alignment of goals and performance measures, and integration of processes and systems. Fifth and last, once the deal is done, the most successful companies relentlessly execute the planned business assimilation and integration activity. Mergers and acquisitions require detailed planning, rigorous management, and aggressive execution to be successful.
Trait #2: Successful companies use initiatives or projects to perform integration and fundamental project management techniques to manage each initiative.Every company, including yours, has a unique combination of strengths and weaknesses and market-oriented strategies. The combination of these factors dictates what specific initiatives your company must use to assimilate the new business unit. In some cases, the most pressing needs will revolve around streamlining personnel, facilities, and capital assets. In other cases, the most important thing will be to achieve uniformity in information systems to allow for cross-selling and rebranding. Whatever the combination, your company must lead these initiatives effectively through a formal program management structure. Formally structured and carefully managed initiatives are a strong feature of the most successful M&A firms. Formal program management requires elements such as a detailed project plan, discrete milestones, defined performance measures, designated responsibilities, risk management and change management processes, etc. Initiative-based integration rooted in a strong market-oriented strategy will improve the odds of successful M&A performance.
Trait #3: Successful companies pay significant attention to the mix of cultures, organizations, and HR issues such as management retention.If your company has been through an acquisition or merger, you already know that the different cultures of the companies involved always make the situation challenging. In hostile takeovers, it can be devastating. Employees often find that behaviors previously rewarded by their company can sometimes result in demotion or termination. Performance criteria change, as do the people who measure performance. When this happens, the acquired company’s management, as well as many of the employees, become threatened, defensive, and resentful. The loss of key leadership at critical transition periods can blow the deal, and even when the entire deal remains intact, the resulting organizational instability often consumes so much energy and time from the remaining managers that it takes the new company longer to get the deal done. expected financial return. goals. Some M&A advisers report that as many as 72 percent of key managers are headed for the door within three years of an acquisition or merger. Almost all successful M&A companies incorporate a formal culture management structure into their integration planning. Some even implement specific performance measures to monitor the success of the blending of cultures following their formal public announcement of the merger or acquisition. The details of human resources, from communication to compensation, are decisive elements for the success of mergers and acquisitions.
Trait #4: Successful companies make sure acquisition is an integral part of the overall business strategy. Have some of your company’s acquisitions turned out not to fit well with the rest of the business? Responses to my recent survey of senior managers with extensive involvement in mergers and acquisitions indicated that selecting acquisitions that are a good strategic fit was the third most critical issue for M&A success. The strategic adjustment implies a close alignment of the markets served, the proprietary technologies, the Research and Development direction, the financial position (income, market share) among the companies involved. It also means that there is a real and quantifiable set of opportunities related to synergy between the two companies. The best in M&A maintain a strong strategic plan with market-oriented strategies, internal operating strategies, specific performance targets, and performance metrics linked from top to bottom across the company. They incorporate the alignment of those acquisition goal elements into the integration planning for their transactions, and activate them shortly after consummating the deal. Effective planning is a fundamental element of business success. In M&A situations, it should also be the basis for every major decision.
Trait #5: Successful companies have dedicated full-time resources and strong lines of executive responsibility for acquisition success.Does your company assign full-time teams to procurement activities, or does it rely on the part-time efforts of people who also have day jobs? The pressures of the daily job responsibilities of key staff members make it incredibly difficult for them to focus on a part-time assignment related to M&A activity. Early assignment of qualified full-time resources to these tasks as early as possible in the due diligence phase of the acquisition or merger process is often critical to success. Arguably one of the best acquirers in the business (certainly one of the most prolific), General Electric recognized that management experience made a big difference in the success of its efforts and, as a result, decided a few years ago to designate the management of integration as a full-time position in your company. Studies by GE and others show that companies that assign full-time teams have better M&A records.
Trait #6: Successful companies have discrete goals for integration activities and short-term financial goals that are quantitative.In your company’s most recent acquisition, were the specific performance targets published and widely publicized? While goals like “grow in a year” are quantitative enough, they need to be broken down into a set of initiatives and complementary performance measures to be useful. The best companies understand not only what the high-level objectives are in quantitative terms, but also what specific actions will be taken, by whom, and when, to achieve the desired result. Hence the detailed project plans around a defined set of initiatives outlined in Feature #2, above. Initiatives may relate to revenue growth, market share growth, or reduction in operating costs. They may involve a wide variety of actions, such as establishing strategic marketing or distribution partnerships, cross-selling or rebranding efforts, facility rationalization, new research and development initiatives, organizational restructuring, and Information system updates. Those companies that are most successful march through discrete initiatives toward quantitative targets. Achieving those discrete targets allows the newly merged company to achieve specific financial goals at designated times. The most successful M&A companies are those that most quietly define what success means.
Trait #7: Successful companies move assertively to have the newly acquired business entity incorporated into common business processes and information systems early on.One of the C-level executives I interviewed (this was a financial services executive) in preparing my book said, “We have three main priorities in these transactions: gain market share, grow assets and reduce operating costs in proportion to the assets we manage. Getting acquired entities to become common processes and systems is strategically critical for us to achieve that third objective. But beyond our financial performance, it impacts our employee morale, our ability to present a consistent face to our customers, and our efficiency in training employees. When a company like ours is systematic in its approach, it can incorporate new acquisitions into common processes and systems in six to nine months.”Most of the leading companies in this area, including companies like GE and Cisco, exhibit this feature. Unity and consistency produce and exhibit strength to customers and shareholders. The strength of unity and consistency is never more important than in the immediate aftermath of a merger or acquisition.
