Seven Characteristics of the Most Successful M&A Firms
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 advisors charge substantial fees each year, nearly every major review of companies completing M&A transactions shows that most of these transactions fail to deliver on the promised financial performance. 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 firms.
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 a web-based survey of senior managers with extensive M&A experience. Seven winning characteristics emerged among the few truly successful M&A firms:
Trait #1: Successful companies follow a proven path of broad acquisitions and mergers.First, they do significant strategic planning. This practice allows you 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 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 ensuring that management does not fall in love with 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 finally, once the deal is done, the most successful companies tirelessly 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 accomplish the integration and fundamental project management techniques to manage each of the initiatives.Every company, including yours, has a unique mix of strengths, weaknesses, and market-oriented strategies. The combination of these factors dictates which specific initiatives your company should use to assimilate the new business unit. In some cases, the most pressing needs will revolve around the rationalization of staff, facilities, and capital equipment. 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 characteristic 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, change management and risk management processes, etc. Initiative-based integration rooted in a strong go-to-market strategy will improve the odds of successful M&A performance.
Trait #3: Successful companies pay significant attention to the mix of cultures, organizations, and human resource 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 in critical transition periods can wreck the deal, and even when the entire deal remains intact, the resulting organizational instability often drains so much energy and time from the remaining managers that it costs the new company more time to achieve success. expected financial return. goals. Some M&A advisers report that as many as 72 percent of key managers are headed out the door within three years of an acquisition or merger. Almost all successful merger and merger companies incorporate a formal culture management structure into their integration planning. Some even implement specific performance measures to monitor the success of merging cultures following their formal public announcement of a 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 the acquisition is an integral part of the overall business strategy. Have any of your company’s acquisitions turned out not to be a good fit with the rest of the business? Responses to my recent survey of senior managers with extensive involvement in M&A indicated that selecting acquisitions that are a 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 (revenues, market share) among the companies involved. It also means that there is a real and measurable set of opportunities related to synergy between the two companies. The best at M&A maintain a strong strategic plan with go-to-market 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 target elements into the integration planning for their transactions, and activate them shortly after the deal is consummated. Effective planning is a critical element of business success. In merger and acquisition situations, it should also be the basis for every major decision.
Trait #5: Successful companies have committed full-time resources and strong lines of executive responsibility for the success of the acquisition.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 key staff members’ daily job responsibilities 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. General Electric, arguably one of the best acquirers in the business (certainly one of the most prolific) recognized that managerial experience made a big difference in the success of its efforts and, as a result, decided a few years ago to designate integration management 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 track 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 specific performance targets published and widely disclosed? While goals like “grow in a year” are quantitative enough, they need to be broken down into a set of complementary initiatives and 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 operating cost reduction. They can involve a wide variety of actions, such as establishing strategic partnerships for marketing or distribution, cross-selling or rebranding efforts, streamlining facilities, new research and development initiatives, organizational restructuring, and upgrades. of information systems. Those companies that are most successful march through discrete initiatives toward quantitative goals. Achieving those discrete goals allows the newly merged company to hit specific financial goals at designated times. The most successful M&A firms are those that more quietly define what success means.
Characteristic #7: Successful companies move assertively to have the newly acquired business entity incorporated into common business processes and information systems from the start.One of the C-level executives I interviewed (this was a financial services executive) in the preparation of 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 the acquired entities to become common processes and systems is strategically critical for us to achieve that third goal. But beyond our financial performance, it impacts our employee morale, our ability to present a consistent face to our customers, and our efficiency in employee training. 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 the immediate aftermath of a merger or acquisition.