Introduction
Mergers and acquisitions are a prominent phenomenon in business. Provides additional opportunities for growth and earnings. It is also often used by entrepreneurs as an exit strategy and is crucial in determining your ultimate success and financial independence. Unfortunately, things don’t always go smoothly when executing M&A, and sometimes it’s a complete failure.
Rationale behind mergers and acquisitions
In general, a company sees a merger and acquisition as an opportunity to improve its competitive advantage and financial well-being. The logic behind mergers and acquisitions includes the following:
- Realization of shareholder value. The management of companies is measured in the improvement of value for shareholders. Entrepreneurs, on the other hand, want to make a substantial material profit after they have successfully built their businesses.
- Expansion of markets. The growth potential of companies is enhanced through additional market niches and a broader geographic distribution.
- Greater efficiencies. Economies of scale can be obtained from an increase in the size of operations and through better control of operations (for example, by controlling a larger portion of the supply chain).
- Access to resources. Competitive advantage is enhanced through better access to finance, raw materials, skills, and intellectual capital.
- Manage risks. Risks can be reduced by diversifying the business and having supply chain options (for example, manufacturing and purchasing in different countries).
- potential listing. The public offering of a company’s shares is enhanced by an increase in turnover and profitability.
- Political necessity. Countries have different legal requirements (eg in South Africa there are certain Black Economic Empowerment (BEE) regulations that companies must comply with).
- Speculative possibilities. Companies often buy another company only to sell it in the near future or to dismantle the company and sell parts of it.
- Additional products, services and facilities. Proprietary products and additional warehousing and distribution channels improve a company’s service levels and offerings.
Why do many mergers and acquisitions fail?
Mergers and acquisitions fail for various reasons. The failure may occur before the physical M&A takes place, during the implementation process, or during the operation of the newly merged entity. Potential failures are due to many factors, including:
- Failure of the negotiations. No agreement is reached between the parties due to factors such as different cultures, expectations and risk profiles.
- Legal matters. The competition laws of various countries often prohibit transactions that are considered anti-competitive.
- Implementation problems. Systems (especially IT) are often not very compatible and difficult to merge.
- financial failure. The expected turnover and return on investment have not been achieved and/or the liquidity and solvency of the company are at risk.
- Failure of the people Cultural differences, staff hostility, and resignations can cause serious problems.
- The planned strategic objectives are not achieved. This includes achieving synergies such as increased efficiencies and market penetration.
- Failure in risk management. The risks (for example, legal, business, financial, and operational) of the merged entity are unacceptably high.
Success criteria for a successful merger and acquisition
A successful M&A can be measured based on two main factors:
- Increased value for the shareholder. A sustainable increase in the value of the shares must be achieved over time.
- Materialized synergies. The achievement of the expected synergies such as more efficient operations, greater profitability and an increase in market share.
Improve the odds of a successful merger and acquisition
Companies can increase their chances of successful M&A by planning properly, working within a pre-defined methodology, and managing the entire M&A as a project. Specific details that need to be properly managed include the following:
- Strategy. Mergers and acquisitions are part of the company’s broader strategy and must be thought through and planned carefully.
- Due diligence. Risks (for example, legal, commercial, financial and operational) are analyzed in a due diligence process. This process must be carefully planned and executed.
- Synergies. The anticipated synergies must be detailed and attention must be paid to their achievement.
- costs. Expenses can easily skyrocket during the merger and acquisition process. Expenses must be budgeted and then monitored.
- Expectations. The false expectations of various groups often lead to disappointment. All expectations must be discussed and clarified with all relevant parties.
- Transparency. Proper communication and openness (where appropriate) with employees, customers, vendors, and other business partners is encouraged. Rumors (very often unsubstantiated) that are not quickly nipped in the bud can do a lot of damage to morale and roleplayers can look for alternative opportunities.
- systems. The merger of systems (especially IT) must be carefully planned and executed or it may bring down the new merged entity.
- Keep interested. Senior management commitment is essential. Your participation (when necessary) can substantially improve the chances of success.
- Watch the ball. The merger and acquisition is a means to an end. Companies often don’t see it in perspective and then other critical aspects of the business are neglected.
- Change management. The success of any M&A often hinges on the successful blending of two different business cultures. On top of this, people often have random resistance and experience some sort of trauma in the process. Professional change management can make the difference between a successful M&A or its failure.
- Trusted advisors. Mergers and acquisitions are often a unique experience for many companies. In this situation, as well as when companies do not have sufficient and qualified personnel to handle all aspects of a merger and acquisition, they must hire competent external advisors. These advisors may include lawyers, auditors, business consultants, and change management facilitators.
Summary A merger and acquisition is typically one of the most important strategies a company will start with. Unfortunately, many M&As are flops (or at least in some respect). One of the best ways to increase the chances of success is to properly plan the M&A and view it as a project and manage it that way. An M&A generally has all the important characteristics of a project: it is multidisciplinary, it has specific objectives, it is unique, and it is time and budget constrained.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.