Preparing for a happy marriage
Failing to prepare really is preparing to fail when it comes to mergers and acquisitions
Fiat and Chrysler are now enjoying what appears to be a very happy marriage indeed. Photograph: iStock
Many of the world’s leading companies are actually the products of a series of mergers with and acquisitions of other household names over the years. Compaq Computers and Digital Equipment Corporation are contained within HP; Mondelex International includes Cadbury’s and Kraft Foods and many others; and GlaxoSmithKline is made up of any number of formerly well-known pharma firms.
These are all examples of happy and successful unions. But the corporate history books are littered with cautionary tales of unhappy marriages which not only failed to deliver the hoped-for outcome where the whole would be greater than the sum of the parts but actually threatened the very viability of the original businesses.
And there is no magic formula for success. Businesses which would appear to be natural partners can turn out to be the opposite. The Daimler-Chrysler merger of 1998 was meant to build a global giant capable of taking on all comer across all segments of the auto market. Instead, it turned into a nightmare, with Chrysler being sold off for a comparative song nine years later to private equity firm Cerberus.
The ensuing blame game pointed fingers in both directions, with claims that American and European car-making cultures could simply never mix. Hindsight seems to have proved that theory wrong, with Fiat and Chrysler now enjoying what appears to be a very happy marriage indeed.
Preparation is key to success, according to accounting firm BDO’s corporate finance partner Katharine Byrne. She says the reasons deals fail at the early stages include buyers getting cold feet as a result of problems uncovered during due diligence and other factors. “The way around that is by being transparent,” she says. “If there are issues, let the buyer know as soon as possible.”
One way to do that is through what is known as vendor due diligence. This involves a company getting a due diligence exercise carried out by an independent adviser before going to market. “From an owner perspective, this gives them full control of the process and flags up potential problems well in advance. It can accelerate the process and give owners more options in terms of the type of buyers they can look at.”
From the buyer perspective, Shane Foyle, associate director at AIB Corporate Finance, advises companies to undertake a target screening process. “Companies considering acquisitions should create a formal process,” he says. “This involves creating high-level profiles for any potential acquisition – including capability, customer base, service offering, geography, size, and so on. They then need to consider the rationale for any acquisition, both strategic and financial. Would the potential acquisition allow the company to accelerate its strategy and increase its offering to customers, and contribute to long-term growth and profitability? Going through this process will help to ensure M&A activities remain closely linked to overall strategy and avoid knee-jerk acquisitions.”
Management’s ability to integrate two organisations into an effective and streamlined operation is where transactions ultimately succeed – or fail – to deliver the much-anticipated synergies
Detailed due diligence is also critical. “Many buyers place the majority of their focus on financial, tax and legal due diligence,” says Foyle. “However, other streams of due diligence including commercial, customer, operational, IT, insurance, and environmental are just as important. Conducting thorough due diligence is critical to any successful acquisition. Without complete and intimate knowledge of the target company, it is impossible to make the well-informed decisions.”
Foyle also points to the importance of deal-structuring. “A buyer could negotiate an element of earn-out or deferred consideration in the purchase price. Deferred consideration can help eliminate some uncertainty for the buyer, as it is tied to future financial performance and can be used to keep vendors honest and with ‘skin in the game’. In most cases, the vendors will be required to stay working in the business during the earn-out period, which can aid the transition and integration process.”
The post-transaction process is also critical to success. “Many M&A transactions fail to realise the synergies that are often highlighted when a transaction is first announced,” says David Widger, partner and head of law firm A&L Goodbody’s corporate department. “After a company has executed the transaction, the bottom line comes down to successful integration. Management’s ability to integrate two organisations into an effective and streamlined operation is where transactions ultimately succeed – or fail – to deliver the much-anticipated synergies.”
A successful integration begins with a plan that will enable those synergies to start taking effect on day one, he adds. “Defining an implementation programme prior to closing is a simple yet critical step that senior management should consider in order to maximise the probability of seeing synergies materialise. Absent this, progress can be lost in the day-to-day reality of the challenges that mergers can bring about. Many of the more prolific acquirers have developed significant in-house expertise to achieve this. For others, they ought to consider retaining the services of transaction services professionals who are increasingly focused on providing these types of services to reduce the risk of M&A transactions not achieving the success expected.”
This element of the process depends on the nature of the deal, according to Katharine Byrne.
“Post-transaction integration has to be part of the deal process,” she notes. “But there is a balance to be struck. If it is a private equity buyer, they are probably backing the existing management team and integration is not as important. The focus is on the growth opportunity and further bolt-on acquisition opportunities. If you are selling to such a buyer it’s important to be realistic about the company’s prospects; don’t over-promise or under-deliver.”
When it involves two companies coming together, she says the basic back-office integration can be achieved through good project management. Success in the other aspects is dependent on the identification of potential synergies at the due diligence stage and realism on both sides. “You have to try to manage both sides’ expectations.”
“A well-planned and managed integration process can help maximise the benefits of an acquisition post deal,” Foyle adds. “A buyer should start integration planning well before an acquisition completes. Buyers should use the due diligence process and advisers to understand issues, weaknesses and risks. They should engage with key people in the target to develop an approach to managing key integration risks and develop a detailed integration plan. From day one, post-completion, the buyer should implement the integration plan and process. A disciplined approach with clear actions, ownership and accountability will ensure the plan is implemented.”