The total value of M&A deals in 2019 amounted to $1.58 trillion. Despite this, the M&A strategies of many companies are seemingly lacking effective due diligence and integration plans.
Roger L. Martin, former dean of the Rotman School of Management at the University of Toronto, wrote a much-cited HBR article on the topic of M&A in which he stated:
“M&A is a mug’s game: Typically 70%–90% of acquisitions are abysmal failures.”
His reasoning is fairly straightforward: Companies that focus on what they stand to gain in an acquisition are less likely to succeed than those who also focus on what they have to give it.
With so many companies in “take” mode bidding on a company, it drives the price of acquisition up to the point where profitability becomes nigh impossible. On the flip side, if you can provide an acquired company with a unique enhancement that will make the acquired product or service more competitive, they are more likely to thrive and you will reap those rewards.
There are many high profile examples of M&A process gone wrong due to the take mentality such as Microsoft’s purchase of Nokia, Google’s purchase of Motorola, HP’s purchase of Autonomy, News Corp.’s purchase of MySpace. Martin breaks down the results of these unfortunate purchases:
“In 2015 Microsoft wrote off 96% of the value of the handset business it had acquired from Nokia for $7.9 billion the previous year. Meanwhile, Google has unloaded for $2.9 billion the handset business it bought from Motorola for $12.5 billion in 2012; HP has written down $8.8 billion of its $11.1 billion Autonomy acquisition; and in 2011 News Corporation sold MySpace for a mere $35 million after acquiring it for $580 million just six years earlier.”
All these businesses bet on those acquisitions being able to help further their goals to enter new markets but didn’t properly plan for how to successfully integrate and utilize what made them unique. These high-profile examples highlight the need for companies to properly assess all the opportunities that enter the M&A pipeline consideration phase to ensure a good fit.
The other major factor cited by Deloitte as the cause of 30% of failed M&As, and Bain and Company’s number one cause of M&A failure, is failed cultural integration. This is a symptom of the take mentality in which little to no emphasis is placed on successful integration planning.
There are many financial and HR lessons to take away from these trends, which we’ve compiled during our M&A and corporate development consulting work with businesses across the US.
Here are 8 pitfalls to avoid when managing a merger and acquisition pipeline.
1. Undefined or vague acquisition strategy
What goes into the pipeline comes back out, so you need to make sure you’re investing a lot of due diligence into the companies you’re considering. It starts with: what are your overall business goals, and how would an acquisition help you accomplish those aims? If you’re considering an M&A on gut feel alone, you’re far more likely to fall into a pitfall of overinvesting and underperforming.
A successful M&A pipeline requires a replicable due diligence process so that potential acquisition targets can be evaluated in line with your overall strategy.
2. Too many cooks in managing the pipeline
Who owns your pipeline? If there’s no clear management structure in place, you’re far more likely to end up with a slew of unsuitable targets. Naturally, there are many stakeholders who need (or want) to be involved with a pipeline, but the key is consistency. That way, the targets entering the pipeline will consistently be appraised using that all-important replicable due diligence process.
It is important that this team meet regularly to manage multiple deals in the pipeline, and that the pipeline management structure is clear to everyone in the company.
3. Inconsistent reporting/lack of formal M&A pipeline stages
Stage gates are set periods of the deal flow in which you follow a set of evaluation processes. The stages that encompass the research and assessment portion of the pipeline might include:
- Prospect Stage: At a high-level determine the target’s potential to achieve your company objectives through acquisition.
- Initial Analysis Stage: A basic business case and high-level integration plan that considers the target’s operations, synergies with your own company, and any known integration requirements.
- Due Diligence Stage: A more formal audit of the target’s key finances, competitive market analysis, and quantitative factors including seeking references and assessing company mission, vision, and culture.
Beyond that, other stages would include the transaction itself, along with the integration of the two businesses.
It is key that every stage in the deal process leverages relevant reports and presentations so that stakeholders can properly analyze its progress. Some of the key metrics that should be included are:
A highlight movement since the last update
A high-level overview of the deal stages
A drill-down on issues related to individual deals
Many companies make use of M&A pipeline management software for reporting as it allows you to easily navigate between various deals and generate reports.
4. Attempting to erase the acquired company cultures
As a new acquisition is integrating with your business, it is important that you respect the existing culture. Culture is deeply ingrained in employees who have been with a company for a long time, and trying to rub it out can result in a shock to the system. Integration needs to be handled gingerly, with an understanding that there will always be a trace of that culture that helped the acquired company rise to success.
5. Not managing the anxiety of senior leadership
Fear and anxiety are contagious and will trickle down if the senior leadership in an acquired business fear for their jobs or influence. Without proper guarantees, senior leadership can soon begin to show signs of worry or straight out disinterest in their role, which can infect the overall culture of the organization.
6. Rushing integration decisions
Part of easing into an integration also means not overwhelming people with too many integration decisions too fast. You need to make sure you are taking the time to consult with key stakeholders to fully discuss the ramifications of each decision (people and processes) and develop a roadmap that allows for proper implementation.
7. Lack of two-way communication with employees
Sometimes leadership will continually repeat the same talking points about why the merger is going great, without actually addressing new concerns that have arisen as a result. It is important that stakeholders in both organizations host regular roundtable discussions where they keep employees informed of the latest developments, and create a safe space for employees to voice concerns and get questions answered.
8. Claiming success prematurely
The M&A process is long, often stretching out over years, and can be unpredictable and uncomfortable. Claiming a successful integration after a few months is optimistic at best, and effectively halts any effort to properly integrate the two companies. Having an integration and risk management plan in place ahead of integration is key so you are proactive in ensuring the integration will be successful.
Looking For Helping Managing Your M&A Pipeline or Developing Strategy?
Our leadership team has extensive knowledge of several industries’ financial considerations and has supported more than 800 organizations—some on a short-term basis and others over many years—across a range of technology-related industries. Our consultants can provide you with all the strategic financial oversight and direction you need for a stable financial future so you can concentrate on integrating a successful portfolio of companies that generate a lucrative ROI.
Contact us for a free consultation, and we’ll outline how our services can help your business reach the next plateau of success.