Anecdotal evidence from the investment banking industry suggests that 70% of all mergers and acquisitions (M&A) fail and destroy value, sometimes spectacularly.
Mergers and acquisitions don’t always go wrong. The results depend upon the reasons for deals being struck, the personalities involved in launching them and their managerial competence. Or total lack thereof.
But M&A will remain a catalyst for business transformation worldwide, say the authors of Why Deals Fail and How To Rescue Them, published by The Economist in 2016.
The prospect of exciting corporate expansion into new products, new geographic markets and/or new expertise can overcome common sense.
For cast-iron proof, look no further than the Royal Bank of Scotland (RBS). The decision of its senior management to proceed with the purchase of ABN Amro in 2007, when the financial industry was hitting a rough patch, looked questionable at the time.
With the benefit of hindsight, knowing that the world stood on the brink of the worst decade since the great depression, it looks like insanity. After hubris, CEO Fred Goodwin and colleagues at the top table rapidly discovered, almost inevitably comes nemesis.
In 2012, the Queen stripped Goodwin of his knighthood and in 2017 he was still being taken to court over the near-collapse of RBS a decade earlier.
Among other high-profile disasters, Microsoft paid US$7.9bn for the handset business of Finland-based Nokia in April 2014. Just 15 months later the new CEO announced a US$7.6bn writedown of Nokia's assets and 7,800 staff found themselves out of a job.
Hewlett-Packard, a company with a dreadful record of making bad buys, paid US$11bn for the UK's Autonomy in October 2011. In November 2012, it faced writedowns of US$8.8bn.
For long-term observers, this latter case contained echoes of the ruinous acquisition of computer leasing company Atlantic Computers by British & Commonwealth in 1988, albeit on a larger scale. B&C collapsed in 1990.
Demonstrating the inadvisability of over-relying on advisers, in April 1994 B&C administrators issued a writ claiming £600m for alleged negligence by BZW and strategy consultancy Outram Cullinan & Co, now part of Coopers & Lybrand. They also won £172m from the bankers Samuel Montagu over another B&C deal.
Glass always half-full
The glass of the M&A specialist is, it seems, always half-full, despite the experience accumulated through many deals that were ill-advised or just poorly executed.
For ambitious chief executive officers, the temptation of launching into M&A deals as a short cut to business growth can prove irresistible.
But M&A, when properly done, drives corporate and economic growth, creating jobs and fostering innovations, argue the authors of Why Deals Fail… The inverse is also true, they add. Badly done, M&A can damage business and by extension the economy, and result in widespread job losses.
The solution is simple, they say: get the deal strategy and acquisition right. They then set out to show readers how to do just that, walking would-be acquirers through the positives they need to focus on pre-deal, deal and post-deal stages including:
- Do have a clearly defined M&A strategy
- Do your homework
- Do your due diligence
- Do stay flexible
- Do be patient
- Avoid overpaying
They also identify the three biggest mistakes in deal-making: planning issues, failure to communicate and a lack of understanding of the corporate culture of the acquiree company.
- Don't make a decision based on emotion or hubris
- Don't launch an approach without being sure how the target will react
- Don't expect to delegate negotiations to somebody else
- Don't forget the costs involved
- Don't get fixated on a single target
Don't forget that M&A valuation is an art, not a science
Statistics tell a story
The statistics on the sheer scale of M&A activity are mind-boggling. The Pitch Book M&A Report 2016 shows that over the past five years, the corporate world has experienced a financial and strategic-buyer profile that has pressed forward with deals unaffected by global political, economic and market risks.
More than 100,000 M&A deals have been completed over that timeframe, calculates Pitch Book. And despite transactions only becoming increasingly expensive, enough deals were completed last year to place 2016’s deal value at the highest level ever seen ($2.1 trillion+).
That figure becomes even more pronounced given that it was spread across considerably fewer deals than were seen in the two years preceding 2016.
Unused cash put to use
It cites as one major reason the fact that corporates were sitting on piles of unused cash that depressed return on invested capital figures. Thus 2016 saw strategic buyers – as opposed to asset strippers – put money to work in some of the largest deals ever seen.
In the face of increased antitrust concerns and a slew of potential policy impacts from a new administration, executives continued to buy big.
The aborted unsolicited US$143bn move by Kraft Heinz to buy Unilever would have continued that trend but for the second thoughts on the buying side.
The single largest M&A transaction to close in 2016 was Anheuser-Busch InBev’s £79bn acquisition of SABMiller.
Pitch Book says this acquisition was mostly a move to gain market share in the developing economies of Africa and South America.
It exemplifies the increasingly global nature of the M&A market (particularly in consumer products), despite the increasingly populist rhetoric of many western countries, it adds.
Lessons from history
Historic merger and acquisition analysis suggest there are a number of critical success factors that underpin any successful integration.
The comprehensive book on the joint venture between the Orange and T-Mobile mobile telecommunications providers that created EE is as good a guide as any to what makes such a transaction work.
Authors Olaf Swantee and Stuart Jackson identify a number of such factors to make a success of a high profile transaction.
Swantee led the team that launched EE and Jackson led the EE communications team before running the office of the chief executive.
“Ultimately we took two businesses worth a combined £8.5bn, created a new one, and sold it to BT for over £12.5bn five years later,” says Olaf Swantee in the preface to 4G The mobile revolution (published by KoganPage).
Joint venture failures
The percentage of joint ventures that fail is generally accepted by industry participants to far outweigh those that succeed.
The combined credentials of Messrs Swantee and Jackson in making EE a success strongly suggest they deserve a hearing as they run through their helpful M&A list.
Six keys to success
1. Business as usual
The majority of management in each organisation should focus on business-as-usual activities in order to minimise disruption to commercial momentum and to protect against disruptive activity by key competitors.
2. Transactional objectives
Cross-company understanding and expertise should be leveraged jointly to develop clear transactional objectives that underpin and prioritise all integration activity.
Suitable individuals should be hand-picked from both organisations to lead the integration activities and implement a robust governance process that does not limit the speed of execution or adaptability.
3. Show respect
In order to manage the transition, the management of the acquirer needs to be respectful of the key leaders in the acquired entity when considering integration planning and decision-making. Not doing so will disempower the existing management team, damage business-as-usual performance and destabilise key individuals across the business.
4. Integrate early
Integration activity should always start as soon as possible to maximise the time available, respond to competitor activity and develop a robust day-one action plan that can be implemented as soon as the transaction is complete.
5. Focus on corporate goals
An organisational and management team structure should be designed to support the transaction rationale and corporate vision. It is critical to retain the core capabilities of the company that’s been bought and to retain exceptional agility and execution focus.
6. Retain staff
Policies should be implemented to attract and retain employees of both organisations by keeping the