Technische Universität München (TUM) found in a study released at the end of 2010 that five out of six M&A transactions fail. One-third of the examined company acquisitions or sales were not based on a deliberate, strategic decision of the buyer or seller. Instead, they were triggered by external factors, often by an offer. In addition, due diligence was often undervalued; most of the examined companies did not want to spend money on this issue. Post-merger integration was another field where mistakes were made. While this issue was regarded as important, it remained a matter of “trial and error”; there were no attempts to arrive at methodical or appropriate solutions of upcoming problems.
Strategy and post-merger integration are key
These results largely reflect my experience from a number of M&A transactions. From my vantage point, two conditions are key for a successful M&A transaction. First, an adequate strategic preparation of the transaction is essential. Before considering an acquisition (or a sale), managers need to define their company’s strategy. Otherwise, there is a risk that short-term goals replace long-term strategic thinking. Second, integration efforts need to start ahead of the negotations and not after the signing of the contract. Now that we have found strategy and post-merger integration to be the two key aspects for success, another difficulty arises: operational departments lack the necessary strategic tools and strategic departments are not close enough to products, clients and the market. Moreover, banks and investment companies indiscriminately put potential acquisition candidates on the shelves. Once managers see this alluring display, they start thinking about mergers and acquisitions.
Identify open spots
Managers who start without a reliable strategic compass run the risk of focusing only on what is on offer. What is necessary, however, is to think about strategic necessities first. Companies need to define their core business before trying to strengthen it by acquisitions. Their managers should think about the following questions: What is our core competency? What is our USP (unique selling proposition) for customers? And managers should try to see things from their customers’ vantage point. What are customers’ real needs? Which of them does our company already fulfil? And which not? These questions help the management to identify “open spots” in terms of markets (regions), products (technology) and customer procedures (usefulness). Only then can they start to analyse potential target companies.
Post-merger integration to start early
Once the first names are on the list, managers should start to think about post-merger integration. For this phase, it is useful to appoint an integration manager who reports to the steering committee and is involved in setting the company’s future agenda (see also “Managing your integration manager”, McKinsey Quarterly, 2003, Special Edition: The value in organization, p. 81-88). Integration managers should pay particular attention to cultural differences, which have often been the reason why a merger failed. Managers should ask the question of why they would like to acquire a company whose culture does not mesh with their own. If they only aim to acquire technological know-how, a transaction may work despite cultural differences. But if they hope to obtain access to new markets or know-how about customer procedures, cultural differences may doom the merger.
In case of cross-border transactions, cultural barriers often stem from historical sympathy or antipathy between the countries involved. Such historical relationships (for example between Canada and the US, the US and Mexico or France and England) may support or weigh on M&A transactions. Cultural differences may also surface if an M&A procedure leads to a clash between different corporate structures, for example between an SME and a group. In many cases language barriers play a role as well. However, these difficulties are usually easier to overcome than cultural gaps. Still, even if all those involved speak English, there may be misunderstandings. For example, Europeans often struggle to understand the Indian version of English.
“People management” key for success
Overall, managing the “human side of change” is key to realize the maximum value added of an M&A deal. “People problems” are always an important reason why a transaction fails. It is therefore particularly important to ensure that most (if not all) key employees are still on board by the end of the integration phase (see also “The people problem in mergers”, McKinsey Quarterly, 2000, no. 4, p. 27 – 37).
Note: For practical examples of post-merger integration by Guido Beyss see: Gerds, Johannes/Schewe, Gerhard: Post Merger Integration. Unternehmenserfolg durch Integration Excellence, Berlin/Heidelberg/New York: Springer 2006.