Global mergers and acquisitions (M&As) hit a record high of more than $5 trillion last year, according to new data released by Reuters, as companies prioritised inorganic growth opportunities in response to the pandemic.
Low interest rates have made borrowing cash to buy rivals cheap, while sky-high stock prices have made raising funds much easier. Couple that with a robust post-Covid bounce-back in consumer demand – and, in turn, profits – and you can see why companies are keen to find new ways to outdo the competition.
American firms led the way last year with the value of US deals nearly doubling compared to 2020, while Europe and Asia Pacific saw rises of 47% and 37%, respectively. The value of global M&As is already 63% higher than 2020’s total and 16% higher than the previous record set in 2015. But, as we know, the success rate of M&A deals isn’t great, with the often quoted 60% failing to increase shareholder value, leaving the CEO and board criticised for not achieving a better deal outcome. So how can CEOs and board members be on the front foot and ensure they are valuing the business, negotiating the best deal for all shareholders, managing risks and ensuring a smooth post-merger integration?
There are four risk areas where CEOs and boards can potentially play a bigger role: alignment of the deal to the growth strategy, testing valuation, monitoring due diligence and ensuring a robust post-merger integration planning and execution process. This includes testing that the deals fit with the long-term strategic goals; closely monitoring key risks, cultural issues and capability to execute, and ensuring that the synergies are delivered during the integration process.
The deal is not consistent with the organisation’s growth strategy
The board must ensure that there is a robust company strategy that identifies organic and strategic growth opportunities as well as any key “gaps” such as talent, technology, innovation and market opportunities and potential targets aligned with the strategy. Be aware of potential management bias – as some members may have fallen in love with the deal which could cloud their judgement, and assess how mature the business is in acquiring companies and therefore what role the board needs to play. For large and complex deals or companies low in M&A maturity, it can often be worth establishing a board sub-committee to focus solely on the deal.
There is an over-optimistic valuation
CEOs and board members should assess if the valuation is consistent with industry norms and realistic for the market as well as whether a broader set of values is being considered such as the sustainability of the business. It’s worth spending the time to test how realistic the assumptions are that are being made about the market and its potential. What do projections assume e.g., about customer behaviour, ongoing loyalty and propensity to upsell and cross-sell products and or services? Where are the target’s products or services in their life cycle? How dependent is the deal’s success on retaining employees, customers, key vendors and suppliers? It’s worth getting an independent view on valuation and testing valuation assumptions over time in line with obtaining data through due diligence.
Due diligence is not broad enough
The board must ensure that any issues raised by the due diligence team are not overshadowed by pressures from management to get the deal done. They must also ensure that due diligence is broad beyond financial and legal issues to include people and culture, customer, ESG, operational, technology and IP. Two areas worth paying attention to are whether there are any potential cultural mismatches and how realistic the internal forecasts for growth and customer retention are. The more robust the due diligence process is, the higher the likelihood of M&A success.
Post-merger integration planning and execution fails to deliver the synergy case
As a board member, it’s crucial to understand how the deal creates shareholder value and delivers the growth and cost synergy case. The pace of delivering value should always be challenged as should ensuring the integration is seamless from all perspectives – beginning with an integration thesis to avoid falling into the trap of ‘this is how we did it last time’.
The best advice is to ‘follow the money’ and focus integration on the few critical issues that drive the value. My experience is that the cost synergies are typically well thought through – often delivered by bringing enabling function teams together, as well as procurement synergies and opportunities to reduce or renegotiate on the company’s property estate. Revenue synergies are often predicated on the up-sell and cross-sell of new or enhanced products and services to customers and so it’s important to safeguard your customer assets through integration.
To retain talent in both organisations, it’s important through integration to lead via open and transparent dialogue. Identifying and empowering strong and influential people from both businesses – ‘the keepers’ – and ensuring that they are involved early in leading the integration. I have seen employees experience either too much or too little intervention and it’s important to achieve the right balance. Failure often comes down to a lack of experience on how to integrate people, not the business, and a lack of learning lessons from the past.
The best integration approaches often focus on the base business and Day One requirements before adding new capabilities and after understanding the operating model vision. It’s about mapping systems and processes that will require significant change and/or investment. A blue-sky only approach can create an overly ambitious scope and phasing so it’s important to put guardrails in place around changes to processes and systems early on.
With board members and CEOs ensuring that robust processes are in place to mitigate against each of these four risk areas, your chances of being in the 40% of deals that increase shareholder value over the long term, will increase.
About the author: Karen Thomas-Bland is a Global Board Advisor, Management Consultant and Non-Executive Director with over 24 years’ leading complex enterprise-wide transformations and M&A integrations to over £77 billion turnover. Her clients include Accenture, EY, WPP, RELX Group and Private Equity Funds.
With an excellent track record in creating sustainable long-term value, she is a trusted advisor to many boards, executive teams, and investors and has been an NED on several private equity boards. Before founding Seven, Karen was an executive in IBM, KPMG, and several boutique consultancies, based out of New York, Dubai, and Sao Paulo. Karen is a Chartered Organisational Psychologist, Associate Fellow of the British Psychological Society and is an INSEAD accredited Board Director.