Research has proven companies can dramatically improve the success of their Mergers and Acquisitions (M&A) by improving their approach to due diligence and post-merger integration.
Why the need to improve the M&A transaction process?
Industry research firms state that most executives must do a better job of executing M&A more effectively:
· Resolve some key strategic, organizational, business, and technology issues prior to closing M&A transactions; and
· Plan for and manage post-merger integration.
A number of M&A Effectiveness Studies have concluded that on average, acquisitions have created little or no value for the acquiring companies. For example, a study by McKinsey found that only 23 % of acquisitions ever recovered their costs.
In addition, there was a Business Week Cover Story, “The Case against Mergers” where Business Week reviewed historical merger and acquisition data and concluded that “Over the past 35 years, mergers and acquisitions have hurt more then helped companies and shareholders”
The record of many managers and their companies in delivering projected results from their mergers & acquisitions is mixed. However, despite this record, companies will continue doing these transactions, and managers will continue to follow their traditional experiences at acquiring a company.
While many service companies are offering more effective due diligence techniques, better analysis, planning and integration tools, they seem to have made little difference in reducing these disappointing results.
This is because acquisitions rarely fail because of lack of analysis in the areas that are prioritized- i.e. financial and legal. They failed because a comprehensive process has not been followed.
Generally they failed, in many cases, for two reasons. First, all the appropriate business issues were not resolved satisfactorily. Second, the merger or acquisition was not effectively managed through integration.
Our review of various independent studies suggests that up to 80% of the due diligence effort is devoted to the legal and financial matters related to the transaction. While the same studies find that these transactions do not meet expectations usually because of operating, management, technical, and/or integration issues. Many of these could have been identified and addressed during the due diligence and integration phases of the transaction.
If a more comprehensive analysis of these issues was applied in the due diligence effort, as companies now apply to the legal and accounting issues, more value may have been achieved.
In short, the company should give a more balanced attention to the strategic, operational, organizational, and human issues, rather than an over-concentration on the legal and financial aspects. Addressing these additional issues on a more equal footing may go a long way in making many acquisitions more successful and drive an increase in corporate value.
Need for Improved Assessment of Strategic & Business Issues
The final decision to proceed with a transaction is made by the company leadership based on their best judgment supported by the best information available to them at the time.
A comprehensive and independent, assessment of strategic, business, operations, financial, technology, and legal issues during the M&A due diligence process may provide a deeper understanding of these issues. This analysis can add greater insight into their decision making process and increase the long term chances of success in the future of a transaction.
Today, in many cases, the non financial or legal related issues are not given the appropriate priority and, therefore, not resolved, before the deal is signed. This can cause problems after the deal is closed. In some cases, this has included longer term personal and integration issues resulting in loss of company value.
Therefore, expanding the M&A due diligence to add an independent review of more business issues can be important to creating longer term company value. This can help the management team make a better decision by giving them an independent assessment of the strategy and business issues that research suggests management may not have had the time in the past to address.
Examples of Necessary Changes to the Due Diligence Process
Based on Bonocore Technology Partners’ experience in assisting our clients in numerous M&A due diligence engagements, we can present some examples of the strategy & business issues not given proper attention in a number of transactions.
In our experience, it may be appropriate to add M&A business focused due diligence professionals to the team to provide an objective opinion and/or technical knowledge to consult on these strategy and business issues.
In many cases, the internal management team may not have the time or the specific expertise to address the wide range of issues that the transaction may require.
Some examples of business focused due diligence issues when independent reviews may be requested include:
(1) An external analysis on the technology that the acquisition brings and how it compares to other technology in the marketplace;
(2) An independent view of the top talent in the acquisition and their expectations for their future roles as well as the acquiring company’s expectations for acquired talent.
(3) A customer impact analysis for the company being acquired, including an objective evaluation of cross-selling and customer retention opportunities (for both sets of customers, if appropriate); and
(4) An independent opinion on the scope, time and potential complexity of the integration plan and any joint cooperation needed to meet the expected results.
a. In our experience, this integration plan should be comprehensive so that there will be few surprises after the transaction is closed. During the M&A “deal”, so much emphasis is placed on the legal and financial aspects of the “transaction” that the integration planning, in many cases, is a last minute exercise. This plan is a critical element in achieving value from the new combined entity. Careful and detailed planning is necessary. Along with other key parts of the M&A process, this plan should be carefully constructed, understood and reviewed by the CEO and Board of the Company.
(5) Independent oversight in post-transaction integration management: The post-transaction integration should not be delegated to mid-management with little senior management or board oversight. The successful execution of a well thought out integration plan is critical to creating the value that was expected of the combined entity in the first place. The CEO and the Board should continue to monitor the post-transaction integration implementation to assure that the project was effectively implemented.
The “bottom line” is that research confirms that most executives must do a better job of resolving some key strategic, organizational, business, and technology issues prior to closing of M&A transactions and more effectively plan for and manage post-merger integration.
An independent strategic & business assessment as part of M&A due diligence may result in many more companies being better prepared for a successful transaction. This assessment could lead to many more critical business issues being identified and addressed during the due diligence process. The research indicates that if these problems are not dealt with early, many of them can result in significant loss of company value after the close. Addressing the additional issues also can result in a faster and more successful integration.
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