Mergers and acquisitions (M&As) are increasingly becoming the strategy of choice for organizations striving to maintain a competitive edge. Despite the significant financial investment, the potential benefits of M&As, such as increased market share and operational efficiencies, make them a promising avenue for success.
The argument that they will create synergy justifies many acquisitions and large strategic investments. Synergy is the additional energy or growth that two companies generate when combined. The combined entity is expected to show improved overall performance. On average, acquirers pay a thirty percent premium to the target.
However, the literature tells us that many acquisitions and PE investments fail to achieve the desired return. Indeed, most companies find their stock price stagnating for some period after an acquisition. It happens because synergy does not kick in immediately but comes with a lag.
Why are we not able to generate the desired synergy?
The recombination phase, a critical stage in M&As, plays a pivotal role. Marks M. L et al., 2001, in their study of over seventy mergers and acquisitions, underscore the importance of this phase. It is during this phase that the potential synergies between the two sides' structures and cultures are critically tested, highlighting the crucial role of this phase in shaping the future relationship between the two companies intending to merge.
Business research informs us that three out of four deals fail to achieve their financial and strategic objectives. The deal-making process is shrouded in secrecy, and data takes time to appear in the combined entity's financial statements. This underscores the potential pitfalls in the M&A process and the critical need for caution and thorough due diligence in every step of the process.
Damodaran, A., 2005, attributes the failure to deliver synergy to incorrect valuation and inadequate planning. The acquisition success rate is less than fifty percent. Acquisition failure is also attributed to the wrong target selection and paying too high a premium. Most M&A deals generate requisite alpha for the target more often than for the acquirer.
The advisory industry that supports investments and M&As is packed with financial analysts who overemphasize the role of corporate finance, valuation, and Excel sheets. Investors, including Private Equity, Venture capitalists, and family offices, are impressed by impressive spreadsheets and invest billions of dollars in companies, believing that this time around, the projected synergy will be achieved.
Key determinants of post-deal performance include serial acquisitions, CEO overconfidence, acquirer-target relatedness and complementarity, and shareholder intervention in the form of voting or activism. (Renneboog, L et al., 2009)
Tips for post-deal success
Deploying a competent post-deal integration team can significantly reduce the chances of post-deal mismanagement and high failure rates. This reassures stakeholders and instills confidence in the potential success of the M&A.
Post-deal management is complex and extends beyond financial management. Understanding the mindsets that people bring with them and develop throughout a combination is equally important. People must be aware of and able to respond to the normal and to-be-expected stresses and strains of living through a combination.
Therefore, investors, M&A dealmakers, and corporations must examine softer human issues more deeply before deciding to proceed. Once that decision is made and a definitive agreement is signed, do not hesitate to bring a composite team of multi-disciplinary integration specialists to handhold post-deal management.
It would help if you remembered that strategic complementarity and cultural fit are two issues that integration teams should be particularly focused on.
Yet, as Hitt, M.A. et al. (2009) mention, when firms search for and identify targets with complementary capabilities and put in place mechanisms that enrich their learning from the acquired firm, they are more likely to build new capabilities and enhance their competitive position in the market.
I have seen these research findings play out in real life during my experience as a business consultant and business adviser.
Success is dependent on several managerial and organizational factors. These include the relative size of M&A partners, managerial involvement, and cultural and organizational structure issues (Calipha R et al., 2010).
Organizational culture has emerged as one factor identified as a potential catalyst to M&A success. Organizational change, organizational strategy, and organizational development are seen to play a more significant role in raising the success rate of M&As. (Schraeder, M., and Self, D. R. (2003)
References:
Damodaran, A. (2005). The value of synergy. Available at SSRN 841486.
Hitt, M. A., King, D., Krishnan, H., Makri, M., Schijven, M., Shimizu, K., & Zhu, H. (2009). Mergers and acquisitions: Overcoming pitfalls, building synergy, and creating value. Business Horizons.
Calipha, R., Tarba, S., & Brock, D. (2010). Mergers and acquisitions: A review of phases, motives, and success factors. Advances in mergers and acquisitions, 9, 1-24.
Schraeder, M., & Self, D. R. (2003). Enhancing the success of mergers and acquisitions: an organizational culture perspective. Management decision, 41(5), 511-522.
Renneboog, L., & Vansteenkiste, C. (2019). Failure and success in mergers and acquisitions. Journal of Corporate Finance, 58, 650-699.
Marks, M. L., & Mirvis, P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. Academy of Management Perspectives, 15(2), 80-92.
Bauer, F., & Matzler, K. (2014). Antecedents of M&A success: The role of strategic complementarity, cultural fit, and degree and speed of integration. Strategic Management Journal, 35(2), 269-291.