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Problem/Solution

Why So Many M&A’s Don’t Work Out

What do you think of when you think about mergers and acquisitions? Money, right? And it’s true that money is a critical ingredient – for both parties, but especially the seller.

However, well over half of all mergers and acquisitions do not succeed financially in the long run. What does that actually mean? Quite simply, the additional net profit generated by the acquired company, post acquisition, does not equal the amount of money paid for it. Whatever the multiple applied – though obviously the bigger that multiple is, the harder it is to achieve it.

Why is that? Because buyers are over-paying in the first place? Well, maybe. But there are other critical reasons why so many failures occur, and The M&A Team has been formed to try to tilt the odds the other way.

So why do so many deals not work out?

Reason One
The acquisition has taken place, in part at least, because the acquired business became available and it was “too good an opportunity to miss” to add revenue while taking out a competitor.

Reason Two
The two businesses may do similar – or better, complementary – things, but no one has thought through the sheer mechanics of putting the two operations together from a technical perspective: supply chain, manufacturing capacity, distribution, sales & marketing, personnel policy and issues, financial systems, IT. Any one of these issues can throw a giant spanner in the post-acquisition works.

Reason Three
And the most common by far: the two businesses are so far apart culturally, that senior management – never mind the rest of the long-suffering staff who are leaving in droves – just can’t (or won’t) work together, after having been thrown together. Large egos in collision usually end up harming both businesses.

The M&A Team Solution

Stage One
Better research before the event. Few businesses on the acquisition trail really have the time or resource on the payroll to look at all the options in any depth. Decisions are frequently made on a gut reaction and deals done more quickly than they should be (if they should be done at all), in order to avoid competitors getting in on the act, muddying the water and possibly setting up a Dutch auction – in short, to just get it done, once it’s been decided to proceed.

What is needed is more time spent identifying growth sectors and business areas with the potential for good strategic growth; and then spending as much time and resource as is necessary to look at a long list of potential acquirees, before shrinking them down to a handful that are of genuine interest.

Stage Two
This forms a portion of stage one, but really kicks in once serious targets are identified and short-listed. Can the two businesses work together technically, culturally, effectively, as a single unitary team? How important is the management team of the business potentially being acquired to its ongoing operations? Perhaps because the team spirit in the business is so strong; perhaps because they play too great a day-to-day role in proceedings. How pliable are they to adapting to new working methods and systems? How willing to report to someone (anyone) else and to play by someone else’s rules?

Stage Three
Assuming parts one and two are highlighting some real potential, can we make the numbers work for both parties? So yes, we’ll help you with the standard financial due diligence, but we’ll also help you plan (in advance of the deal being sealed) how to put the two businesses together practically – operationally and structurally – a post acquisition strategy that means the two businesses trade as seamlessly as possible from day one.

That means a clear business plan and structure, with job titles, job descriptions, roles and responsibilities, business objectives and reporting lines for all (key) staff.

It means ensuring IT systems at the very least talk to each other and work efficiently together – and ideally are reconciled into one over-arching process.

It means ensuring clarity of communication about the new expanded entity, both internally and to the outside world.

And it means the harmonization of production and/or sales and distribution processes.

Growth Through Merger or Acquisition

While organic growth in any business is desirable – essential, even - there is no doubt that acquisition represents a more dynamic option for rapid growth.

The secret is to acquire companies that represent complementary rather than simply competitive business opportunities, thereby creating additional revenue through synergy.

The difference between a poor acquisition and an optimum one can be represented in two simple graphics:

chart1

Buying market share: 1 + 1 = 2

If your acquisition is a competitor in a similar market place to your own, you are simply buying market share. And because not all customers stay with the new expanded entity, for all sorts of reasons, 1 + 1 often equals little more than 1½.

If, however, you can identify acquisitions in complementary market sectors, with a customer base that might also buy what you make or provide, and with products or services which you can sell to your own customers, then it is possible to double the value of the new entity, post-acquisition.

Of course this is simplistic, but nevertheless, the principle of looking for complementary rather than competitive businesses to acquire is more likely to maximize the added value quotient in terms of your medium- to long-term revenues.

The M&A Team was formed to help businesses identify and negotiate the best acquisition fits for your specific growth strategy.

chart2

Put extremely simplistically, with the right acquisition strategy, 1 + 1 = 4


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