Ill-Conceived, Badly Executed M&A Deals Destroy Value
Mergers, and forced amalgamations are often described as the ‘winner’s curse’.
Like every long-term relationship, mergers must happen for the right reasons. Often, they don’t. Mergers aren’t goals. They are a means to achieve and fulfil strategic and far greater outcomes. They must trigger and stimulate the positive impact of the merged entity. Mergers must be value enhancing for most other stakeholders.
Ill-conceived, badly executed mergers are toxic. Destroy stakeholder value
Mergers must be given careful thought. Organisational alignment and cultural cohesion are critical for impactful mergers. Sometimes organisations chase ‘youth’, want to look younger. Some others focus on the ‘markets’, even at the cost of business. Many merge (as a last resort) to save their sagging position.
Deal makers tend to rely much too heavily on optimistic but simplistic assumptions, ignore the complexities and realities. They overestimate synergies. These deals rarely fructify. In a few cases where they do, the impact is much lower than when ‘sold’ to the market.
The personality of the leadership plays a huge role in the outcome. Leadership egos are fragile, corporate culture can be brittle, some chase size, others grandeur. Most other leaders seek immortality. The shareholders (not share owners) play a role too. They egg on. Shareholder value created, as a result of the merger goes not to the buyer. The seller takes most of the spoil. This is poor corporate governance.
When two formidable entities merge to capture value and create shareholder wealth, it makes perfect sense. Similarly, when they create synergies, economies of scale and scope, proliferate best practices, exploit shared ‘capabilities and opportunities’ that are consumed well, they can generate long- term value in multiples.
A Crux study of the 50 oft talked of mergers-integration efforts across a range of industries and geographies points to the main source of the winner’s curse. The leadership is guided by ‘consultants’, goaded by investment bankers who overestimate the yields of the synergies. Materially.
Merger and acquisition (M&A) modes are becoming binary. While some acquirers stomp-like elephants, ignoring the repercussion, others tread on eggshells; too cautious, too late to capture the intended value.
Post-merger, the leadership becomes the victim of their announcements, ignore pitfalls; and meander through the value depreciating path, instead of disengaging to avoid further losses. Mid-course correction is difficult when one is in the limelight.
Merger cheerleaders overestimate and inflate top-line synergies. There are several ‘second’ guesses, even ‘playing blind’. The degree of error is often so small that any input, however minute, can diminish the outcome and even negate the envisioned benefits. The study highlights that very rarely, if at all, “dis-synergies” (customer overlap and exits, integration and reconciling challenges etc.) are discussed. Similarly, assessment of the cost and time it takes to derive the benefits of synergies is rarely realistic.
There are lessons, robust templates from successful mergers. Honest intention, holistic data, robust analysis, deep understanding of the target is key. The consultants and investment banks seldom involve themselves in the detailed and bottom-up estimation of synergies, and the resources and methodologies needed.
Revenue synergies are anchored around access to the target’s customers, channels, and geographies. Over 70 per cent of the mergers fail to achieve the stated revenue and bottomline synergies. Often, and inevitably, the disruption as a result of the merger, hinders the acquirer’s ability to capitalise on it. Similarly, the merged entity falls prey to its’ selling point’ of ‘cost reduction’.
Dealmakers also underestimate the impact of one-time costs. They neglect, (or often choose to) the fact that expenditure cuts risk revenue growth. Cost cuts ramify as deep value erosion. The mergers that envision branch optimisations, cost-based synergies, are good examples of ‘missing the wood for the trees’. ‘Regular’ branch using customers walk away.
Culture ‘vastly overblown’; most cited excuse for failure. There are others
A significant obstacle to post-merger integration is the clash of corporate values and cultures, confounded by the absence of social connect between the leadership teams. Lack of clarity hurts too. A large percentage of mergers fail due to a culture mismatch. This is well documented. However, culture is overblown. Intention and purpose is not well documented.
They often get the timing wrong (how long to capture synergies and how sustainable). Sometimes one gets it totally wrong; both overpay and err on pricing and market share (inconsistent with the overall market growth). The Crux study highlights that a 25 per cent overestimation can translate into a 15 per cent valuation error.
Similarly poor strategic moves, unanticipated events, for example a particular technology becoming obsolete, can erode value. This is because of inadequate input, lack of capacity and overestimation of their own ability to ‘cross the bridge’. Sometimes the leadership ‘visions the make belief’.
Line managers are rarely involved in the due diligence process, denying the process a bottom up and quality rigour. The process also risks demotivating the employees. Many key people leave. Their involvement helps build support for post-merger integration initiatives.
Mergers and acquisitions must serve the strategic purpose, such as enhancing capabilities, acquiring marketing power, creating moats, gaining competitive advantage, and boosting customer base. Similarly, mergers must expand footprints, help test new geographies, augment the supply chain, revitalise the network and bolster scale. Organisations merge to diversify, grow, and amplify brand equity etc. However superficial reasons like tax benefits, survival, or defensive strategies (mitigate market risk), solve fewer problems, create more.
Need a closure. A good ending
Integration must begin before the financial transactions, even before the deal concludes.
The Crux study highlights that a third of all mergers create shareholder value, whereas a third destroy value. Most others don’t meet expectations. However, these numbers are getting worse. In certain industries for example, over 80 per cent of the mergers have failed to achieve the stated purpose.
The study further highlights how mergers succeed only when the leadership has the right intention, sustainable purpose, a ‘defined’ plan. It needs an elucidated process that blends operational values with the cultural ethos. Leadership must back this with steadfast resolve, consistent communication, and the ability to mobilise change.
The dreams and the optimism of the pre-merger stage is just one side of the coin. The post-merger implementation, the nurturing of the relationship in the changing scenario decides the fate of the merger.
