Why Mergers and Acquisition fail

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In July last year, the world woke up to a $35 billion merger announcement of US based advertising giant Omnicom and its French counterpart Publicis, initiated to cope with an evolving advertising industry dominated by tech giants like Google and Facebook.

The merger deal was expected to dethrone WPP as the world’s largest advertising agency, heralded as a merger of equals.

Close to one year later, the biggest acquisition deal in the advertising industry was called off last week.

Merger or Acquisition deals have always been frenzied as a guarantee of tapping into various growth opportunities such as acquiring new products and expansion into new geographical areas or access to new customers. This is in addition to motives as improving profitability and the company’s strategic capabilities and positioning in the market.

Analysts had predicted the 50-50 ownership deal between the two ginormous advertising holding companies as a union would provide scale and capital to cope with technological forces reshaping the industry.

But research indicates that Mergers and Acquisitions have an overall success rate of about 50% only, that’s in the post-takeover period which is the integration process. The deals always look good on spreadsheets but few organizations pay proper attention to the integration process.

This can be attributed to the misleading notion in Finance and Economics field that Mergers or Acquisitions are a clear roadmap to increased market share. Researchers from these areas have always measured the success of a merger by the change in the stock rates in the first few days after announcement of the merger. The basic assumption is that the stock value reflects the company’s value in an objective manner based on all the existing public information. The idea is that the immediate change in the stock price reflects changed expectations on the value of the firm, and thereby indicates long term trend.

Therefore, they assert that every M&A that causes an immediate rise in the stock value reflects success and creates value for the stockholders.

Case in point, Sprint acquired controlling stake in Nextel communication in a 35Billion stock purchase in 2005.These two companies believed that merging opposite ends of a market’s spectrum would create one big happy communication family for only $35 billion making them the third largest telecommunication provider.

At the time, both Sprint and Nextel had a market capitalization of 30Billion and it was viewed as a merger of equals. In 2006 their market cap had even climbed to as high as $76 Billion, only to plummet by 2008 forcing Sprint to write down an astonishing $30 Billion.

It’s now considered as one of the worst merger deal to have happened in recent times.

 

The good thing is that most SME’s are not involved in M&A deals as a way of positioning itself in the market or increase market share, it would have been disastrous all round the economy.

Most SME’s have been sidelined by this Finance and economic scholars’ yardstick because they have no financial muscles to absorb a bad deal and patch it up like the large companies who have the resource and skilled managers.

Another constraining factor which I believe is a “blessing in disguise” for  SME’s is that they have no proper financial data that can be manipulated to know financial implications of doing an M&A deal, they too have insufficient management capacity to take on the integration process, in fact most are stretched to keep the business running.

I say it’s a “blessing in disguise” for them because no amount of management can fix an acquisition that should never have happened. Large companies can high the best consultants to turn around or salvage the deal but sometimes it still doesn’t work, recovery alone can cost as much time and resource than the total cost of the merger or acquisition.

With the Omnicom-Publicis deal off the cards, WPP which will still keep its crown as the world’s largest advertising agency, used the uncertainty to negotiate better terms by cutting its fees and winning a lot of work worth more than $1.5 Billion from both Publicis and Omnicom clients in the past month alone.

 

What Finance and Economic researchers have ignored when analyzing the success of M&A deals is that the real success of the deal is in the integration process, the integration process is a long term process and not short term.

It’s easy to buy but hard to perform an M&A deal.

 

So why do M&A deals fail?

In general, many mergers are characterized by the lack of planning, limited synergies, differences in the management/organization culture, negotiation and difficulties in the implementation of the strategy following the choice of an incorrect integration approach on the part of the merging organizations after the agreement is signed.

The key sticking point that delayed the Omnicom-Publicis deal was that the two companies possessed strong divergent corporate cultures that couldn’t merge leading to a clash.

Omnicom wanted their people to fill the CEO, CFO and General Counsel jobs diluting Publicis management representation but Publicis were not ready to cede much position to such a point. The Chief Financial Officer was the key position both companies were eyeing because it was the position of influence on whether the new company should incline towards a centralized structure to manage costs which Publicis argued had driven its higher margin, while Omnicom was looking towards a more devolved approach.

Most companies never thoroughly assess the culture of the target acquisition and its compatibility with their own company’s culture.

During the pre-M&A deal, companies never try to resolve cultural differences that threaten the success of a merger. There is always an unconscious segmentation, that one team works on the due diligence to make sure that they understand all the financial implications of the deal and a second team works on the integration of business.

Then most M&A deals are not in line with the corporate strategy, when the target’s strategy is a diversion it’s always costly to change its course.

Also managers are always quick to seal M&A deals acting out of pressure from the board of directors and stockholders to show continuous growth, without looking at the big picture.

The main reason why M&A deals fail during the integration stage is that an operational audits that help decision-makers understand the operational implications of the deal is never done to accompany the due diligence report, which only captures the financial implications.

An operational audit looks at a few vital things like where the revenue comes from, how the majority of customers are handled and who are the primary suppliers. The best tools to use in doing this is a BPM (Business Process Mapping) and VSM (Value Stream and Mapping) activities which map out major components of their business from end to end.

VSM is an end-to-end system map that takes into account not only the activity of the product but also the management and information systems that support the basic process. It documents, analyzes and improves the flow of information/material required to produce a product/service for a customer. It helps one to understand the flow of material and information as a product/service making its way through the value stream.

An operational report gives shrift to assessing the target company’s operational effectiveness, providing a clear snapshot of the linkages across customers, operations, systems and financials.

A pre-M&A operational audit is important because it facilitates the transition from paper synergies to real operational improvements, providing the building blocks needed to create a business transformational roadmap without negatively impacting the customers and employee existence.

The operational understanding combined with other components of the due diligence process-financials, management composition, legal risks, willingness to embrace change and the asking price –  creates a more complete picture of the value at stake.

Therefore, meticulously and diligently screening deals for integration always increases odds of success.

 

Written by Tony Watima.

SigmaStrat

http://www.sigmastrat.com/

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