How to ensure a successful Merger and Acquisition

At a time when the market is rife with uncertainties and disruptions, companies worldwide are frantically searching for ways to survive these turbulent times. As companies are finding it harder to meet and exceed growth expectations, they seek an enabler to respond well to the growth challenges.

Mergers & Acquisitions (M&As) can prove to be that antidote.

The Role of Mergers & Acquisitions

While most companies rely on organic growth strategies, some companies need to incorporate strategies that ensure organic and inorganic growth. For such companies, M&A deals are crucial as they serve as strategic capabilities that provide them with a competitive advantage over their competition.

M&A strategy is an extension of the overall growth strategy that creates tremendous value for the companies. It helps them achieve faster growth through access to new markets, infrastructure, and sales and distribution channels. M&A deals, in addition to building resilience, are also an enabler of growth and long-term value for the companies.

Few events or actions by a company can replicate the value addition that merger and acquisition deals can bring to the table. 

The case for Mergers & Acquisitions

The business world has seen a record level of M&As in the recent past. Software, Automobile and Chemical industries have continued to deploy their long-used strategy of mergers and acquisitions to strengthen their portfolio, consolidate segments, and accelerate growth.

Between 2010 and 2012, companies like IBM, Apple, Volkswagen, Audi and Porsche used acquisition deals to bolster their growth trajectories:

  1. IBM went on a spree acquiring over 43 companies within a span of 3 years, thereby creating a 'product distribution synergy' and boosting their growth by over 40%.
  2. Apple acquired Siri and Beats Electronics to boost its service offerings. By acquiring the companies, Apple was able to deliver the service to its customers quicker. This acquisition boosted its profits, thereby creating a 'revenue synergy.'
  3. Volkswagen, Audi and Porsche merged into the same group to create a 'cost synergy' by sharing the resources and cutting down their operating costs.

Divestitures, like acquisitions and investments, are equally rewarding for many companies. One such case is that of TXY Pharma (name changed for confidentiality), a large Indian conglomerate that owns several businesses across different non-related sectors: pharmaceuticals, medical insurance, packaging, real estate, FMCG.

However, his diversification had been preventing the company from achieving its profit targets. Our team was brought in for a comprehensive analysis of the business and help advise the company in:

  1. Discovering the money-losing businesses and new revenue-generating opportunities,
  2. Aligning its operations to its strategic goals,
  3. Developing strategies for its smaller businesses,
  4. Clarifying the role of its top management in achieving overall growth.

The team divided TXY Pharma's goal into four different priority-based challenges and created specific frameworks for each of them.

The priority was to fix the money-losing businesses, so we recommended that the company divest its product lines to free up its blocked resources. Using the team's detailed frameworks and business plans, the company was able to discover two new endeavors and redefine the corporate role for its top management.

As a result, over a 3-year time frame, the company saw a massive jump in its ROIC (Return on Capital Invested) from 16% to 28%. The company is currently focusing on adjacent business opportunities that we later identified for them.

Evidence from several researches suggests that companies with static portfolios tend to underperform. Hence, an active and programmatic M&A can help the company with portfolio transformation. With selective investments and divestitures, the companies can continually shift their portfolios toward better industries and assets.

The Catch-22

A merger deal is an opportunity for bold change. However, the window for action closes fast. As a result, a successful merger and acquisition deal is seemingly elusive, and most mergers and acquisitions fail. Corporate leaders often find themselves in the classic Catch-22 situation – M&As being key to building world-class companies, yet most mergers and acquisitions fail.

'Deal fever' is very common when several deal-related questions arise:

  1. What will be the direction for the resultant company?
  2. What shall be the costs of the integration?
  3. The profitability of the sales channels?
  4. Do the customer bases of both the business (in question) overlap?
  5. What growth potential can the deal enable for the resulting business?

Contrary to the common notion, realizing the value of a merger or acquisition deal is rarely straightforward – sometimes taking up to 3 years or more. This disparity arises from the overestimation of post-merger performance by the top management. With over 55% of the executives citing overestimated synergies as the root cause of deal disappointments, they are under immense pressure to find ways to ensure the deals conclude successfully.

The leaders must develop a thorough understanding of the deals and the complexity of the business environment. To ensure M&A success, they must find ways to leverage the unique strengths of the company to overcome the weak areas by identifying the key value drivers and properly allocating the capital.

Scope vs. Scale Deals

Many organizations view a merger and acquisition deal through the lens of scope vs. scale. This notion that scale deals are safer and scope deals are inherently riskier isn't necessarily true always.

While scale deals enable an acquiring company to expand its business in the existing industry or market rapidly, scope deals enable it to enter a new market or a product line. Scale deals involve a high degree of business overlap; hence, companies with less M&A experience tend to focus on scale deals to consolidate their position in their current market. Companies with sufficient experience in M & A deals average a mix of 50-50 mix of scope and scale deals to improve their market share while also entering new markets, important capabilities and expanding their geographical reach.

The Formula

Though there is no magical formula for ensuring successful merger and acquisition deals, companies can make significant progress in ensuring successful deals by redefining their objectives and prioritizing the opportunities.

Companies will need to adopt swift decision-making process with regards to portfolio reviews, investments and divestments. Furthermore, they will need to generate a comprehensive list of targets and devise a plan to engage in frequent, smaller, lower-risk deals. Such deals will enable companies to scale up gradually.

By over-investing in due diligence, building specific teams, and syncing the acquiring and target companies' workplace culture, a repeatable M & A model can be developed that supports frequent larger deals in the future.

The Conclusion

Companies can use M&A deals as an opportunity to maximize their capabilities to achieve full potential for the combined entity.

The case for melding two disparate organizations comes with a host of unique challenges that require prioritizing opportunities, conducting frequent reviews, running diagnostics, generating a list of targets, developing frameworks, managing workplace culture, creating a roadmap and much more.

M&A deals, though tough to undertake, are incredibly rewarding and enabling. They fuel the growth on which the corporations survive. The real question for the corporations is not whether to carry out M&As deal; it is how to do it well.

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