Mergers and Acquisitions: Examining the M&A Ecosystem

Posted by admin on January 4, 2011

It’s hard to name many business transactions that are as risky and complex as mergers and acquisitions (M&A).  Over 85% of M&A deals fail, according to a recent study on M&A outcomes by KPMG. Another study, by A.T. Kearney, found that the total return to shareholders on 115 global M&A transactions was negative 58%.  These astounding numbers are enough to make any organization think twice.

Still, when interviewed by the NY Times recently, Robert Kindler, global head of M&A at Morgan Stanley, responded that he is optimistic about the takeover market for the first time in years.  He stated, “When you have historically low interest rates, less volatile equity markets and stock trading at low forward multiples, that is when mergers and acquisitions are going to be active.”  Despite the grim statistics, there are many compelling reasons to attempt an M&A transaction, but they must be done with and understanding of the risks and challenges involved.

M&A activity tends to be driven by favorable market conditions, but that drive really begins with broader strategic objectives that are complementary among the parties in the M&A transaction. The objectives of the buyer and the seller come together in a way that propels the transaction to forward. For example, one or both organizations may need the M&A in order to survive; or perhaps the move will enable a leaner, more profitable company; or it will better position the resulting company for necessary growth.

Why Consider an M&A Transaction?

There are many strategic reasons why mergers or acquisitions are considered in the first place, and include:

• To gain economies of scale
• To increase financial growth
• To achieve vertical integration
• To eliminate competition
• To acquire new assets
• To hedge a counter-cyclical business
• To gain Intellectual Property (IP)
• To expand into new markets
• To expand into complimentary products and services
• To eliminate emerging IP and product threats
• To acquire new customers

The need or desire to acquire or merge is always present in the business world but the challenges are many.

What Does the Ecosystem of Mergers and Acquisitions Look Like?

For the purposes of this discussion, an ecosystem is a system formed by the interaction of a community of entities with their business environment.  The key players in the M&A ecosystem are:

• Acquiring / buyer companies
• Being acquired / selling companies
• Shareholders
• Banks
• Federal / State agencies
• Business enterprises of the buyer and seller, specifically the affected areas of each:
  • Staff
  • Administration
  • Partners & vendors
  • External customers / clients
  • Internal customers
  • Suppliers
  • Technology / systems supporting all of the above

To simplify the topic and delve into the nuances of the decisions to be made, change management to occur and execution required, we will focus on the buyer and seller along with the ecosystem members directly related to the enterprise operations for this analysis.

Is it a merger or an acquisition?  

This is a small question where the answer has big implications.  Let us examine some foundations to the M&A ecosystem.

The Merger:

BusinessDictionary.com definition:

Merger:  Voluntary amalgamation of two firms on roughly equal terms into one new legal entity. Mergers are effected by exchange of the pre-merger stock (shares) for the stock of the new firm. Owners of each pre-merger firm continue as owners, and the resources of the merging entities are pooled for the benefit of the new entity. If the merged entities were competitors, the merger is called horizontal integration, if they were supplier or customer of one another, it is called vertical integration.  Read more: here.

If the M&A deal is structured as a merger, that suggests fully integrating the purchased company into the buying company.  Cultures must be meshed, operations made to work together cohesively and core competencies of the resulting organization enhanced.  Sound simple?  Consider as an example the merger (integration) of two firms on the basis of manufacturing consolidation. While the benefits may be great, the additional costs incurred for merging engineering, establishing new sales channels, blending marketing organizations and philosophies, and all other elements of the business could significantly offset the benefits being used to drive the merger / integration effort in the first place.  

Mergers are most common when an industry begins to consolidate in order to survive.  Such is the case with the consolidation occurring right now within the airline industry.  After struggling over the past few years, it has been clear for some time that changes needed to be made so that the industry can continue to grow and thrive.  Hence, major mergers began to be announced on the heels of one another.  The merger pattern started when Delta and Northwest joined together.  The transaction was positioned as a merger, but was really a take-over by Delta - resulting in the world’s largest airline.  The most recent high profile merger occurred when United and Continental agreed to merge.  The resulting airline will operate under United’s name. When the merger is complete (it’s expected to take a couple of years), United will take over the title of world’s largest carrier.  Judging by the remaining independent legacy carriers (especially US Airways and American Airlines), United should hold the title for quite a while.  Southwest Airlines was the most recent airline to announce a merger.  Southwest is merging with another low-cost-carrier - AirTran, one of its main budget competitors.  A series of smaller mergers and alliances have truly altered the landscape of the airline industry.

The Acquisition:
BusinessDictionary.com definition:

Acquisition:  Taking control of a firm by purchasing 51 percent (or more) of its voting shares.  Read more: here.

So if mergers are complex, are acquisitions simpler to complete successfully?  It would be nice if that were the case, but unfortunately for all concerned, acquisitions pose their own set of challenges.  One of those challenges is in making the right decision on whether to integrate or leave the acquired company alone and allow them to remain autonomous.

Allowing the acquired company to remain separate can certainly be advantageous in some situations due to the lesser degree of complexity required, but the reasons behind the acquisition may dictate integration.  

Consideration must be give to factors like:

• If separate, can we cross sell to each firms customer base?
• If cross selling is the intent, how will sales and marketing be cross-trained and educated on the benefits?  What might compensation and commission plans look like if integrated?
• If combined, is there elimination of duplication of effort?
• Will the products and/ or services integrate & what might that process look like?
• Is there commonality in approach across regions?
• Would integration squash the entrepreneurial spirit of the acquired company?
• If the goal is to create an entrepreneurial atmosphere in the company, would the entrepreneurs of the acquired company stay in the boat long enough to wait that happen?
• Can the acquisition target’s culture actually become the dominant culture?
• Can two distinctive cultures be integrated?
• How costly will technology integration be?

Given the need to acquire or merge will always be present in the business world, how can it be done successfully?

Points of Commonality:  Some Initial Factors

Mergers share many points in common with acquisitions.  Some would say that the question is not whether to integrate and merge, but rather:  “to what extent and in what sequence?”  Much more than the financial aspects of any M&A deal and the resulting value to the market (which, actually, must have been fully vetted during the due diligence process that will be discussed later) it is the “people” that need to be integrated. The core values and the cultures of the two organizations are extremely important considerations that simply cannot be overlooked.  Factors such as work environments or day-to-day spending habits of the two organizations could very easily be the make or break factors in getting the buy-in required and the synergy hoped for in the M&A. Human Resource departments and the executives of both companies have a very important role to play here - during planning and in execution of the plan.

For the acquirer, the M&A process spans tasks that range from researching potential  targets all the way to negotiating and closing the deal.  For the company being acquired, they face emotional turmoil, stress and the arduous task of collecting and turning over mass amounts of information while being grilled with questions.

Yes, there are innumerable data points to collect and hand-over or to review, and stress must be managed against timelines that may be critical to the business survival of one or both organizations.  Additionally, in some cases, seemingly arbitrary time constraints on lower-level personnel can be perceived as artificial and unrealistic - increasing stress and complexity as more work is squeezed into the same amount of time.  It is important to communicate the reasons for tight timelines (e.g. avoiding a bidding war with another potential buyer) and to manage those involved in the process carefully to ensure progress is tracking to expectations.  But these are the easiest parts of the M&A process to deal with and get correct.  There is so much more to the ecosystem of an M&A transaction to consider.

The life-cycle of an M&A depends upon your point of view during the experience.  Let us explore two M&A perspectives, the “buy” and the “sell” side - again within the context of common points between mergers and acquisitions.

Buy-Side

On the buy-side, the M&A process starts with prospecting potential candidate companies; evaluating many dimensions of the short-listed targets and considering the risk / reward balance of each.  To be considered are factors such as:

Administration:

• are the financial systems compatible?
• are the accounting practices up to standards?
• are the key executives and managers competent?
• are there legal issues and contract ramifications?
• are technology platforms compatible?

Staff: 

• are key staff stable or would they be flight risks?
• do the capabilities of existing staff meet expectations of the M&A outcomes?
• would earn-outs for key managers, sales stars, etc. be a good idea?
• do employee contracts “fit” with the existing personnel policies?

Partners and vendors:

• how will the M&A affect relationships with key partners and vendors? 
• will competition be introduced as a result of the M&A that could jeopardize any mission critical market channels, joint ventures or resellers?
• are there any credit issues?

Suppliers:

• will current suppliers still be needed if the M&A transaction completes?
• can new terms be negotiated as a result of larger orders in the future?
• how will the M&A affect relationships with key suppliers? 
• are there any credit issues?

Customers of the business:

• are customer relationships in good shape?
• what percentage will likely come across if and when the M&A completes?
• will strategic customers be gained as a result of the M&A?
• will strategic markets be opened?

Internal customers (e.g. vertically integrated supply-chain organizations):

• how will an M&A transaction affect shared services, such as Information Technology, Finance and Accounting?
• will existing vertically integrated organizational elements need to change? 

Sell-side

On the sell-side, the M&A process might start with consideration of such factors as:

Control:

• will current management be retained?
• what level of autonomy will be allowed?
• will our brand name survive?
• will our expenses be managed by our current management or through a new approval process (e.g. what happens to my executive platinum card?)

Financial, timing and valuation:

• will a buy-out allow the company to continue on with strong financial backing?
• will we have access to credit avenues that were not available before?
• is this the right time to consider selling?
• what is the company worth?
• what attributes of the company might be featured to the buyer in order to get a higher premium on an offer?

Culture:

• how would this affect the culture it took so long to develop?
• do the values and the culture of the suitor match our own?

Employees:

• would our employees be at risk?
• would this provide greater career opportunities for them?
• would this make it easier to attract top talent?

Customers:

• would our customers take the news in a positive way?
• would new markets be opened to us as a result of the M&A synergies?
• would our customers benefit from having a wider range of products and / or services?

The factors listed above are by no means an all-inclusive list, but the list does begin to touch on many variables that should be considered during early analysis of an M&A move. 

Will the sum of the parts be improved? 

It is critical to get a thorough understanding of the state-of-affairs of the target company and use that information to assess the value they offer to your organization, then make an early determination of whether or not to proceed.  It is a risk / reward proposition.  If the rewards appear to outweigh the risks and there are plans to proceed, developing a future-state of the newly formed organization will be more accurate and meaningful as a result of the analysis.

If your company is being acquired, organizing the requests for information early on will benefit you greatly later in the final stages of the transaction.  But how will you know what data the acquirer may ask for?  It is generally safe to assume that they will ask for as much detail in each facet of the M&A ecosystem as they can get.  Often, the level of detail the potential buyer may request goes down to wanting information on the types of locks used on buildings.  Using the list above of factors the acquirer should consider provides a starting point for organizing the collection effort of records, proof of value and logistics on how information will be shared.

Regardless of the perspective you have (acquirer or being acquired / merged), the M&A experience is largely predicated on how well the process is defined, planned and executed, monitored and adapted along the way.

Other M&A Factors to Consider

Is the M&A transaction Domestic or International? 

Obviously, the complexities of mergers and acquisitions across national borders are far more so than M&A transactions with a domestic company - so the data collection, due diligence process and closing process will take more time, effort and money to complete.

The level of challenge is generally dependent on the acquirer's experience and presence in the country where an acquisition is being made.  Acquiring across national borders requires the buying firm to understand differences to account for in areas such as:

• Political
• Legal
• Economic / Financial
• Cultural

Different functions of the target company pose unique challenges, such as in Accounting and Finance.  Standards and best practices differ across countries and the impacts of those differences cannot be overlooked.  For a purchaser with multi-national acquisition experience, this may be less of a factor than for a first-time buyer.  Regardless, it adds to the time and effort required for due diligence.  The human resource function is another area that in cross border M&As requires an in depth understanding of potential risk factors like:

• Labor laws 
• Health benefit programs
• Vacation policies
• Pension plans
• National regulations
• Unions and workers councils
• Work conditions
• Local employment restrictions
• Employment security laws
• National and organizational cultures and customs

Being there helps.  Organizations that are already operating globally and have a division or subsidiary in a particular country will have an advantage during due diligence and the negotiations of an M&A transaction over one entering into a country where there is no local knowledge and no established contacts to leverage. However, the role of the subsidiary must be clearly defined in the M&A process and just as much planning and coordination is required. In cases where a firm is undertaking an acquisition in one or more countries where it has no presence, seeking a local intermediary to assist in the process can help avert many issues that might snag the process later on after much time, money and effort have been spent.  Such M&A transactions in certain countries can be even more difficult to complete when the local and federal governments play stronger roles in business affairs of companies, involving themselves in labor decisions, market entry and foreign company access to their supply networks.

How Do You Target and Select Another Company When Acquiring or Merging?

Assessing “fit” with another company can be where executives face the greatest difficulty in the M&A process.  It is easy to overestimate the synergies that might result from an M&A transaction and to underestimate the difficulty of assimilating the purchased company into the organization and harvesting the benefits of those synergies.  Excitement about a pending deal can cause executives to see the M&A deal through “rose colored glasses” and fall victim to a “wishful” strategy and not a realistic one.

Knowing what you are looking for and how you want to use it are essential knowledge elements in targeting companies in M&A strategy.  With a merger, the acquired company will be absorbed into the buying company.  With an acquisition, it must be decided on whether the purchased company be integrated (and to what extent) or left alone.  If integration is the intent, it poses another challenge that is easier said than done. Assuming the potential target to be a perfect fit for deriving synergistic benefits, integration of strategy depends on the vision and the mission of the two organizations. The strategy pertaining to target markets, human resources, information technology platforms, financial systems, accounting practices and many other ecosystem factors must be in sync for having a successful M&A deal close.

While there is something to be said for consolidation and the initial cost savings that can be achieved, integration should never be evaluated on cost savings alone. If the collective output of the integrated firm does not exceed the individual outputs of each entity (prior to the integration) than it should not be attempted other than in the case of horizontal integration for the purpose of eliminating a competitor. This basic metric for evaluating the benefits could be applied to manufacturing capacities, sales increases, engineering, economies of scale in purchasing and marketing, etc. Individually each of these areas may be a reason to consider acquisition and integration, though it is best to do so when looking at the collective picture so as to avoid placing too much emphasis on the benefits achieved in any one area that might represent the smallest cost implications (which leads to underestimation of difficulty).

The result of overestimation of the M&A benefits and underestimation of the M&A costs is, of course, another statistic in the failure count of such transactions.  With more careful valuation and due diligence (and less wishful thinking) it can sometimes become apparent to the buying company’s executives that the company being acquired presents a long shot (perhaps even more so than the "more risky" strategy of internally developing the capabilities of the acquisition target) and the purchase price is far too high and likely returns on capital for the acquisition are far too low given the associated risks.

Performing Due Diligence

After targets have been selected and initial high-level analysis has narrowed the field of candidate companies, due diligence begins.  Due diligence is where much of the information gathering takes place to confirm the “fit” for the target company in the buying organization’s strategy.  The process also typically involves valuation and early-stage negotiations to determine if the two companies are in the same “ball park” on valuation. It is during this period that the executives, senior managers and their staffs attempt to learn all they can about a target company (or division) so as to better understand the organization’s value, how it operated and performed in the past, how it is likely to operate and perform in the future, and how it will likely fit with the buying firm (determining the synergies).

In a perfect world, the acquiring company would have access to and know everything there is to know about a target firm prior to the M&A transaction closing. In reality, attaining that level of visibility into the target company rarely, if ever, happens.  Instead, M&A deals usually get constructed with a much murkier view into the target.

So why do deals proceed without a fully completed due diligence process?  Sometimes it can be because the process to get the target company’s information is not well planned and the target company is often not organized and prepared enough to gather all of the requested information.  Add to that the pressures from executives in the buyer company to quickly complete a deal, and soon short-cuts are taken and “hopeful” strategy wins out over comprehensive analysis.  Why would the buying company’s executives want to rush the process?  Perhaps to avoid further distractions to the core business because the process has gone on too long.  In some cases the rush to close is to avoid competitive bidding from other suitors.

Unfortunately, during due diligence, the executives of the acquiring firm typically develop only a partial understanding of a target firm.  This partial understanding is often accomplished by piecing together information obtained from internal company documents, interviews with key managers, interviews with a sampling of employees, on-site inspection and surveys and/or interviews with key customers.

During due diligence, using external data can help add back some of the missing pieces to the information puzzle.   Gathering external data might include:

• Talking to ex-employees
• Surveying or interviewing current and past customers
• Reviewing SEC and other published data
• Interviewing former consultants
• Researching past press releases or articles written about the target firm
• Conducting a 5-Forces analysis

Often, however, obtaining such information requires considerable effort and adds time to already aggressive schedules. For example, rarely is there as much external data available in acquisitions of small privately held firms. Moreover, many owners of small businesses either do not have much of the information requested or can be guarded about revealing it.  This is especially true if the buying firm is a larger competitor. In such cases, the negotiation process will have to progress to more advanced levels of commitment (e.g., letter of intent, preliminary agreement, non-disclosure agreements) before access to information is provided. Even when historical data is reasonable to obtain and is acquired during due diligence, it is still impossible to know what the future holds.

More Than 85% of Mergers and Acquisitions Fail.  Why?

While there are many compelling reasons to attempt a merger or acquisition, it must be done with a clear and calculated understanding of the risks and challenges the organization is certain to face.  Most businesses contemplating an M&A transaction do not realize that over 85% of M&A deals fail, according to a recent KPMG study, and that the total return to shareholders on 115 global M&A transactions was negative 58%, according to another study by A.T. Kearney.

The potential for failure is great.  But it doesn’t have to be the fate of your organization.

Why are the statistics are so bad...what goes wrong?

As a means of defining a successful approach to M&A, let us begin with examining what normally goes wrong.  There are many factors that lead to mergers and acquisitions that are deemed failures.  Some of those include:

• Ill defined M&A key outcomes that are not measurable or quantifiable
• The M&A planning effort was not well defined or executed
• Neglecting core business
• Under estimating people impacts, such as:
  • Employee attrition and loss of key management
  • Not transitioning core competencies of acquired company properly
  • Culture mismatches, not managed properly
  • Focusing on terms and conditions and not the logistics
  • Poor due diligence
  • Underestimating the cost of the merger

Let us now explore some of the reasons M&A deals go bad in more detail and discuss some mitigation techniques to avoid them.

Ill defined key outcomes that are not measurable or quantifiable

Before proceeding with plans to acquire another company, the intended outcomes of the acquisition must be defined.  There are a number of dimensions the key outcome analysis should examine.

• What is the definition of success? 
• Is it a merger or an acquisition?
• If it is a merger, who will be a dominant company?
• How will the acquired company add to the acquiring company’s overall value proposition? 
• What will be gained as a result of the acquisition?
• How much overlap in product and geography?
• How much duplication in staff will occur?
• Will there be common customers?
• What if the acquired company is in a different line of business?  Will there be sufficient understanding of the new organization to really manage their business?
• Will the acquired company be integrated into the organization or left to operate independently?

Mitigation:
The planning process should identify clear answers to these and other questions in order to define the desired future state of the post M&A business.  Taking a top-down / bottom-up approach during the analysis along with the utilization of a clear RACI model will help manage the risk of missing key information.

The M&A planning effort was not well defined or executed

There are countless places for M&A transactions to go off track.  We have reviewed many of them and could go on and on as to the possibilities and permutations for problems to crop up.  So what can be done?

Mitigation:
The planning process for M&A is an absolute imperative to ensure successful outcomes.  A structured planning process will help properly identify and mitigate as much business risk as possible in advance of treading too deeply into M&A waters.  The process will address human capital issues such as union negotiations, pay-scales and benefit plans, residual management structures, cultural match-ups and organizational structures.  The M&A planning effort will also address technological integration, financial consolidation and reporting, sales, marketing and legal ramifications.  None of these areas are trivial to analyze, therefore a holistic and structured M&A planning approach must be followed.

Neglecting the Core Business

M&A transactions are huge distractions to the top executives of the acquirer and the acquired.  Months or years can go by in the largest and most complex of these situations.  During the period of planning and executing a M&A deal, business must go on as usual.  Spinning so many plates at once and not breaking one is of course very challenging, but it must be done.  Slip-ups could damage the core business of one or both organizations, undermining the deal before it even happens, or weakening the post M&A company. 

Mitigation:

Maintaining energy and focus on the core business during this period, while difficult, is essential.  Careful planning and execution of the M&A will make that process run smoother, producing fewer distractions to core business.  The buying company executives must maintain a sense of internal urgency to keep the due diligence process advancing towards complete.

Under Estimating the People Impacts

Even when M&A transactions are carefully planned and orchestrated beautifully, employees and managers of both organizations will be impacted.  In the less dominate of the two organizations, a common fallout of the M&A is the loss of key management and employees.  Of course, this occurs due to fear and uncertainty of the future. 

Mitigation:
Attrition can be mitigated with a change management program that communicates the intention of the M&A and the planned approach for integration of the two companies (see the article, “The Change Management Process: Accomplishing Change and Making it Stick”).  If layoffs or terminations are in the game plan for the post acquisition entity, a communication plan must be created that spells out clear instructions and timelines for managers to follow.  An integration governance office can be established to oversee change management, communications and risk management.

Failure to Properly Transition the Core Competencies of the Acquired Company

Another factor in M&A transactions that leads to failure (or at least under achievement of intended results) is the process of assimilating the acquired company’s core competencies into the new organization’s portfolio of talents.  Even very small companies, when acquired, should yield expertise in products and/or services that can be harvested for enrichment of the new overall organization. 

Mitigation:
Even if the M&A deal is communicated as a merger, most transactions actually work themselves out to be a selection of competitive capabilities from both companies.
Regardless of whether there is an intended full integration of the two companies, cross-selling opportunities, vertical integration or brand integration might be missed if a core competency analysis has not been completed and utilized (see “Align Your Strategy and Operational Plans to Core Competencies”).  An seller organization’s core competencies rest in the people who will put their knowledge, abilities and expertise to work.  If leaders of the buyer organization fail to understand how current core competencies being acquired / merged will relate to the new organization’s future goals - strategic and operational plans may be seriously flawed. Only with a deep understanding of the competencies required to accomplish strategic goals can the organization implement successfully.

Culture Mismatches are Not Managed Properly

M&A transactions are always prone to have issues in the area of mis-matched cultures. 
The prevailing culture usually comes from the acquirer however, the culture itself can be a target, and then the acquired company's culture needs to be pushed throughout the new company - obviously with blessing and leadership of the new board.

Mitigation:
Within a single organization, there may be one or possibly multiple cultures.  To understand the match-up of culture(s), cultural mapping can be done, using the common corporate culture heuristics, which we have broken down into one of four models:

• Cooperative: The organization or team focuses on the customer and delivery to the customer, resulting in customization and tailoring to customer needs.
• Merit Focused:  The organization or team focuses on how it can organize and create predictability, reliability, low cost and structure.
• Actualized: The organization or team focuses on fulfilling the human potential, helping create better lives for its customers and offering self-actualization.
• Creative:  The organization or team focuses on creating superiority of product or service, uniqueness, one of a kind value-add service and product.

Associated with these four distinct culture signatures are corresponding organizational hierarchies.  The differences in culture and hierarchy relate back to the “how” the organization works and “how” work gets accomplished.  Aligning strategy, tactics and governance to address these dimensions will greatly affect the outcome of the M&A efforts.

Management is Focused On the Terms and Conditions and Not the Logistics

An enormous amount of time gets spent reviewing the fine details of purchase agreement wording, often to the exclusion or minimization of actual logistical plans related to the M&A.  While the contractual arrangement is critical, no doubt, the terms and conditions of the M&A deal is a means to an end and planning carefully to achieve the intended outcome for buying the company in the first place needs to remain the primary focus.

Mitigation:
Executives on both the buy and the sell sides should approach M&A deals in an organized fashion, dividing specific areas of the workload among teams, and meeting to review progress and obstacles frequently.  The executives working on the terms and conditions should strive to come to agreement on terms prior to drafting a contract and paying expensive attorneys representing both sides to tangle over minutia.  Reaching agreement on the spirit of the agreement allows for the contract process to run smoother and end successfully sooner.

Poor Due Diligence Prior to the Merger or Acquisition

Earlier in the article, we covered the importance of due diligence, as it represents a large risk to the two companies involved in the M&A transaction if not done well.  As stated before, the executives of the acquiring firm typically develop only a partial understanding of a target firm and fill in information gaps with hopeful strategy and wishful thinking. 

Mitigation:
Review each functional area of the target company (e.g. Information Technology, Human Resources, Finance, Accounting, Sales, Marketing, Distribution, etc.) looking for risks and potential pitfalls.  Take care to also review customer agreements, supplier contracts, credit issues, security, personnel issues, lease agreements, legal entanglements, pricing strategies, value proposition, culture match and management business acumen.

The Cost of the M&A is Underestimated

Mergers and acquisitions are expensive to complete, and not just because of the purchase price that must be paid for the target company.  Prior to the deal closing and the purchase price being paid, expect to pay dearly for costs associated with:

• travel
• attorney fees
• accountants
• IT reviews
• HR reviews
• client satisfaction reviews
• sales pipeline due diligence
• market analysis

Mitigation:
Due diligence cannot be skipped, so do not contemplate undertaking a merger or acquisition without budgeting for the costs and planning to spend the dollars it takes to get the deal done.  Some amount of travel might be saved by doing some meetings as video or phone conference, but most of the work will require people on the ground doing the detailed analysis.

Final Points:

Determine your basis for measuring the success of a merger or acquisition.  Define your process to ensure:

• hitting key outcomes
• enhancing value
• preserving or enhancing brand equity
• increasing productivity
• long term strategic financial stability ...and short term

Always remember that the M&A transaction must be undertaken for strategic reasons (as opposed to solely financial or tax reasons) such as to improve or develop competitive capabilities (e.g., lower costs through economies of scale or better technology, enhanced differentiation through better product design), to expand products, customers served, or geographic presence. More specifically, M&As must be viewed as means to achieve strategic outcomes rather than ends in themselves. In fact, they should be considered as just two such means, much like internal development, joint ventures, and strategic alliances. When M&As are driven solely by opportunism (i.e., "a good deal") or the desire to "do a deal," rather than sound strategic reasons, they are less likely to succeed.

The final purchase price of a merger or an acquisition typically reflects both the inherent value of a target business and its value to the buying or merging firm (i.e., combination value). The latter value is greater because of strategic benefits that a buying or merging firm anticipates it can obtain after a change in ownership. However, when the purchase price exceeds either the inherent or combination value (due to overestimation or poor negotiations), M&As are also less likely to succeed.
The value of M&As will ultimately be determined by the extent to which they can be effectively implemented. In spite of a "reasonable" purchase price and sound strategic reasons, M&As are less likely to succeed if the merging organizations are not effectively combined after the closing of a deal; i.e., strategic benefits are realized in practice. There are many examples of M&As that looked good prior to the closing of a deal, only to have failed after the deal because the challenges and difficulties of implementation were underestimated.

Lastly, if your organization is acquiring another company, then having experience (either internally or from an outside consultant) will help greatly in making the process go smoothly and ultimately in getting the benefits.  Consider the size of the organization you are targeting when determining the level-of-effort due diligence will take.  All facets of the merger / acquisition ecosystem must be examined for the organization to be merged or acquired and the re-examined in the context of the new organization.

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For permission to use or reprint any portions of this copyrighted article, contact Method Frameworks at articles@methodframeworks.com.

About the Author:

Joe Evans is the President and CEO of Method Frameworks.  Joe is a published author, frequent speaker and recognized expert in corporate strategic planning. To contact Method Frameworks about scheduling Mr. Evans about an upcoming speaking engagement, visit www.methodframeworks.com/business-speaker or email requests to media_relations@methodframeworks.com.

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Method Frameworks is a leading business strategy and management consulting company, based in the Dallas / Fort Worth area and serving clients nationally and internationally.

Discover our capabilities and learn why Method Frameworks is the strategic planning partner chosen by Fortune-500 companies and small businesses alike. Let us show you how to realize 140%+ ROI on your strategic planning efforts through our unique Plan4^SM process that brings together strategy and execution into a powerful plan.   Plan4 is our proprietary business planning process that involves an integrated set of actions designed to help companies gain sustainable advantage. Download our brochure to learn more about Method Frameworks and our services or download our Plan4 Planning Process Overview.

You can contact Method Frameworks at 877-317-5264 (877-31PLAN4) or follow this link to request a meeting with a planning consultant. Check our articles and blog often at www.methodframeworks.com to get many more planning tips and information about our Plan4 process.

Locations

Atlanta	Chicago	Dallas
Los Angeles	New York	Washington DC

       

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