One of the findings, back in 2001, from McKinsey’s Evergreen study, was that there are a niche of companies that successfully grew through making a series of acquisitions. We called them M&A-led-growth companies. (M&A stands for Mergers and Acquisitions)
There were a few caveats.
Firstly, the pre-requisite was that the acquiring company was already a strong performer, doing the fundamentals of business well. The flip side of this was a clear result that lousy companies made for lousy acquirers. I’ve subsequently experienced this myself, and now observe that selling to a dysfunctional player should be considered an admission of defeat, lack of choice, or a purchase price that was well in excess of the value of the firm.
Secondly, the successful M&A-growth-led companies acquired a series of companies that were much smaller, and avoided trying to absorb companies near their own size. This made the shock of each acquisition to the acquirer much lower, and made the chances of integration much higher.
Combined with the first point, it’s easy to see that giant mergers of lousy companies, such as US Air and American Airlines (rejected for now by authorities) are highly likely, almost certain even, to destroy value.
Finally, companies that grew through M&A-led-growth became very good at the process of identifying, acquiring and merging the new businesses. We particularly saw that they were good at the post merger integration, and were able to capture the benefits of the merger quickly and well.
It’s now 12 years later, and McKinsey has published M&A as competitive advantage, which is consistent with our results explores the topic further.:
In our experience, companies are more successful at M&A when they apply the same focus, consistency, and professionalism to it as they do to other critical disciplines.
This requires building four often-neglected institutional capabilities: engaging in M&A thematically, managing your reputation as an acquirer, confirming the strategic vision, and managing synergy targets across the M&A life cycle.
The four areas are worth exploring:
Engaging in M&A Thematically
The McKinsey authors suggest thinking ahead and agreeing what goals you are trying to achieve with M&A versus the overall company strategy. This of course means having a company strategy to begin with, and not (necessarily) reacting to an opportunity for the sake of it.
The best way that to form that M&A strategy, in my own experience, is to integrate potential M&A into the annual planning cycle. That work should highlight any key potential partners or M&A candidates in the agreed areas of focus and the team should prioritise a potential deal pipeline. The McKinsey article advises, and I agree, not to take on too many deals at once, to focus on a particular area and to gradually build the capability to absorb.
Managing your reputation as an acquirer
In the USA and other large economies investment banks often propose unsolicited deals to buyer and seller alike, seeking fees from the transaction. While these deals may sometimes be for the better, the acquiring company is not really in control. As a company gets better at being an acquirer, it can take control of the process of finding and absorbing companies.
Businesses that handle finding and absorbing acquisitions well can earn the right and reputation to be able to acquire more. These businesses build their internal M&A and post merger capability, and very clear about their own processed with target companies. I’ve seen this when dealing with potential US acquirers, and that well-defined process can make it much easier for the target company to prepare for, engage with and with go through with a deal or move on. Good dealmakers make sure that they are working as partners on the journey to a deal. One tip not in the article – make sure advisors on both sides are experienced at doing similar deals.
In one recent pair of acquisitions that I advised on we used similar term sheets and the same legal and accounting advisors for each deal. My own involvement was able to drop as the executive team gained experience from the first deal, and as the company grows their ability to find and execute more deals will become a real strength.
Confirm the strategic vision
An acquisition or merger opportunity is an invitation to journey together for ever, and that means each side better be very clear about that direction, and how each is helping. It should come as no surprise that open communication is a start, and in my mind there should be a two-way discussion which, if done well, may result in amending the overall strategy of the acquirer. If things are going to change a lot post merger, then it’s wise to work through this well before a deal is done and agree on the future vision together. Sorting this stuff out early, before the expensive legal and accounting details are done, is important, as those details can risk taking over the process. During the due diligence process make sure that as well as counting the beans and bits, to also check that the shared vision is attainable.
In my own experience the deals that worked most effectively were based on a shared future vision which was crafted together. Ideally the side I’m advising is doing most of the crafting, but it does needs to be based on genuine benefits to all parties. Once that shared vision is agreed, it’s much easier to have conversations about the value of the combination and the plans will be post merger.
Reassess Synergy Targets
Before signing a deal, you will have a fairly decent idea of how much extra value, or synergies, the combined entity will be able to create. The synergies are the magic that makes deals happen, as they allow each parties to receive more value than they pay. The buyer gets something that is worth more than they paid, and the seller receives more money than the company was worth as a stand alone.
So it’s important to agree on a post merger management plan up front, before the deal is done, to capture the synergies. However the article points out that it’s also important to be flexible as the post merger plan proceeds.
I’ve walked into several post merger situations, as a consultant, and, well, that’s not a good sign. The worst mergers, in my experience, things like mandated head count reductions, enforced new business processes that are worse than the old ways and the inability to adapt as new information appears.
The best mergers do have a plan, but they also accept that plans change, that each company can learn from the other and that it might be best to let the newly merged teams work out their own way forward.
The latest McKinsey work is consistent with what we found 12 years ago. If you are considering either acquiring or merging with another firm, then do first look internally, and make sure you are in good enough shape to absorb the new business. Remember that trying to merge your way out of trouble will fail for you, and drag the other firm with you as well.
While it’s obvious that any seriously considered mergers should be justified by the synergies of the combination, that combination should also drive towards the overall mission and vision of your business. That means explicitly analysing how the new larger entity will deliver better outcomes for customers and end users, and not just the balance sheet and P&L.
On that note, for me, far too often mergers are justified on cost cutting relating to people, perhaps driven by individuals outside the company, or who have never been an employee in that situation. It’s a short term approach that invariably delivers worse outcomes for customers and end users, destroys morale and stifles any new developments from either side of the deal.
Instead genuine deal synergies and thus performance for shareholder comes from combining strengths of the companies rather than relying on cost cutting. Keep the staff, follow the shared vision together and expand more rapidly.
Being in New Zealand we will tend to look for potential acquisitions locally, but perhaps the best value is gained by looking offshore, especially for companies that can accelerate routes to markets.
However you do it, for well-run companies M&A-led-growth can be an incredibly effective way to grow, and done well can create tremendous value for all parties.
(Cross-posted from LWCM)