Success Factors in Mergers and Acquisitions deals

Success factors in Mergers and Acquisitions deals

In this blog, we wil look at success factors in mergers and acquisitions deals. M&A is a core component of a company’s corporate strategy.Studies indicate that M&A produces mixed results and successes.This is because M&A deals are not carried out regularly by the companies and in some cases.When such deals fail or does not add the necessary value, then M&A team gets a bad reputation within the company.
Companies have built an internal M&A capability that has the necessary expertise to execute the transaction successfully.Successful companies have built a programmatic M&A capability where the deal teams execute M&A deals by carrying out a systematic process of identifying targets , doing due diligence, carry out deal negotiations and then successfully integrating the target company with the acquirer.

Critical success factors in mergers and acquisitions deals

  1. Successful companies that have achieved significant successes in M&A transactions have the following success factors.

Have a clear Strategy in place

Successful acquirers have a clear strategy on why they are acquiring companies and how the target is adding value to the acquirer.The acquisition has to be aligned to the corporate strategy of the company.
Few reasons why companies are acquired is:

  1. To add or strengthen their existing capability
  2. To build a new capability and add a new product/service that can be sold by the company sales force
  3. To expand into new markets which can be used as a distribution channel to sell the company offerings

Successful acquirers have a clear process for identifying targets and deciding which targets would be doubled down, which capability needs to be added and which new market is the most attractive.
When the M&A process is clear with a detailed roadmap tasked with right skillsets who know what is needed to be done, then the acquirer would be better equipped to overcome any disruption in the process.Most of these disruptions would be external due to the competitors who would also be interested to acquire the same business. With a clear M&A process built, successful acquirers would be able to react appropriately.
Successful acquirers have the highest probability of success in those deals where the acquirer and target operate under same industry or product.This is because the acquirer has knowledge about the underlying product and the industry which would also help in smoother integration as the cultures/business models between the acquirer and target are not very different.
When companies are looking at M&A to build capabilities or to diversify their business, then the probability of success from these deals is very low.For instance, when a legacy company is looking to acquire a leading AI startup, the success of the deal is purely measured by the employees of the target firm deciding to stay after the acquisition. In order to incentivise the target employees to stay, acquirers resort to high retention bonuses.Inspite of doling out high retention bonuses, target employees leave after a certain time due to the divergent cultures.In capability deals, acquirers are basically hiring employees in mass but this strategy have yielded very poor success.Many startups just want to cashout and are not really interested to add value.Founders here would stay for limited time period and would exit to start other business.

M&A strategy should not be restricted only to M&A team

  1. The execution of inorganic strategy should not be limited only to the M&A team.The inputs of business development and sales team is extremely important as these client facing resources are in the field and have more details on what is happening in the market.
  2. Successful acquirers have built KPP on the sales bonuses which is to support the M&A team in identifying the targets as well as the capabilities that companies need to compete effectively.
  3. Successful acquirers have their Corporate Development team report directly to the CEO against CFO.This is because the CFO can block some deals due to high valuation multiples and might even restrain the M&A to stop looking at some businesses.This might result in some very good deals ending with competitors. When there is a direct reporting to CEO, then these filters can be removed.

Reputation of Acquirer is important

  1. The brand and reputation of the acquirer is based on the success of the last transaction. If the last transaction is a failure, then the reputation of the acquirer in the market is generally not high.
  2. The target companies would be interested to know the acquirer success in past M&A deals and how they have handled other target companies.The bankers also give a comprehensive overview on the acquirer culture and how honest they are in fulfilling their commitment.Most of the target firms conduct a reverse due diligence on acquirers to ensure that they are taking the right decision to align with the acquirer.
  3. Eventhough the final purchase price and the deal structure is important, human factors like credibility and trust is equally important in M&A deals.

How successful acquirers handle the Activist Investors

  1. Activist investors play a critical role in M&A strategy of the company.Although activist investors have a bad reputation in the market, around 80% of the time, their opinion is correct.
  2. The management of the companies are not still equipped to handle the external criticism of the shareholder activists.The activist investors ensure that all the portfolio of businesses earn a return higher than cost of capital.When this does not happen, then they demand the management to divest the low performing business.When their request to the board is rejected, then the activist investor engage in a proxy fight to topple the board and occupy a seat in the board so that they can have a say in the strategy of the company management.
  3. Activist investors also would want any excess cash be returned back to the shareholders.Capital allocation for many successful acquirers would be 25% in share buybacks, 25% in dividends, 25% in making investments and remaining 25% in M&A.Activist investors also prevent any M&A deal to be approved when they are not sure of the returns they can achieve.
  4. Many companies settle with activist shareholders rather than fighting against them.These settlements would basically involve amending the board composition to deciding to divest a non performing business.
  5. Successful acquirers constantly reassess their portfolio from the perspective of activist mindset and proactively look to divest their businesses.They inculcate the mindset of Private equity companies where they are constantly looking to acquire and divest businesses aligned to their strategy.

Success factors in mergers and acquisitions determines the success

  1. Successful acquirers have built a strong capabilities with success factors in mergers and acquisitions which increases their probability of success in deal making.
  2. M&A deals that are carried out for acquiring capabilities do not have a high success rate.This is due to the high reliance on the target employees to continue with the acquirer post acquisition. This does not happen in most cases due to different cultures and employees deciding to leave organization after collecting their retention bonuses.
  3. Successful acquirers know how to handle activist investors as they recognize that the opinions of activist investors are correct most of the time.Hence acquirers proactively assess their portfolio of business and decide which business needs to be divested.In addition their capital allocation strategy is more oriented towards returning a major part of their free cash back to shareholders.

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