Approach to a Successful Large M&A Transactions

Large M&A Transactions

In this blog, we shall discuss on what it takes to attain success when companies engage in large M&A. Large acquisitions make headlines and trigger wide spread media publicity, but does such deals make financial and strategic sense?
Large acquisitions can be classified as those transactions where the deal value is more than 30% of the acquirer market capitalization. Such transactions are risky, hence board members and investors generally are skeptical of the success of the deal.History has provided abundant case studies of failure of such deals which can result in destruction of significant value for the shareholders.

Large M&A transactions create significant value

• Large M&A deals create significant value to the acquirer but the time taken to create value is higher when compared to Tuck-in acquisitions. Most of the large deals take more than two years to start showing some value.
• The difference between the success and failure in executing larger acquisitions often comes down to Strategy. Many acquirers do not take the risk to go for a large acquisition unless there is a compelling reason for a strategic fit.The reason is due to the risks posed by the larger deals followed by the integration complexity.
• Companies in mature industries have few organic options for growth.This is particularly visible in fragmented industries like semi conductor sector where a consolidation play can give rise to major economies of scale.
• When the target company is a strategic fit to the acquirer, then the acquisition can improve the acquirer growth and performance rapidly.

Large M&A transactions execution play – key to success

• Successful deals have strong focus on execution.In the case of large transformational acquisitions, the execution and integration approaches followed are different when compared to a tuck-in acquisition.
• Successful acquirers set higher performance targets than the due diligence estimates and reject the widely followed idea that the new merged entity will follow the best of both the cultures.
• Leadership teams have their focus on the few of the most critical aspects of the deal and are laser focused on executing those areas to derive synergies.

Finalizing Large M&A transactions synergy estimates

• The synergy targets taken by the Integration team post deal closure is the one that Due Diligence team estimates during the pre-deal phase.
• These synergies estimates are taken as the performance targets by the Integration team.The synergy estimates by the due diligence team has it’s own set of challenges.
• The Due Diligence team does not have access to all the target data and due to the lack of enough time available, the Due Diligence report will not cover in detail all the aspects of the target business
• In most of the cases, the Due Diligence team focus more on Cost synergies as it is easy to identify the cost savings by downsizing employees and removing redundant functions/overheads expenses.The revenues synergies from growth initiatives and other cross-selling opportunities are difficult to assess.
• The individual managers in Due Diligence take at a conservative estimate on the synergies targets as these measures are taken as performance targets to achieve cost and revenues targets.
• In many successful acquisitions, the integration team reassess the synergy targets given by the Pre deal team to validate whether these targets are achievable.The synergy targets in the Pre-Deal team are taken as performance baseline and these are further reset by the Integration team based on the new and additional information.These additional information can provide opportunities for cost savings or adding growth.
• When the integration team identifies opportunities that can further increase the synergy targets, it is necessary that the acquirers have the right set of executives who can achieve these targets.
• Such executives in the Integration office should have clearly defined managerial roles, strong links between individual performance with consequences and have attractive incentives of exceeding the synergy targets.These attributes needs to be developed long before the deal is closed.

Asserting cultural control in large M&A transactions

• In case of tuck-in acquisitions, the acquiring company tend to assert its culture over the acquired company. The same is not possible in case of larger acquisition where companies generally follow a Merger of equals approach.

• In Merger of equals, generally the best of both the cultures are taken and then followed.This approach leads to confusion, reduces accountability, delaying integration which results in more time needed to run the target business.

• Successful acquirers realize that for the deal to be successful it is better if one culture tends to dominate.This makes sense when acquiring a digital company, following the target culture of innovation and agility would improve the performance of both the acquiring and the acquired entity.

• At the integration planning, the integration team identifies the cultural differences and the steps to be taken to narrow the differences between the culture of target and acquirer.Change management plays an important role to help the employees understand what is needed to be done in order to be aligned to the Target Operating model.This is then followed by aggressively managing the change through proper employee engagement, training and Communication strategy.

• In some cases, the integration team deliberately wants to leave the cultural gaps in order to protect the distinct capability of the target company. This approach should be restricted only in those cases where the uniqueness of the target culture creates value and the acquirer makes the required investment to keep the culture seperate by forming clear organizational and operational boundaries.

• For instance in case of an acquisition involving a target having disruptive technology, the investment needed to protect the target culture would be equal to the cost of integration.In such deals, the parent company should be ready to forego any cost synergies as result of redundant operations, have flexible financial reporting and budgeting that fits the target operating model.

Leadership Involvement in large M&A transactions

• As large deals are more risky and have higher integration complexity, leadership involvement primarily the CEO is important to ensure the deal team is focused and energized.
• The involvement of leadership team is essentially confined to few issues which are critical and where their guidance matters the most.The most imporant concern would be to protect the target base business before looking at ways to add value to the deal.
• All the other issues specific to the deal are delegated to the senior management.The integration leader would be responsible for the process related issues and integration updates, who escalated them only if necessary.

Conclusion

• Large M&A transactions create significant value to the acquirer but at the same time are risky and can destroy significant value for shareholders.
• The approach required in acquiring and integrating a larger target firm is different from a tuck-in acquisition.
• Successful acquirers reset their perfomance targets by validating the due diligence estimates of deal value, do not follow a Merger of equals approach of adopting the best of both the cultures and have their leadership involvement on a few most critical areas.