Merger failures: What every finance director should know

But value is destroyed as often as created when two companies come together.

Phil Dunmore PIPC

Director of Finance Online, February 2011

Mergers and acquisitions are up year on year, quarter on quarter and month on month.

Looking ahead the trend remains positive, with financial services, pharma, transport, media and IT to name but a few sectors all expecting further consolidation this year.

But value is destroyed as often as created when two companies come together.

That’s a huge risk to throw into the corporate mix, particularly during such uncertain economic times so why would any finance director ever give the green light?

The reason is that everyone believes that theirs will be a successful venture. If the numbers are right, success will surely follow? Well, not really. Putting together ‘the deal’ and executing it effectively, even if the numbers look stellar, is only one of many battles. Experience dictates this is not where the war will be won or lost.

Success is about minimising the downstream risk and this is about planning. The best planning follows a basic route map and starts when the board first decides it wants to wade in to M&A waters – what kind of target is ideal? Is the motivation knocking out the competition, filling in skills and product gaps, entering new territories or acquiring technology? Or is the deal opportunistic? Clarity of purpose now will make the process infinitely more likely of success.

On identifying the target, a business together with its advisors will start due diligence. Nothing is assumed about the target, every detail is checked from a financial and IT audit to staff contracts, corporate reputation, buildings, leases, pipeline both near and far and a skills audit of staff. This won’t be news to most finance directors and finding the gremlins now will save money later.

But there’s another sort of planning that is often overlooked: planning how you’re team’s actually going to bring the two entities together - on time, on budget – ensuring the value is physically realised, not just a remnant on the acquisition proposal for shareholders to beat you with.

Once a deal is accepted, detailed plans for integration, fully costed and resourced, must be drawn up. Ideally, an experienced senior executive will be put in charge to liaise across the two companies’ departments. Without the right leadership it will be neigh on impossible to motivate staff, drive through 30-day, 60-day, 90-day and 180-day plans and prevent long and difficult delays to integration that so often destroy value.

In successful projects, this person is often a consultant, an independent, experienced decision maker whose only vested interest is making the deal work. Their experience will help smooth the way and their independence will reassure staff, but whoever is in charge, they should follow five basic principles of integration that will heavily influence the outcome.

Keep a sharp eye on the performance of the main business

Sounds simple, but neglect here is so often the root cause of integration failures, resulting in a fall business as clients are neglected and defect to the competition. Keep sales teams motivated and clients informed during the process – and monitor KPIs closely be they daily, weekly or monthly. If something appears to be going wrong, address it immediately to get it back on track.

Integration versus optimisation - no contest!

Integration must be the priority and should only be eclipsed by KSoR (Keeping the Show on the Road) or mandatory imposed change. This is not the time for fixing every operational issue or pandering to internal pressures to add functionality or structures but for finding ways to take complexity (and change) out.

Do not strive for planning perfection... it will never be achieved!

Aiming to create an integration plan that answers all of the questions before the organisation moves into execution will just result in delays and prolonged debate. Events will occur that no matter how long you take in planning you will never predict. The level of success will come down to how the organisation navigates through these points of pain.

Dedication

Single accountability and dedicated focus on delivering integration
Whoever is in charge must be accountable and have direct access to the board. Managing the delivery of a successful integration (or any major change programme) is not a part-time activity nor is it for the uninitiated. A dedicated, experienced team will inject speed to decision making and create the relentless focus on the end game.

Manage the market and communicate like mad!

The post-acquisition world is alive with uncertainty for both the external market and the enlarged organisation. This is the time to ‘up the ante’ on communications, increasing the frequency of updates to clients; staff; ensuring key third-parties are clear on their roles in the integration process; and keeping the myriad of interested by-standers including the media and city analysts on your side. Across all of these groups, you must constantly communicate the logic of the acquisition, the integration plan and its progress. The importance of this cannot be overstated!

Of course there is no ‘one size fits all’ model to integration but success is closely linked to keeping sight of the above principles. When the one in charge of the purse strings does so the chances of unlocking the potential and creating value from the deal is maximised. Give it the green light!