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Last updateFri, 30 Jan 2015 2pm

 

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Mergers and Acquisitions and the risk of failure

Why are failure rates so high?

Why are failure rates so high?

 

With the potential for Kraft to acquire Cadbury and with the news that Magna will acquire Opel/Vauxhall and Orange merging with T-Mobile in the UK so comes the prospect of shareholders getting excited about the new business upsides.

Statistics vary for the failures of M&A to deliver the promised value between 50% and 75%. Whatever the true number, the failure rate is very high. Why so?

Indeed why so when all the analysts, bankers and economists never mind the business executives pore over the deals beforehand to an extraordinary and very expensive degree.

Here are some of the main reasons for the M&A failures:

Synergies


So often the synergies are propounded around technical knowhow, complementary products or market access. This maybe sound in theory, but the execution so often fails because it requires extra efforts from all employees in both companies. Meanwhile most employees felt they were giving 100% already and so it requires a major challenge for the companies to attain these increased efforts.

Above all, to gain synergies, as with most gains for M&As there needs to be change. But, change is difficult and particularly in large companies. British Airways only really shook off the BEA vs. BOAC divide for the 1970s when it moved to Terminal 5 in 2007. Change integration for full synergistic gain can only happen by creating the framework in which people can happily and practically work. Even in these modern times, business leaders think that change and synergies can be forced through and often will say publicly “we will push this through.” Therein lays the admission there is a barrier to overcome.

Back office savings


There only needs to be one HR, finance, IT, manufacturing, and marketing function in any newly merged company. Reports on the Orange merger predict £545m in back office savings. This number is not trivial and behind this will be vast amounts of disruption. Look what happened when NTL bought Virgin or when Barclays bought Woolwich – there was chaos and immense customer frustrations as the service levels fell during the merging of functions. That said, the back office savings are usually the most reliable source of upside in an M&A.

Strategy and growth models


Two businesses coming together will often have completely different strategies and growth models. These are the fundamentals of a business usually unseen from the outside though usually detectable. M&A’s often demand some alignment of strategies. This assumes that one or maybe both were flawed in the first place. The result is either a new one or the imposition of one party strategy on the other. This usually leads to some level of failure. One only has to look at GE and its ‘blueprint’ for acquisitions to see how the ‘one size fits all’ approach to business strategy leads to failures. Each business, market and customer franchise is unique in some way – no matter how small that may be. The risk is when this gets overlooked though ignorance or arrogance.

Brand management


Brands are often ignored by the M&A planners because they fail to fully understand what elements make up brands and their equity. The same should not be true of the boards but none the less, how often have we seen M&As where very strong brands are swept aside by the name of the new owner. This can have disastrous consequences, destroying the value and alienating customers. All brands should be respected and invested in where they have current and future value.

Customer focus


Customers are too often forgotten in the M&A frenzy. Boards do not stop and say – what will the customer think of we shift distribution, adopt common pricing etc? The customer is the life blood of the business along with its cash which should always be remembered. However, many M&As still take place with the arrogance to ignore the customer.

Management competence


Is the competence in both organisations to equal measure? If not then how will balance be achieved? Does the acquiring company really understand its new acquisition? Too often the acquirer parachutes in its own team and fails to grasp the idiosyncrasies of the acquired company. If a new, single board is to run the combination then so often this board cannot manage to complexities of the new, larger organisation. Simple management weakness is a common trap.

Company culture


When P&G acquired Gillette the cultures were quite different. P&G understood this and eventually absorbed Gillette into its own culture. This is so often the way and can work well. But clashing cultures can be the undoing of the deal unless a proper culture adoption, harmonisation or change programme is put in place. This needs managing well with strong champions. Culture is a great enabler but it can be the hidden destroyer.

Leadership


Orange has outstanding, proven leadership. All too often leadership is tested beyond its abilities when it comes to handling a bigger commercial enterprise with integration challenges. This is one area that is more vital than most. For shareholders the true motivation of leadership is critical. This must be fully understood.

Hubris & Desperation vs. Analysis


In the end, some deals take place for reason involving too much hubris and vanity. IT may also be out of desperation. The desperation to grow, add products, satisfy the cravings of shareholders or because of unbridled ambition.

No deal should be analysed to death, but no deal should be done before a cooling shower of reality and sanity.

 

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