After being involved in 25 mergers and acquisitions in five different organisations, I think it is reasonable to say that I have seen my fair share of M&A activity. Ah the stories!!!
Some of them have been hugely successful and others a complete disaster. Some have made sound business sense and others have been clearly an ego driven exercise. I have participated in the acquisition of small, local companies of less than 10 people, and the acquisition of large businesses of more than 1,300 in international transactions.
As tempting as it is to share the many entertaining stories I have witnessed first-hand, this article is of a more practical nature. For anyone who is thinking about expanding through M&A, there are some very consistent lessons. Ignore these at your peril – as I have watched several CEOs do so.
Due Diligence
As obvious as it sounds, I have watched some businesses spend a terrifyingly short period of time on due diligence. The greater the complexity of the acquisition, the more detailed due diligence you should conduct. This process should not be rushed and you should expect to involve several different types of professions in your analysis.
Look beyond the information in the data room and take a forensic approach to the information offered. Take a thorough look at items such as IT, as this will definitely have an impact in terms of your integration and ongoing costs.
If you are looking to acquire a business in a different country, it makes sense to step up the due diligence and look to engage local experts to help you. This is particularly important when you can’t speak the language and there are cultural differences! Do not assume that everything is as it seems. Believe it or not, I have watched one CFO refuse to do this due to the cost. Ultimately, that acquisition cost a great deal more than the option of proper due diligence.
Sadly, I have seen considerable international transactions take place with limited due diligence. If you cannot afford the time or invest the funds in conducting proper due diligence, you should expect the risks to multiply accordingly.
I have little sympathy for those who buy a business and then blame everything on previous management. The blame lies squarely on the shoulders of those who did not do their homework.
Culture
Most transactions are very much focused on the financial aspects of the deal and whether or not the acquired business will add value to the combined entity. Although this is an important piece of any acquisition, equally as important is the culture fit.
It makes sense to conduct a full cultural review as part of your due diligence exercise and map out the differences in the organisations. Not only will this help you to identify the number of differences, it will also help you to begin work on the integration piece if you decide to proceed.
There are different ways to approach cultural mapping, but my preference is to utilise the McKinsey 7S model[1]. This provides a logical framework and helps you to structure your mapping and conduct a complete organisational analysis.
If there are a significant number of cultural differences, do not sweep these under the carpet. The cultural differences will ultimately be the biggest challenge of integration and if you do not address these up front, they will definitely come back to bite you.
There will be some deal breakers where the culture is so vastly different that you need to have the courage to walk away. This will often prove difficult for many, particularly when they are drawn to the services, client base, revenue or geographic location of the target. However, the number of issues that will erode the combined entity will multiply greatly when there is little cultural similarity.
Before you assess the culture of another business, you need to be crystal clear on your own culture. This is not necessarily articulated in the core values that are hanging on the wall. This is really about what is rewarded, what is celebrated, what is accepted in terms of behaviour and leadership – and what is not accepted. Once you have more clarity around this, you will be able to identify when another organisation does not fit.
Leadership
The old saying that “a fish rots at the head” is ultimately true. The position of CEO is critical in any organisation and will set the tone for EVERYTHING. This is incredibly important when looking at M&A. The CEO and the senior leadership of both organisations need to agree that this is a good outcome for both companies and be fully and visibly supportive.
There is also the tricky matter of what happens to the CEO of the business that is being acquired. In some cases this can be worked through as part of the integration. However, this needs to be addressed prior to the transaction being completed.
If there is a consistency in the leadership style of the two organisations and clarity around what will happen with the leaders in the combined entity, you have a significantly greater chance at success.
Good leaders communicate continuously during times of change. There are fewer changes that have as much impact as the integration of two businesses – so make sure you communicate frequently, using many different mediums and feedback loops.
Honesty about Integration
Doing the deal is really the easy part – it is making it work that is the difficult piece! Often there is a flurry of activity and excitement around negotiations and many celebrations once the deal is signed. However, the integration is the commencement of new complexities and the management of expectations. Thorough planning and ongoing communication is critical for success.
Integration is much much easier if everyone is honest during the negotiations about what will really happen afterwards. The people on both sides will be change ready for 6-12 months after the deal is done. They are expecting you to change things, so this is your window to move swiftly and make the difficult integration decisions. Don’t delay – the longer you take to integrate, the harder it will be.
Talk about the difficult items such as potential job losses, overlap with clients, which systems you will utilise and the timeframes for change. Once you put the difficult items on the table and everyone has clarity about the eventual plan, it is much easier to move forward as a combined entity.
In summary, M&A can prove to be a great vehicle for growth, but the stakes are high – and the failures are frequent. If you are going to grow your business through this avenue, pay attention to these items to position your organisation for the maximum chances of success.