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Home > Mergers and Acquisitions Best Practice > Identifying and Minimizing the Strategic Risks from M&A

Mergers and Acquisitions Best Practice

Identifying and Minimizing the Strategic Risks from M&A

by Peter Howson

Table of contents

Executive Summary

  • The high failure rate of acquisitions can be mitigated considerably by dealing with the strategic risks that are present at every stage of the acquisition process.

  • It is best to start with a well-developed business strategy, a clear idea of the place of mergers and acquisitions (M&A) in this strategy, and an acquisition target that furthers strategic aims.

  • Before embarking on negotiations, acquirers should avoid the risk of overpaying by setting a price above which they will not go.

  • Before negotiating the final details, due diligence should be used as a final confirmation of the strategy and the target’s fit.

  • The most important thing is to make sure that the post acquisition plan is put together early and in as much detail as possible. Acquirers need to add value, and they can only do this if they are clearly focused on the sources of extra value and how to realize them right from the very start.

Introduction

M&A is extremely risky. Studies carried out over the last 30 years suggest that the failure rate is above 50% and probably close to 75%. However, by identifying and acting to minimize the strategic risks early on in the process, the rewards can be spectacular.

There are four stages in the M&A process:

  • acquisition strategy

  • due diligence

  • negotiation

  • post-acquisition integration.

Strategic risks are present in each.

Acquisition Strategy

M&A is glamorous. Market analysts see M&A as a sign of a dynamic management and mark up share prices accordingly. For management, M&A can be a means of bolstering short-term performance and/or masking underlying problems. It is hardly surprising that the failure rate is so high when the mystique of M&A encourages acquirers to rush into acquisitions.

M&A Is a Strategic Tool

This brings us to the first strategic risk—a failure to recognize that M&A is a strategic weapon. Strategy is all about giving customers what they want, and to do it better or more cheaply than anyone else. It is about competitive advantage gained through superior capabilities and resources. M&A should fit into this framework.

Given the high risk of failure, acquirers should ask themselves if acquisition is the best means of achieving aims. There will generally be a tradeoff between risk and time. Acquisition is the highest-risk route to corporate development, but it is often the quickest. Acquisition should be examined alongside all the other options—organic development, joint venture, merger, etc.

Is the Timing Right?

Implementation is the key to successful strategy and this is the clue to the next strategic risk—is this the right time to be acquiring? Getting the transaction done and integrating it afterwards will take up a disproportionate amount of time, resource, and expertise. This means making sure that there is:

  • a strong base business (if existing operations are struggling, acquisitions will only add to the problems);

  • the resources to add value (where there are insufficient resources to manage an acquisition, the chances of adding value are slim).

Select the Right Target

The next risk may sound obvious, but one of the biggest ever M&A disasters stemmed in part from selecting the wrong target. In 1991 AT&T, the US telecommunications company, bought NCR for $7.48 billion. AT&T was implementing a so called “3Cs strategy” where communications, computers, and consumer electronics were expected to coalesce into a new market. It bought NCR to provide a capability in computers. But NCR was not a computer company. Its core business was in retail transaction processing and banking systems, and it happened also to manufacture a range of “me too” personal computers. While this may be an extreme example, it is not uncommon for buyers to misunderstand the target company’s capabilities.

Due Diligence

The strategic risks in due diligence all stem from making the focus of due diligence too narrow.

The success of any acquisition depends on buyers creating value. Due diligence presents a potential buyer with the access and information it needs to confirm that a transaction can be a long-term success. This means using due diligence not just as an input to the sale and purchase agreement but, more importantly, also to confirm both the robustness of synergy assumptions and their deliverability. As people will deliver the extra value, buyers should also make sure that due diligence covers cultural and people issues.

Negotiation

In negotiation, the strategic risk is overpaying. Buyers are almost certainly going to have to pay a premium for the control of a company. The challenge is to make sure that the synergies are big enough to cover both the premium and the deal costs. Work out a price in advance and, as it is all too easy to get carried away, always set a maximum walk-away price before negotiations begin.

Post-Acquisition Integration

The major cause of acquisition failure is poor integration. Integration is poorly carried out because it gets forgotten. Doing the deal may be sexy, but integration is where the real money is made or lost. The strategic risks stem from not starting work on the integration plan early enough in the process. As integration is central to valuation, the integration plan must be put together well before negotiations begin, and the other golden rules of acquisition integration also demand an early plan:

  • Integrate quickly to minimize uncertainty. In particular, integration changes related to personnel need to be made as soon as possible; early communication is paramount; and there should be early victories to demonstrate progress.

  • Do not neglect the soft issues. The culture of a company is the set of assumptions, beliefs, and accepted rules of conduct that define the way things are done. These are never written down, and most people in an organization would be hard pressed to articulate them. However, they can substantially increase post-acquisition costs or hold back performance

  • Manage properly. Buyers should appoint an integration manager. Like any other big project, acquisitions need one person to be accountable for the project’s success.

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Further reading

Books:

  • Camp, J. Start with NO: The Negotiating Tools that the Pros Don’t Want You to Know. New York: Crown Business, 2002.
  • Carey, Dennis, et al. Harvard Business Review on Mergers & Acquisitions. Boston, MA: Harvard Business School, 2001.
  • Cleary, P. J. The Negotiation Handbook. Armonk, NY: M. E. Sharpe, 2001.
  • Freund, James C. Smart Negotiating: How to Make Good Deals in the Real World. New York: Fireside, 1993.
  • Howson, Peter. Due Diligence: The Critical Stage in Acquisitions and Mergers. Aldershot, UK: Gower Publishing, 2003.
  • Howson, Peter. Commercial Due Diligence: The Key to Understanding Value in an Acquisition. Aldershot, UK: Gower Publishing, 2006.
  • Howson, Peter. Checklists for Due Diligence. Aldershot, UK: Gower Publishing, 2008.
  • Howson, Peter, with Denzil Rankine. Acquisition Essentials. London: Pearson Education., 2005.
  • Hubbard, Nancy. Acquisition: Strategy and Implementation. Basingstoke, UK: Palgrave Macmillan, 1999.
  • Hunt, J. W., S. Lees, J. J. Grumbar, and P. D. Vivian. Acquisitions: The Human Factor. London: London Business School and Egon Zehnder International, 1987.
  • Lajoux, Alexandra Reed, and Charles Elson. The Art of M&A Due Diligence: Navigating Critical Steps and Uncovering Crucial Data. New York: McGraw-Hill, 2000.
  • Rankine, Denzil. Why Acquisitions Fail: Practical Advice for Making Acquisitions Succeed. London: Pearson Education, 2001.

Article:

  • Davy, A. J., et al. “After the merger: Dealing with people’s uncertainty.” Training and Development Journal 42 (November 1988): 57–61.

Report:

  • KPMG. “Unlocking shareholder value: Keys to success.” London: KPMG, 1999. Online at: tinyurl.com/3yn35rz [PDF]

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