As we approach in a few weeks most fiscal year ends, we will surely be reading the usual list of major acquisitions made during the year, the corresponding value of the deals, and the key advisors behind the top transactions. The list is usually interesting material for a read. What I would love to see, however, is a list of which mergers and acquisitions deals made three years ago worked, and which ones failed—and then the list of the major advisors for each. Statistics indicate that a vast majority of acquisitions do not end up as planned. I attribute most of the failures to a handful of reasons. Let’s review them together and see, firstly if you agree with me, and also, how with few practical suggestions we can make mergers and acquistions work better.
Most textbooks tell us that mergers and acquisitions are made for the following five key benefits:
§ Acquiring market share
§ Diversification of product and service offerings
§ Increasing plant capacity or distribution channels
§ Acquiring specific strategic expertise, R&D, and/or assets
§ Reduction of financial risk
The attractiveness of acquisitions is also highlighted by the speed of growth effect of owning new assets and resources “overnight”. You make a one-time investment, which hit your balance sheet just once. You can grow through regular organic growth or through the acquisition route. Regular organic growth takes time to achieve versus the acquisition route, which is much quicker growth.
Basically, all these reasons and benefits are technically correct, but the main reason for acquisitions is in acquiring a larger market share, which leads to improved control over pricing, which results in improved profitability. This may be an over-simplification, but that’s the bottom line for most mergers and acquisitions.
Another important aspect of acquisitions is that government approval must usually be obtained for the large ones.
All the major consulting and accounting firms stand ready to help you identify targeted companies, assist you put together a plan of attack, help you evaluate, negotiate and finance the deal, obtain government approval, do the legal paperwork, and address fiscal strategy. You can get all the help you need until a successful close of the deal.
All this is true, but once the acquisition is consumed and the advisors collect their fees, the army of accountants, lawyers, experts, and advisors leave wishing you much success for “many happy years”… You are usually, left alone to sort out the new customers acquired, the new employees that are now members of your family, the new assets that were purchased, and most importantly, the new “culture” you have just inherited.
This is when you need help most, and nobody is around to help you put together these two organizations, or in other words, digest what you just ate.
Post-acquisition planning and execution is the main reason acquisitions fail. For an acquisition to succeed, there must be a comprehensive plan in place and one that has been researched well and put together by the new team and not by some consultants and advisors. Many acquisitions have earn-out clauses, meaning that a portion of the agreed upon price of the deal is paid up front and a second part is earned and paid as the benefits of the mergers and acquisitions are realized/harvested. So, why not have advisors and consultants paid in the same manner? This would solve 80 per cent of the problems. Eating is not the problem; it is the digestion that is the problem.
A second big reason why mergers and acquisitions fail, is that the acquisition price is usually inflated. In the interest of consuming the deal, the acquiring company ends up paying too much. And why is that you ask? For the simple reason that the valuation was made by non-independent interested party(ies). Remember that the value of advice is in direct relationship to the expertise of the giver and in indirect relationship to the degree of their involvement or interest. If your expert advisor fees are directly tied to the value of the deal, they will benefit from a higher price and not a lower one. True advice must come from an expert that is independent. So, why not separate the brokering from the advice? Mercantile will do a valuation at no cost or obligation.
In his new book, Maverick Leadership, author Hugh Latif dedicated a chapter to sustaining your business performance and explained the six key ways for building moats around your business. I also gave examples of failed and successful acquisitions.
Hugh Latif, of Hugh Latif & Associates in Vaughan, Ontario, is a management consultant who helps mid-size, private companies with strategy, succession planning and HR. He is author of a new book, Maverick Leadership