Reverse the Odds: Give Your M&A Transaction a 70 to 90 Percent Chance of Success
By David Gross
Trillions of dollars pour into mergers and acquisitions (M&A) annually as companies seek to increase market share, reduce costs, differentiate, diversify, refocus, and capture other sources of value.
Unfortunately, M&A success is the exception, not the rule. A whopping 70 to 90 percent of transactions fail. This means, only 10 to 30 percent of transactions succeed. To put these terrible odds in perspective, let us turn to the gambling capital of the world, Las Vegas. The odds of winning in blackjack are 44 to 48 percent, much greater than the odds upon which companies stake their futures.
Though these statistics may seem grim, there are companies beating the M&A odds, and they’re beating the odds over and over again. But how do these companies, or “M&A Winners,” repeatedly beat the odds? After 20 years of dealmaking, we have discovered 5 hallmarks underpinning their success.
HALLMARK #1: M&A IS A DAILY ACTIVITY
They say practice makes perfect and consistency is key. The same is true for M&A Winners. These companies have specialized talent, or “dealmakers”, who focus exclusively on M&A strategy and execution. Dealmakers typically reside on the corporate strategy or corporate development team, or on the equivalent business unit team in decentralized organizations. They are adept at marshaling talent, information, and other resources across the company; keeping their eye on critical value drivers and interdependencies; and managing the deal process. Effective and efficient dealmakers pay for themselves many times over.
An alternative and frequently-taken path is to challenge a leader with operational responsibilities to manage M&A activity day-to-day. Unfortunately, this approach stretches buy-and sell-side leaders too thin and may result in underperformance on the deal and missed operating targets in the existing business. For the sell-side, missed targets may prompt the acquirer to demand a lower valuation and changes to other key terms.
HALLMARK #2: REGULAR “TUCK-IN” OR “BOLT-ON” ACQUISITIONS
M&A Winners regularly make “tuck-in” or “bolt-on” acquisitions and rapidly integrate them into, or alongside, existing businesses to capture value. These acquisitions are smaller than “bet the company” acquisitions, leverage and complement the existing business, and carry low-to-moderate integration, operating, and financial risks.
Over time, M&A Winners utilizing this approach gain unique process efficiencies and know-how. M&A Winners recognize they have to successfully identify, evaluate, negotiate, close, and integrate acquisitions regularly to meet strategic objectives. With this pressure, dealmakers are forced to design highly-efficient processes, sell them to key stakeholders across the organization, and refine them over time.
These processes, and related corporate guidance, tools, and templates, and other know-how, are typically captured in the company’s “M&A Playbook.” This playbook also memorializes key learnings from prior deals and changes in corporate strategies, markets, laws, regulations, and other aspects of transactions. M&A Winners update their playbooks at least once per year.
HALLMARK #3: OVER-INVESTMENT IN DUE DILIGENCE
M&A transactions fail when value in the acquired business is diminished or anticipated value is not captured after closing. M&A Winners know that failed transactions may also destroy value in their existing businesses and cause reputational harm which may last for years to come. To protect themselves, M&A Winners over-invest in due diligence, relative to under-performers, to ensure these risks are fully understood and proactively managed.
We have seen the adverse impacts of M&A on existing businesses and reputations time and time again. Bank of America’s purchase of Countrywide Financial. HP’s purchase of Autonomy. Caterpillar’s purchase of Chinese coal equipment manufacturer ERA. These are just a handful of notable M&A transactions that came back to haunt the acquirer’s existing businesses and reputations for many years to come. In each case, due diligence failed to identify substantial frauds and predict the financial and reputational damage which followed.
Let us consider the consequences of Bank of America’s ill-fated acquisition of Countrywide in 2008. Bank of America paid $2.5 billion for Countrywide. However, estimates place the bank’s financial losses at $70 to $90 billion. This range includes the bank’s $17 billion settlement with the U.S. Department of Justice (DOJ), a “settlement” which preserved authorities’ rights to pursue criminal charges against the bank and individuals in the future. While quantifying the hit to Bank of America’s reputation is challenging, it is fair to say the hit lasted a decade and may reignite with Ambac Assurance Corp’s lawsuit against Bank of America set for trial in 2019.
HALLMARK #4: REALISTIC OPERATING AND FINANCIAL MODELS
Developing and refining models which accurately predict operational and financial performance is another hallmark of M&A Winners. These models contain realistic assumptions (e.g., achievable integration timelines and cost estimates) and link future operating performance to financial outcomes.
The precision of these models is no accident, and developing them requires three steps: 1) Identifying the key value drivers, 2) Developing 3 to 5 plausible scenarios, and 3) Incorporating key insights from scenario planning into detailed plans. All too often, dealmakers allocate excessive time to identifying and justifying long lists of assumptions and realize too late in the process, they did not spend enough time on the key value drivers. The resulting scenarios and plans are ineffective.
Through a simple practice, M&A Winners are continuously upgrading their modeling (and execution) capabilities. This practice is known as the “M&A Lookback”. Feared by many and completed by few, the M&A Lookback is an iterative process which compares actual operating and financial performance to deal team projections, and captures trends and insights across deals. Key findings and learnings are incorporated into the M&A Playbook at least once per year.
Generally speaking, M&A Winners empower the deal team to conduct M&A Lookbacks, and M&A Lookbacks occur at regular intervals after closing (e.g., at 6, 12, 18 and 24 months). In certain situations, the deal and finance teams may partner on M&A Lookbacks, or a board committee may instruct the internal audit team to complete the work.
HALLMARK #5: AUTHENTIC ENGAGEMENT WITH EMPLOYEES
Immediately following M&A announcements, companies are quick to communicate to employees on both sides of a transaction (e.g., the classic FAQ sheet). However, M&A Winners do not communicate to employees, they communicate with employees and engage in progressively targeted and deeper ways. The difference between these two cannot be overstated. Communicating with employees encourages and rewards team members who air concerns and ask tough questions. With this information, M&A Winners create a dialogue around employees’ most important concerns and maintain the trust and loyalty of employees through periods of significant change.
Of course, companies do not engage with employees, their leaders do. At M&A Winners, CEOs and other executives put themselves in front of employees immediately following M&A announcements, come out from behind the podium, and field questions from employees for as long as necessary (not as scheduled).
THE GOOD NEWS
M&A failure rates will continue to run in the 70 to 90 percent range. The good news? M&A Winners are repeatedly beating the odds. Underpinning their successes, we’ve discovered 5 hallmarks. With this in mind, is your company ready to rethink dealmaking?
David Gross is a Founder & Managing Director at Strategic Value Partners (SVP).
SVP delivers tangible results through strategic planning, team building and development, and intensive change management. SVP serves aerospace and defense, automotive, healthcare, natural resource, retail, and TMT companies. SVP also collaborates with alternative investment managers. In every case, SVP's goal is to create exponential returns while proactively managing strategic, operating, and financial risks. For additional information, please email us at email@example.com, visit us at www.consultsvp.com, and connect with us on Facebook and LinkedIn.