Mergers and Acquisitions - Success-failure analysis
In this article, I am focusing on mergers and acquisitions—success-failure analysis reasons. Mergers and Acquisitions are important vehicles for generating synergy and corporate growth. (Hossain M A et al, 2021) As M&A and corporate finance managers, we know that many fail. AT&T, Quaker Oats, Disney, Sony, Compaq, and General Electric are some well-reported examples.
In the run-up to a merger and acquisition, energy levels are intense. Yet, afterward, planning and post-merger activities become weak and ineffective, leading to failure. Several reasons are attributed to failure. It includes poor strategic concepts, personality problems at the top, cultural differences, poor employee morale, incompatible information systems, etc. Therefore, post-merger integration must be tracked closely to reduce the failure rate. (Adams C et al., 2000)
Research in finance has shown that many M&A initiatives fail in terms of the expected financial outcome. Myers, MD (2008) attributes failure to cultural problems and a lack of operative integration. These can relate to issues with Enterprise Resource Planning (ERP) systems integrations.
It is important to balance the management of hard and soft key success factors, combining the economic logic of corporate performance and human capital through an integrated approach to mergers and acquisitions. Bertoncelj A. et al., 2007) mention five hard success factors.
- Professional target search and due diligence
- A realistic assessment of synergies
- The right mix of financial sources
- A detailed post-acquisition integration plan is prepared in the pre-deal phase.
- Speedy implementation
Another study (Hoang T V N et al., 2008) has listed ten critical success factors for M&A projects. These are:
- Complete and clear objectives, goals, and scope of the project
- Client consultation and acceptance
- Project manager and project team’s competence and commitment
- Communication, information sharing, and exchange
- Project plan development
- M&A advisory firm’s resource planning
- Time management and secrecy
- Price evaluation and financing scheme
- Risk management
The literature also notes five other soft success factors that elaborate on causes of mergers and acquisitions – success-failure analysis. These include a new ‘combined’ organizational culture, a competent management team, innovative employees, efficient and consistent communication, and a creative business environment. Both hard and soft success factors are essential to increasing the success rate of corporate combinations. (Bertoncelj A et al. 2007).
Synergy creation
Most people in the M&A advisory business know that acquiring firms create little or no value because they cannot create synergy, pay too high a premium, select inappropriate targets, or have ineffective integration processes, among other things. Careful target selection and effectively implemented acquisitions can achieve synergy and create value. Targets with complementary capabilities to those held by the acquiring firm provide the greatest opportunity for synergy creation.
Acquisitions that provide new knowledge to the acquiring firm can enhance the firm’s competitive position and create value for the acquirer. Knowledge gained from acquisitions can enhance innovation when the target firm has complementary science and technology to that held in the acquiring firm. Cross-border acquisitions present significant opportunities but provide more complex challenges for achieving synergy and creating value. The problem lies in executives frequently having trouble admitting failure and divesting acquisitions. (Hitt, M. A et al, 2012)
Next steps
Therefore, deal makers and investment bankers need to invest time into building a post-deal integration team that can hand-hold the new entity and place it on a growth path. The integration team is always a temporary and short-term fix to be superseded by a regular management team.
References:
Adams, C., & Neely, A. (2000). The performance prism to boost M&A success. Measuring business excellence, 4(3), 19–23.
Bertoncelj, A., & Kovač, D. (2007). An integrated approach for a higher success rate in mergers and acquisitions. Zbornik radova Ekonomskog fakulteta u Rijeci, časopis za ekonomsku teoriju i praksu-Proceedings of Rijeka Faculty of Economics, Journal of Economics and Business, 25(1), 167–188.
Myers, M. D. (2008). Integration of different ERP systems: the case of mergers and acquisitions. PACIS 2008 Proceedings, 65.
Hoang, T. V. N., & Lapumnuaypon, K. (2008). Critical success factors in merger & acquisition projects: A study from the perspectives of advisory firms.
Hitt, M. A., King, D. R., Krishnan, H., Makri, M., Schijven, M., Shimizu, K., & Zhu, H. (2012). They are creating value through mergers and acquisitions: Challenges and opportunities.
Hossain, M. S. (2021). Merger & Acquisitions (M&As) as an important strategic vehicle in business: Thematic areas, research avenues & possible suggestions. Journal of Economics and Business, 116, 106004.