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M&A

The Importance of a Mergers & Acquisitions Strategic Plan – 3 Tips!

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The Point: The thought of acquiring another company can be a very seductive strategic plan when CEOs wish to improve corporate performance and overall growth. Companies spend a huge amount of money every year on acquisitions – yet studies have confirmed that the rate of failure among mergers & acquisitions is at an all time high (peak!). What exactly are the causes of these failures (and more importantly successes)? In this post, we’ll discuss the importance of a Mergers & Acquisitions Strategic Plan and provide 3 Tips… Enjoy!

The Importance of a Mergers & Acquisitions Strategic Plan – 3 Tips!

What Leadership Does Wrong?

A large number of acquisitions miss the mark in regards to expectations since organizational leadership mistakenly attempts to coordinate candidates with the strategic aim behind the arrangement, neglecting to recognize bargains that may enhance current operations and those that could drastically change growth prospects of the company. These often make organizations pay the wrong price (i.e., overvalued) and integrate the acquisition wrongly.

There are two motivations behind acquiring a company, which most executives frequently befuddle. The first, and the most widely recognized one, is to increase your organization’s present performance – That is, to hold a superior position, while cutting expenses. The second, and less-known reason for acquiring a company, is to re-evaluate the mode of business operations through expense reduction – This is most likely to confound investors with spectacular pay off (especially when labor costs are slashed).

Integration often determines whether the acquisition will succeed or fail. You should be able to describe exactly what you are buying to foresee the way integration will play out.

One powerful way forecast effectively is to view the established targets/goals in its business model. Additionally, value is created and delivered through 4 interdependent elements of a business model:

– The customer value proposition is the first element

– The profit formula

– Available resources (such as technology, employees and cash)

– Lastly processes (including budget, R&D, manufacturing, and sales)

Three Tips of Having a Good Mergers & Acquisition Strategic Plan

Tip #1: Helps in Acquiring Resources That Command Premium Prices

Having plans to improve a new product or service is no guarantee to command a price premium. Buying improved components (compatible with their products) is a strategy that is routinely done by some companies to command premium prices.

Tip #2: It Helps to Lower Company Costs

Leadership often promise that an acquisition will lower costs, where in reality, it’s only possible in few scenarios, such as, and acquiring company with high fixed costs can expect higher profit potential. Most deals succeed using almost the same strategy.

The parent plugs some particular assets from the procurement into its current model, ejecting whatever is left of the acquired model and closing down, laying-off or offering redundant assets for sale. The execution help comes about because of utilizing the objective’s assets such that scale financial matters can drive down expenses. The strategic use of resources from the target will help in boosting performance and drive down costs 

Tip #3: A Disruptive Business Model can be Acquired

Disruptive business models and products have been proven to be the most reliable sources of massive growth in both margins and revenues. Disruptive companies typically offer simpler and more affordable products than what bigger players offer. Their footholds are well secured in the low-end of a market and gradually step up to products with higher margin and performance.

SUMMARY

In Mergers & Acquisitions, we all believe that success will be the end result. However, wrong companies are being purchased daily for the erroneous motive, wrong elements are integrated into the wrong business models, and wrong measures of value used when pricing deals (This is a mess that shouldn’t be!) You must be able to predict accurately if a company under acquisition consideration is a great deal, or just a debacle in the waiting!

 

Sam Palazzolo

PS – If you or your organization are challenged as a result of M&A activity, please don’t hesitate to drop me a line and request future post titles! Here are a few of the other M&A titles previously published/in the works:

– Will Your M&A be a Success of Failure? (CLICK HERE)

– How to Successfully Survive Mergers & Acquisitions

– M&A: Creating Shareholder Value

– M&A: Should You Go For Stock or Cash?

What Makes M&A so Difficult to Execute Successfully? Top 3 Reasons!

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The Point: Visualize a scenario where you buy a used car… There were test-drives available, you could examine both interior/exterior, even seek assistance from a trained mechanic to help assess the performance/stability of the car. Now, irrespective of all due diligence, the real fact is, whether you made a good purchase or otherwise, you will get real evidence after the purchase is made once you start riding around in it over time. Mergers &acquisition deals also have the same route and challenges – you can examine the existing business based on visible financial numbers, assumptions of potential fitness and advisory assistance from M&A advisors. With all these though, it’s only when all deals are made and the business needs to be moved forward that reality sets in – the dreaded difficulties and challenges may arise. In this post we’ll talk about what makes most mergers and acquisitions difficult to operate successfully… Enjoy!

What Makes M&A so Difficult to Execute Successfully?

Why Most Mergers & Acquisition Fail

Most people have read studies reporting the failure of most acquisitions to provide shareholder value – yet there have been an increasing M&A market with frothy valuations, not lacking willing buyers to venture.

A purchase with a high price often increases the task of creating a higher value. For the last decade, it has come to the understanding of many buyers that value is created from building real business value and NOT just from mere clever financial engineering and opportunistic buying.

Acquiring growth from new markets, customers and products are the major purpose for most mergers & acquisition – for profit maximization through the strategic potential of a deal. But are most firms really getting all of these? Statistics have confirmed it not to be the case. Discussed below are the reasons why executing M&A successfully can be difficult.

Top 3 Reasons Why Successfully Executing M&A is so Difficult

Reason #1: Not Executing the Integration Process

The post-merger integration has been a major challenge for many mergers & acquisitions deals. In order to identify crucial projects or products, key employees and all sensitive matters, there must be a well structured appraisal process in place. With this in place, there should also be a design for efficient integration/adoption of processes that will be supported with automation, consulting and possible outsourcing alternatives (so as to avoid deal complexity).

Reason #2: When Owners are NOT Involved

Most of the time, a limited role is assigned to advisors until a deal is completed. With this being made known, newly acquired entities are onus of their owners (or without). There should be involvement from owners starting from the establishment of the deal, to how the business will run and should allow advisors to play a role assisting (if need be). This will have a lifelong benefit to the organization as the owner will benefit from the experience of gaining tremendous key knowledge/insight and the all too important ability to execute.

Reason #3: Assuming Optimism Blindly

It is very common for buyers to assume that a targeted company operates just as the way they do things themselves. It must be noted that there are a lot of different approaches of operational functions by which companies operate by. The integration team should account for these differences when plans are being made. They should consciously make the right assumptions rather than aggressive ones.

We’ve worked with a large client for several years now… While each has the same corporate logo hanging out in front of their business, each operates dramatically different from one another on the inside!

SUMMARY

In this post we’ve discussed the topic of mergers & acquisition, and more indepth what makes M&A so difficult to execute successfully. From an outsiders seat there appears to be a need to enhance deal-making skills for acquiring a new business if lasting success is desired. A potential great company will learn from the three reasons given of mistakes made by rookies and improve, integrate the right process where owners will be involved, and consistently build capabilities needed for future growth.

 

Sam Palazzolo

PS – If you/your organization has challenges as a result of Mergers and Acquisition activity, please don’t hesitate to drop me a line and request future post titles! Here are a few other titles that are currently in the works:

  • Will Your M&A be a Success or Failure? 3 Tips!
  • Disrupting Your Industry with Exponential Growth: How Amazon’s Purchase of Whole Foods Upended Retailer’s Strategic Plan
  • Mergers & Acquisition: Should You Go for Stock or Cash?
  • The Importance of an M&A Strategic Plan
  • Mergers & Acquisition: Creating Shareholder Value
  • Mergers & Acquisition – Six Diversification Questions
  • Mergers & Acquisitions: The Future in the Old/New Economy
  • How to Successfully Survive Mergers & Acquisition
  • Mergers & Acquisitions: The Problem with Acquisitions

 

The Leadership Challenge: Will Your M&A be a Success or Failure? 3 Tips!

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The Point: Recent research by Harvard Business Review reported that the rate of failure in most mergers and acquisitions is around 70% to 90%. So what made this possible? This is simple anyway – a company that focus mostly on what to get from an acquisition is less likely to succeed than a company that focus majorly on what it has to give it (Think of this as a play-off of the “In order to get, you have to give” principle). This truth was also echoed from Adam Grant’s book “Give and Take” – stating that people who are keen to giving rather than on taking, especially within the interpersonal/business realm often later do better than those that concentrate more on increasing their own position. In this post we’ll discuss how mergers and acquisitions can be among those deemed successful… Enjoy!

The Leadership Challenge: Will Your M&A be a Success or Failure? 3 Tips!

Value Creation: The Secret to M&A Success?

Being successful with mergers &acquisition has long been proven to be challenging, yet there have been records of serial acquirers who are more successful with M&A than other companies who occasionally make an acquisition. The major secret behind this success is value creation.

Creating value is regarded as the real essence of any business – it can be easy to forget about this important concept when trying to merge and acquire a new company. Value should be concrete/real, and creating this should always have a positive effect on any business. Most products of true value are embedded with definite way(s) of serving consumers – through a service, for instance, value is being created.

The basic premise of any merger should be that merging parties create greater value together rather than in pre-merger (or while separate entities). Value creation is supposed to be executed by all mergers, yet about 80% of mergers fail to follow this fundamental leadership principle.

Other than making a compulsory effort for creating value, there are also other things that will determine the success or failure of mergers & acquisitions. Below are 3 tips that can help an acquirer improve its competitiveness and increase the chance of succeeding.

3 Tips for Any Acquirer to Improve its Competitiveness

Tip #1: Develop a Clear Strategy

There must be a clear strategy coupled with an open communication channel between stakeholders. Failure to identify a strategy and communicate will hinder the merger or acquisition in delivering desired results. There should be transparency in the process, likewise, it must be realistic and every area of management should be involved for success.

Tip #2: Allow a Wide Range Engagement

When the purpose of mergers & acquisitions are well defined and regularly communicated to stakeholders, market share and growth will allow a natural process to be managed and make goals more realistic. There would be some challenges along the way for sure. However, your strategy must assess any potential risks and challenges that may surface during the process.

By carefully utilizing some employee engagement programs with other strategies built around communication, M&As can operate successfully – it should be at the center of their overarching strategy.

Tip #3: Use a Board and Specialists from Outside

It is a smart approach to build an advisory board regardless of M&A stage – this should include heads of departments, major stakeholders, some internal staff and specialists from outside the organizations to assist with the process.

With the help from an independent source, great business decisions can be validated, claims can be challenged and leadership has a better ability to stay on track toward set goals. A specialist from outside will ensure that employees acquire needed support via a merger or acquisition (See the previous comments on transparent communication and employee engagement surveys).

Summary

In this post titled “The Leadership Challenge: Will Your M&A be a Success or Failure?” we have discussed how not all mergers & acquisitions will succeed (In fact, a high percentage often fail!) To succeed, mergers and acquisitions could run smoother (i.e., achieve better results in less time) by applying the 3 Tips discussed above.

 

Sam Palazzolo

PS – If you or your organization are challenged as a result of M&A activity, please don’t hesitate to drop me a line and request future post titles!