צילום: Eric Sultan
Mergers and Acquisitions (M&As) often fail not because the management of the merged companies didn’t identify the right synergies, but because the acquired company stakeholders didn’t have the patience to execute on these synergies. Expectations for realizing short term gains when merging two companies are often unrealistic even when companies complement each other well and should easily integrate.
In this article, Michael Blajwas will draw upon years of experience tracking and being part of M&As, to discuss ways to avoid common pitfalls such as unrealistic short-term expectations.
M&As have established a bad reputation as more often than not being unsuccessful, yet they are by far the most popular way for private companies to exit and provide their shareholders with liquidity. This is especially true when compared to IPOs which became an option for only selected companies post the 2000s tech crash. Specifically, about 100 tech companies went public worldwide in 2017, but half of them in China and only about one quarter on U.S. stock exchanges (PWC- 2017 Global Tech IPO review). Just for perspective, over 2500 tech M&As occurred in the software industry alone! in 2017 (Thomson Financial, Institute for Mergers, Acquisitions and Alliances analysis).
According to a global survey of 1000 executives performed by Deloitte, over 90% reported that at least a portion of the M&As they executed didn’t generate the expected value or return on investment. So why are so many M&As not providing the expected returns?
Is it because both sides (and especially the acquired) are essentially hiding their shortcomings? Do they fail because the acquiring company suffers from the “cute baby” syndrome*? Maybe it’s due to organizational or cultural differences not fully anticipated? Or the presumption that 1+1 really turn into something which is more than 2?
Each M&A obviously has its own dynamics and each deal has its unique story, but I believe there are often common underlying issues and challenges. Based on my personal experience over the last 20 years, the potential synergies identified in many M&A deals are real and substantial. So how come in many cases 1+1 doesn’t turn into more, but rather less than 2?
If potential synergies exist for combining both organizations, it’s now up to the combined management team to deliver a plan to maximize and enable those synergies. It cannot be one way, it needs to be realistic, and it needs to be transparent to both organizations involved. It needs to be planned for both the mid and long term, and needs to take the human factor into account, and it should include the right incentive measures.
If the merger plan does not include most or all those elements it might not only be unsuccessful, but it also most likely will have a negative effect on the combined entity. For instance, managers and employees in both organizations will feel insecure, become paralyzed and on the defensive, and employees will look for jobs and of course the good ones will be the first to go. Soon there will be a ripple effect as the Board of Directors and shareholders will lose patience with management and expenses cuts will be applied as opposed to enabling the strong initiatives that were part of the original merger plan but will now likely be put on hold.
Not surprisingly, the respondents to the survey mentioned above, also cited effective integration, accurate valuation, and economic certainty as the three most important factors for a deal’s success. These factors were followed by the need for a stable regulatory environment and proper target identification.
I was personally involved in a merger which involved no less than 14 different, separate integration teams. The integration efforts didn’t even wait until the transaction was closed as management of the acquired company set very unrealistic short-term targets that they insisted be met. Those integration efforts resulted in limited achievements which heavily involved top and middle management attention, and it took their focus away from their main tasks of enhancing the original businesses. This quickly resulted in revenues from the merged entities declining below the original combined revenues on the eve of the merger. It also quickly resulted in reactionary tactics such as deep cuts in expenses, which ruined the potential for growth – the main driver for the merger in the first place.
A successful merger should include a detailed and well-thought integration plan which is feasible, mutually agreed upon, transparent, efficient, realistic and manageable. It shouldn’t be implemented in full immediately by default, and I often recommend that the companies take time to learn and create mutual understanding. In addition, it should clearly be communicated and understood by all stakeholders that the benefits of a merger might take several years to be fully realized, and in the short run a combined company might even perform less-well financially. However, that should not change the long-term strategy, or the key reasons for the merger in the first place.
Along with a proper integration plan, setting expectation correctly with shareholders, employees and other parties involved from the get-go, as well as developing the right incentive plans that are in line with the merger targets are the keys for success.
Of course, mergers are easier said than done and many do fail, so stakeholders should tread carefully when considering such a process. In fact, these days, stakeholders don’t have to wait for an M&A or even and IPO in order to achieve at least partial liquidity as they can do so via sales of their private shares to secondary funds and delay a full exit until they’re absolutely ready for the “big jump” of an M&A or IPO.
*Cute Baby Syndrome is a term for not being able to control yourself around a really cute baby.