History shows that only 1/3rd of Merger & Acquisition were successful in the past. Why acquisition is not so successful? Why companies could not obtain maximum advantage of acquisition? As we see, after the downturn, M & A activity is going to be in great demand due to expanding market in emerging economy & consolidation activity in western economy in order to obtain economies of scale.
What shall an organization do before & after an acquisition so that they can get maximum advantage of acquisition?
A pivotal assumption of merger & acquisition is that acquisition will both preserve and create value during the integration process. If acquisition has to fuel future growth and to ensure that every deal captures and preserves optimum value, acquisitions must be managed like any other mission-critical function-with processes and platforms that span all stages of the deal lifecycle.
In order to get maximum advantage of acquisition M & A activity of organizations should be divided into 4 parts-
Formation of Internal M & A Department
When companies increase the number and pace of their acquisitions, the biggest practical challenge most of them face is getting not only the right people but also the right number of people involved in M&A. If they don’t, they may buy the wrong assets, under invest in appropriate ones, or manage their deals and integration efforts poorly. Organizations must invest to build their skills and capabilities before launching an aggressive M&A agenda. It can be achieved efficiently if organization shall have Internal M & A department fully dedicated to M & A activity.
For example, over the past six years, a leading global IT company acquired 50 software companies, nearly 20 percent of them market leaders in their segments. It executes many different types of deals to drive its software strategy, targeting companies in high-value, high-growth segments that would extend its current portfolio into new or related markets. They have achieved this by forming an internal global M & A team fully dedicated to M & A activity.
Align M & A activity to Organizations Corporate Strategy
One of the most often overlooked, though seemingly obvious, elements of an effective M & A program is ensuring that every deal supports the corporate strategy. Many companies are following M & A strategy where deals are only generally related to their strategic direction and the connections are neither specific nor quantifiable. Those who advocate a deal should explicitly show, through a few targeted M&A themes, how it advances the growth strategy. A specific deal should, for example, be linked to strategic goals, such as market share and the company’s ability to build a leading position. Bolder, clearer goals encourage companies to be truly proactive in sourcing deals and help to establish the scale, urgency, and valuation approach for growth platforms that require a number of them. Furthermore, many deals underperforms because executives take a one-size-fits-all approach to them—for example, by using the same process to integrate acquisitions for back-office cost synergies and acquisitions for sales force synergies. Certain deals, particularly those focused on raising revenues or building new capabilities, require fundamentally different approaches to sourcing, valuation, due diligence, and integration. It is therefore critical for managers not only to understand what types of deals they seek for shorter-term cost synergies or longer-term top-line synergies but also to assess candidly which types of deals they really know how to execute and whether a particular transaction goes against a company’s traditional norms or experience.
Building On lessons Learned
Like any other core business function, merger integration should be monitored and measured—and, of course, improved. This means building attainment of the required skills into human resource metrics and incentive systems. It also requires an honest assessment of current skills. Some successful acquirers have elevated the office of “integration manager” to a coveted position within the company so that up-and comers see the post as a senior management spot. Others use report cards to monitor the various elements of deal success, as well as the various performance indicators of the integration process: Was it on time and on budget? Were all synergies identified and achieved? One leading insurance company has established a systematic process for capturing lessons learned, holding monthly sessions for members of the integration teams to review the progress of all mergers, both completed and in progress. The company also makes the overall merger integration approach available to the organization as a whole on a database on the web.
There are a number of different aspects to successful target identification. One important emerging need is to identify acquisitions in overseas markets. Acquirers must be able to assess the acquisition from the target’s point of view, as well as from their own. But understanding the regulatory and competitive environment in another country can be complex and time-consuming. Thorough due diligence, using local advisors, is critical to understanding the local market. It can identify challenges and ensure that they are properly reflected in synergy estimates and integration plans. Microsoft uses the enormous resources of its extended enterprise to identify potential acquisition targets. The business groups take the lead, looking within their own and related markets for opportunities. Ideas also come from venture capital relationships in both the United States and Europe, as well as through the company’s alliance and partner community. Acquirers must also be able to identify and capture new skills in the companies they buy. Cisco Systems—often known as the “acquirer of choice” by target companies—is an outstanding example of success in this regard. The maker of Internet networking equipment emphasizes that it acquires people and ideas, not just technologies. The leadership and talent of the acquired company must be committed to seeing the acquisition and the integration of the company work. It is not the first version of a product that becomes a billion dollar market, Cisco argues, but the subsequent versions. Cisco needs the acquired company’s talent to stay and build those next versions.
Executives at acquiring companies often fail to capture all the deal synergies they can because they define those synergies too narrowly. For example, they do not aggressively try to capture revenue synergies, even when they were used to justify the deal, because these synergies are considered harder to track. Business managers also do not want to have to achieve revenue growth rates that are over and above what they were already given as goals for their standalone business. On the other hand, some acquirers spend so much time running around after anything that was used in external communications to justify a deal that they don’t prioritize their efforts on the biggest and most accessible opportunities.
Example: Quaker Oats’ purchase of Snapple, the beverage maker, were using its R&D and marketing muscle to help Snapple rev up its fanciful flavors and visibility, Quaker spent far too much time trying to integrate Snapple’s distribution systems and channels with those of its Gatorade brand, with horrific results and huge losses of revenue and value in the Snapple business unit. To combat those tendencies, post-close integration priorities should precisely match the value and type of synergies that drove the deal in the first place.
This makes us to find out how to quantify synergy in terms of value.
“Synergies are the present value of net, additional cash flow that is generated by combination of two companies that could not have been generated by either company on its own.
Net means that the synergy calculation must take into consideration the cost to achieve the synergies and include any dis-synergies that the deal itself creates. Synergies must also create incremental cash flow. If the acquiring company could have captured the cash flow on its own, then they are not synergistic.”
Definition Example: A company trying to sell products into a country it does not currently serve. It could, perhaps, achieve such access on its own. But at what cost? How long would it take? Acquiring a target company that already has such access can be synergistic, as long as the criterion of net incremental cash flows is met. The synergy calculation would then take into consideration how much faster (and cheaper) such geographic access is to achieve.
Cisco’s acquisition of Linksys is a good example of capturing potential revenue synergies by accessing a new customer segment. Cisco knew that the retail market for wireless routers and associated products used in the home was growing many times faster than the corporate market that Cisco had traditionally served. The company knew that its in-house engineers could design products for this market. But Cisco also realized that it would take a year or two to design and test the products. That, combined with the fact that Cisco was not well known outside of the corporate space, led to the decision to buy Linksys, an established player with proven overseas sourcing and customer service capabilities. The resulting synergy would generate the incremental cash flow that would come from the acquisition contrasted with the cash flow that Cisco could have achieved on its own.
When done correctly, pre-deal synergy estimates should determine the total valuation and premium. By matching integration priorities to the necessary premium and deal rationale, the actual integration work will be correctly prioritized. A key element in synergy definition and measurement is the establishment of an appropriate baseline. Unless the acquirer and the integration teams know what they are comparing synergies against, it is impossible to determine if incremental cash flows are actually being identified and captured. The baseline is the starting point to measure value realized from the deal. Once established, the baseline becomes “non-negotiable”—everything needs to be measured against one common set of numbers. Key considerations for establishing a baseline include:
• A clear definition as to what is included versus excluded. Specifically, executives must firmly establish exactly what revenues and costs are included in the standalone cash flows of the two companies.
• A multi-year time horizon, since synergy capture will not occur in one year.
• Its clear acceptance by all parties. If the baseline is considered unfair, synergy estimates are likely to be sandbagged (it helps to use existing budget).
• Ensuring that savings or operating improvements that were already planned are included in the baseline so they are not counted as synergies later. The establishment of the baseline can be a time-consuming task, but it is critical.
Example: When Sony and Bertelsmann formed Sony BMG Music Entertainment, it was necessary to map financial and overhead spending for more than 60 geographies and businesses to identify baseline elements such as payroll expenses (one company classified them as HR expenses, the other as Finance), and differences in how corporate overheads were allocated to business units. Only when the baseline was agreed to by both parties (which took hundreds of meetings) was it possible to implement the bottom-up synergy targeting. Proper base lining helps avoid many common problems, such as counting as synergies the jobs that are eliminated in one department but transferred to other departments, or where the costs related to personnel reduction are incurred in multiple departments.
A company must not only be able to determine if its own culture will mesh with that of the acquisition. The new, single culture must also serve strategic needs better than either of its predecessors. Hungarian oil company MOL, faced with entrenched national rivalries when it took over Slovakia’s formerly state-owned slovnaft, tackled the problem by recasting the merged entity as an international company and requiring all managers to learn English. Many acquirers confront similarly complex cultural issues. Cultural assessment can be daunting, especially because questions that can reveal key elements of an acquisition’s culture—relative intangibles like teamwork, competition, rewards and power—don’t usually appear on due diligence lists. In such cases, a systematic assessment can help.
Support from senior management
In many companies, senior managers are often too impressed by what appears to be a low price for a deal or the allure of a new product. They then fail to look beyond the financials or to provide support for integration. At companies that handle M&A more productively, the CEO and senior managers explicitly identify it as a pillar of the overall corporate strategy. At GE, for example, the CEO requires all business units to submit a review of each deal. In addition to the financial justification, the review must articulate a rationale that fits the story line of the entire organization and spell out the requirements for integration. A senior vice president then coaches the business unit through each phase of a stage gate process. Because the strict process preceding the close of the deal outlines what the company must do to integrate the acquisition, senior management’s involvement with it after the close is defined clearly.
The most common challenge executive faces in a deal are remaining involved with it and accountable for its success from inception through integration. They tend to focus on sourcing deals and ensuring that the terms are acceptable, quickly moving on to other things once the letter of intent is signed and leaving the integration work to anyone who happens to have the time. To improve the process and the outcome, executives must give more thought to the appointment of key operational players, such as the deal owner and the integration manager.
Appointment of Deal Owner
Deal owners are typically high-performing managers or executives accountable for specific acquisitions, beginning with the identification of a target and running through its eventual integration. The most successful acquirers appoint the deal owner very early in the process, often as a prerequisite for granting approval to negotiate with a target. This assignment, which may be full or part time, could go to someone from the business-development team or even a line organization, depending on the type of deal. For a large one regarded as a possible platform for a new business unit or geography, the right deal owner might be a vice president who can continue to lead the business once the acquisition is complete. For a smaller deal focused on acquiring a specific technology, the right person might be a director in the R&D function or someone from the business-development organization.
Appointment of Integration Manager
Normally, integration managers are not sufficiently involved early in the deal process. Moreover, many of them are chosen for their skills as process managers, not as general managers who can make decisions, work with people throughout the organization, and manage complicated situations independently.
Integration managers should involve as soon as the target has been identified but before the evaluation or negotiations begin. They should drive the end-to-end merger-management process to assure that the strategic rationale of a deal informs the due diligence as well as the planning and implementation of the integration effort. During IBM’s acquisition of Micromuse, for example, a vice president–level executive was chosen to take responsibility for integration. This executive was brought into the process well before due diligence and remains involved almost two years after the deal closed. IBM managers attribute its strong performance to the focused leadership of the integration executive.
Stringent Stage Gate Process
A company that transacts large numbers of deals must take a clearly defined stage gate approach to making and managing decisions. Many organizations have poorly defined processes or are plagued with choke points, and either fault can make good targets walk away or turn to competitive bids. Even closed deals can get off to a bad start if a target’s management team assumes that a sloppy M&A process shows what life would be like under the acquirer.
An effective stage gate system involves three separate phases of review and evaluation. At the strategy approval stage, the business-development team (which includes one or two members from both the business unit and corporate development) evaluates targets outside-in to assess whether they could help the company grow, how much they are worth, and their attractiveness as compared with other targets. Even at this point, the team should discuss key due diligence objectives and integration issues. A subset of the team then drives the process and assigns key roles, including that of the deal owner. The crucial decision at this point is whether a target is compatible with the corporate strategy, has strong support from the acquiring company, and can be integrated into it.
At the approval-to-negotiate stage, the team decides on a price range that will allow the company to maintain pricing discipline. The results of preliminary due diligence (including the limited exchange of data and early management discussions with the target) are critical here, as are integration issues that have been reviewed, at least to some extent, by the corporate functions. A vision for incorporating the target into the acquirer’s business plan, a clear operating program, and an understanding of the acquisition’s key synergies are important as well, no matter what the size or type of deal. At the end of this stage, the team should have produced a nonbinding term sheet or letter of intent and a roadmap for negotiations, confirmatory due diligence, and process to close.
The board of directors must endorse the definitive agreement in the deal approval stage. It should resemble the approval-to-negotiate stage if the process has been executed well; the focus ought to be on answering key questions rather than raising new strategic issues, debating valuations, or looking ahead to integration and discussing how to estimate the deal’s execution risk.
Each stage should be tailored to the type of deal at hand. Small R&D deals don’t have to pass through a detailed board approval process but may instead be authorized at the business or product unit level. Large deals that require significant regulatory scrutiny must certainly meet detailed approval criteria before moving forward. Determining in advance what types of deals a company intends to pursue and how to manage them will allow it to articulate the trade-offs and greatly increase its ability to handle a larger number of deals with less time and effort.
As companies adapt to a faster-paced, more complicated era of M&A deal making, they must fortify themselves with a menu of process and organizational skills to accommodate the variety of deals available to them.
Post-Deal Activity (Capture Synergy):
Fast-Pace Synergy Capture
The synergy capture effort should be “front loaded” so that the emphasis is to go after the biggest synergies as soon as possible.
Opportunities for synergies tend to be time-sensitive. Successful acquirers tend to capture 70-75 percent of synergies in the first year after the deal. The reason is that it is very difficult for any acquirer to stay focused on execution for more than 18-24 months—it becomes too easy to revert back to the status quo, the next acquisition or the new big program that comes along. In fact, very few companies achieve significant synergies in cases where they have waited more than three years to finish capturing benefits. To quickly identify the highest value synergies, best-practice acquirers often prioritize synergy opportunities by assessing them along three dimensions: size, time to implement, and difficulty of capture. They then work on how to make the biggest opportunities easier to implement in less time.
Example: When a major specialty chemicals company began to plan its acquisition of a large global rival, it focused ruthlessly on planning and achieving the major source of synergies-savings from procurement of direct materials. That singular focus led the client to exceed its publicly stated cost synergy target of $200 million by more than 40 percent-a quarter ahead of schedule.
Adequate Incentive program
Incentives play an important part in achieving many other corporate goals (not the least of which is hitting profit targets). So why should things be any different for achieving synergies? Yet many companies do not specifically tie synergy targets to incentive systems. Incentive programs should be explicit and timely; they should create meaningful rewards which are directly tied to synergy goals.
Example: After Cadbury Schweppes purchased candy and gum maker Adams, the external rallying cry was “Beat Wrigley!” Internally, it was “Beat the Model!” Personal financial incentives were tied to the performance of each functional and regional team against the integration model.
Involvement of Right People
Company must appropriately match people with the skills needed in a given position, so they must get the right people doing the right things in relation to capturing synergies.
Example: In a large merger of wireless providers, core finance staff was tied up preparing the integration plans for their own department. The merger integration team saw that these people were needed to craft a synergy management process for the whole company. Finance resources were therefore shifted to roles that supported the overall merger integration process
Cultural & System Synergy
Some cultures are just not adept at achieving synergies. Achieving synergies requires some degree of “measurement culture” where the idea of tracking a success and tying it to a financial metric is a way of life.
Example: A merger of Medicare Advantage providers was predicated on achieving scale economies and sharing operational best practices to fuel continued rapid growth. But without formal budgeting and KPI processes, the NewCo could not agree to how many cost synergies could be harvested without sacrificing growth. As a result, synergies were not captured, operational dis-synergies began to show up in the absence of clear integration action, and the NewCo quickly faced a major slowdown in growth—with big profitability problems.
Adopting Correct Process
Companies must use a rigorous, holistic process to capture synergies. Such a process includes detailed tracking mechanisms, linking synergy targets to ongoing budgets and financial plans, and a system to quickly determine if synergy capture is on schedule (and fix it if it is not).
Example: When Rogers Communications was merging with Microcell, clear synergy guidelines were established before the integration teams kicked off. Rogers Wireless’ Senior Leadership Team initiated the process by outlining the requirements by quarter for creating true deal value. They then articulated what those requirements meant for each team. Teams were then asked to identify one or two “quick win” synergy opportunities (those that would be realized in the first quarter after close) and to map out the synergy realization for each quarter afterwards. The synergy goals were 50 percent higher than what was promised to the Street, and they created tremendous pressure and focus on realization. As a result of this rigorous process, Rogers was able to achieve the target operating cost target synergies of $100 million earlier than anticipated. This contributed to the overall success of the integration of Microcell and positioning Rogers to be the largest wireless provider in Canada.
Major hurdle of any acquisition to achieve maximum out of acquisition or to create great synergy with the merged entity can’t be magically materialized. Synergy by its actual definition means possibility not certainties.
However lots of acquirers think that by describing certain possibility, the synergies will appear once the deal is close- as if to talk about them is some how enough to make them come to pass. In practice, it takes works and commitment to identify maximum value from synergies. They must be rigorously targeted, pursued and tracked by the right people, the right system and the right process at the right time. Only then do synergy opportunity becomes real benefits- and only then can deals be truly successful.
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