Execution of mergers and acquisitions: improving the chances of success


Mergers and acquisitions are a prominent phenomenon in business. Provides additional opportunities for growth and earnings. It is also often used as an exit strategy by entrepreneurs and is crucial in determining your ultimate success and financial independence. Unfortunately, things don’t always go smoothly in executing mergers and acquisitions, and sometimes it’s a complete flop.

Rationale behind mergers and acquisitions

In general, a company sees a merger and acquisition as an opportunity to improve its competitive advantage and financial well-being. The logic behind mergers and acquisitions includes the following:

  • Realization of shareholder value. The management of companies is measured in the improvement of value for shareholders. Entrepreneurs, on the other hand, want to make a substantial material profit after they have successfully built their businesses.
  • Market expansion. The growth potential of companies is enhanced through additional market niches and wider geographic distribution.
  • Greater efficiencies. Economies of scale can be realized from an increase in the size of operations and through better control of operations (for example, by controlling a larger portion of the supply chain).
  • Access to resources. Competitive advantage is enhanced through better access to finance, raw materials, skills, and intellectual capital.
  • Manage risks. Risks can be reduced by diversifying the business and having supply chain options (for example, manufacturing and purchasing in different countries).
  • potential listing. The public offering of a company’s shares is enhanced by an increase in turnover and profitability.
  • Political necessity. Countries have different legal requirements (eg in South Africa there are certain Black Economic Empowerment (BEE) regulations that companies must comply with).
  • speculative possibilities. Companies often buy another company only to sell it in the near future or to dismantle the company and sell parts of it.
  • Additional products, services and facilities. Proprietary products and additional warehousing and distribution channels improve a company’s offering and service levels.

Why do many mergers and acquisitions fail?

Mergers and acquisitions fail for various reasons. The failure may occur before the physical merger and acquisition takes place, during the implementation process, or during the operation of the newly merged entity. Potential failures are due to many factors, including:

  • Negotiations failure. No agreement is reached between the parties due to factors such as different cultures, expectations and risk profiles.
  • Legal matters. The competition laws of various countries often prohibit transactions that are considered anti-competitive.
  • Implementation issues. Systems (especially IT) are often not very compatible and difficult to merge.
  • Financial failure. The expected turnover and return on investment and/or the company’s liquidity and solvency have not been reached.
  • Failure of the people. Cultural differences, staff hostility, and resignations can cause serious problems.
  • The planned strategic objectives are not achieved. This includes achieving synergies such as increased efficiencies and market penetration.
  • Failure in risk management. The risks (for example, legal, commercial, financial and operational) of the merged entity are unacceptably high.

Success Criteria for a Successful Merger and Acquisition

A successful merger and acquisition can be measured based on two main factors:

  • Increase in value for the shareholder. A sustainable increase in share value over time must be achieved.
  • Materialized synergies. The achievement of the expected synergies such as more efficient operations, higher profitability and increased market share.

Improve the odds of a successful merger and acquisition

Companies can increase their chances of successful mergers and acquisitions by planning properly, working within a predefined methodology, and managing the entire merger and acquisition as a project. Specific details that need to be managed properly include the following:

  • Strategy. Mergers and acquisitions are part of the company’s broader strategy and must be carefully thought through and planned.
  • Due diligence. Risks (for example, legal, commercial, financial and operational) are analyzed in a due diligence process. This process must be carefully planned and executed.
  • Synergies. The synergies envisaged should be detailed and attention paid to achieving them.
  • Costs. Expenses can easily skyrocket during the merger and acquisition process. Expenses must be budgeted and then monitored.
  • Expectations. False expectations from various groups often lead to disappointment. All expectations should be discussed and clarified with all relevant parties.
  • Transparency. Appropriate communication and openness (where appropriate) with employees, customers, vendors, and other business partners is encouraged. Rumors (very often unsubstantiated) that are not quickly nipped in the bud can do a lot of damage to morale and role players may look for alternative opportunities.
  • Systems. The merger of systems (especially IT) must be carefully planned and executed or it may cause the downfall of the newly merged entity.
  • Keep it interesting. Senior management commitment is essential. Your involvement (when necessary) can substantially improve the chances of success.
  • Watch the ball. Merger and acquisition is a means to an end. Companies often don’t see it in perspective and then other critical aspects of the business are neglected.
  • Change management. The success of any merger and acquisition often depends on the successful merger of two different business cultures. In addition to this, people often have resistance to luck and experience some kind of trauma in the process. Professional change management can make the difference between a highly successful merger and acquisition or a failed one.
  • Trusted advisors. Mergers and acquisitions are often a unique experience for many companies. In this situation, as well as when companies do not have sufficient and qualified staff to handle all aspects of a merger and acquisition, they must hire competent external advisors. These advisers may include attorneys, auditors, business consultants, and change management facilitators.

Summary A merger and acquisition is typically one of the most important strategies a company will start with. Unfortunately, many mergers and acquisitions fail (or at least fail to some extent). One of the best ways to increase the chances of success is to properly plan the merger and acquisition and see it as a project and manage it that way. A merger and acquisition generally has all the important characteristics of a project: it is multidisciplinary, it has specific goals, it is unique, and it has time and budget constraints.

Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.

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