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Stephen Wise Blog

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M&A: Top Ten Drivers

Embarking on a strategy to grow revenue or cut costs via M&A acquisition is bold and risky. The failure-rate statistics for deals is not a pretty picture. It is not a leap to draw the conclusion from the high failure rate that the typical acquirer materially overestimates the synergy benefits that will accrue after close. Perhaps the blame for a too high valuation on synergy benefits is over-exuberance. However, I think this is the wrong inference.

I believe that under-estimation of the importance of the post-merger integration planning is the single greatest factor leading to this high failure-rate phenomenon. The preventative action is development of a robust post-merger integration plan that aligns stakeholders’ activities with the deal thesis.

Objectives, Measures, and Benefits

A critical first step to creating this plan is for leaders to communicate a deal thesis with clear success criteria. The objectives, measures, and benefits must be detailed and well defined. For example, if they are not tangible or they are vague, it is highly likely they will lose gravitas as they timeline moves forward. As a starting point, to creating a robust deal thesis, here are the top ten drivers of M&A acquisitions[1]

Top-Ten Drivers of M&A acquisitions

1.    Industry Synergy
Achieve economies of scale by buying customer / supplier, or competitor. Acquisition of a competitor is horizontal, and acquisition of a customer or supplier is vertical.

2.    Strategic Planning
Accomplish strategic goals more quickly and more successfully such as entering new markets or acquiring technology or people assets.

3.    Differential efficiency
Realize a return on investment by buying a company with less efficient processes and making them more efficient

4.    Inefficient Management
Realize a return by buying a company with inefficient managers and replacing them

5.    Market Power
Increase market share and ability to increase price/profit.

6.    Financial Synergy
Lower cost of capital by smoothing cash flow and increasing debt capacity

7.    Under valuation
Take advantage of a price that is low in comparison to past stock prices and/or estimated future prices, or in relation to the cost the buyer would incurs if it built the company from scratch

8.    Corporate Governance
Assert control at the board of directors’ level in an underperforming company with dispersed stakeholder ownership

9.    Tax Efficiency
Obtain a more favorable tax status

10.    Managerialism
Increase the pay and/or power of managers

STEPHEN D WISE

INTEGRATION PROFESSIONALS

DRAMATICALLY IMPROVE TRACTION


[1] Lajoux, Alexandra Reed (2019). The art of M & A : a merger, acquisition, and buyout guide. New York: McGraw-Hill Education.

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$1 B Annualized Cost Savings from United Technologies Merger

United Technologies has proposed a merger and acquisition of Raytheon for a combined company valued at more than $100 billion. The architects of the deal have analyzed the strategic rationale. One of the quantified success metrics they announced is synergy of economies of scale leading eventually to $1 billion in annual cost savings.

Unfortunately, deal track records are not so good. According to The Art of M&A (Reed, Lajoux, and Nesvold), 55% of all mergers fail to deliver on the financial promise announced when the merger was initiated.

Why do 55% of all mergers fail to deliver?

Most assume that ensuring the deal success is the domain of the advisors, accountants, lawyers, and bankers. However, once the deal closes, management is left to deliver on the expectations and promises. I am convinced that the single biggest factor of merger failures is the lack-of a CEO sponsored Integration Program lead by a Project Manager.

Why is that?

Most post-merger activities run behind schedule. I believe a root cause is managers are assigned many of the activities as “business-as-usual” (BAU) work. Managers already have a day job and reporting structure so management of the resourcing, risks, issues, and decision making that was present during the pre-close phase has largely evaporated.

There is a high-level of uncertainty on any project and M&A is no different. It is critical that the leadership team responsible for crafting the deal remain involved. The teams responsible for progress and benefits delivery can get easily mired in firefighting and in-fighting. Sometimes this can be blamed on “culture-clash” but regardless of the label it is up to leadership to quickly identify and make key decisions for the team.

How do I fix that?

A Project Manager will assure there is a process to engage, manage and communicate to stakeholders the changes to the timeline, unresolved issues, new risks, and most important, ensure timely decision making.

In the case of the new Raytheon Technologies, the advisors, accountants, lawyers, and bankers have put together an impressive transaction overview. You can check out the announcement package here. Hopefully, in coming days we will also see demonstration of a strong Project Manager working closely with the CEO to successfully deliver on the annualized benefits everyone is so excited about.

Stephen Wise

Integration Professionals

Dramatically Improve Traction

https://www.IntegrationProfessionals.com

 

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