How to Take Care of The Achilles Heel of M&A

How to Take Care of The Achilles Heel of M&A



As the saying goes, “Change is inevitable. Growth is optional.” Everyone wants their business to grow in productivity and value, but whether it does will depend on the choices you make about that growth. Companies can grow through two main routes: organically, through increased revenue and profit, or inorganically, by acquiring or merging with other companies. 

Mergers and acquisitions are a way of restructuring an organization to improve growth and add value. A company might buy another to enhance its positioning in the marketplace, increase its revenue, lower production costs, or reduce competition. 

Merging with a company in a similar field and level of production, which is called horizontal acquisition, allows the acquiring company to remove some competition while also increasing revenue. For example, if a sneaker company purchases a rival shoe company, the two businesses no longer need to fight for the same customers and suppliers. 

Vertical acquisition involves merging with a company on a different level of production, like a tire manufacturer purchasing a rubber processing plant. That tire company now has uninterrupted access to their supply of rubber, and they may have made it harder for their competitors to get what they need, ultimately increasing the acquiring company’s success.  

Done well, mergers and acquisitions can lead to cost and revenue synergies. Cost synergy is created if the acquisition allows the company to save on costs by eliminating redundant personnel or overlapping research and design efforts. Revenue synergy is achieved when cross-selling opportunities lead to increased revenue for the company. 

With all these potential benefits, it may seem surprising that most mergers and acquisitions fail. Sadly, only a few companies put the necessary effort into the integration process. 

The main reasons mergers and acquisitions fail are:

  • Lack of cultural integration – Bringing two companies together means figuring out how to combine the existing cultures into one. Each company has its methods and values and, most importantly, the people who make them work. When mergers and acquisitions do not include a plan for cultural integration, they end up with confused and disgruntled employees and an incoherent culture. 
  • Clashing strategies – Both companies have their own reasons for merging, and they each have their own vision for the result. When those visions – and the processes of achieving them – are not cohesive, the deal can easily fall apart.
  • Overspending in a bidding war – Getting caught up in the back-and-forth might result in spending more than can be afforded, which leaves fewer resources to put into making a merger work. 
  • Unrealized synergy – When a company cannot realize the cost or revenue synergy they anticipated, the acquisition no longer seems like a winning move. 

Despite the possible pitfalls, it may still be worth it to attempt inorganic growth. Companies that have grown through mergers and acquisitions have had higher shareholder returns than the bystanders. 

Here are some key steps to successful mergers and acquisitions:

  1. Work out a clearly defined strategy – Successful mergers and acquisitions are well-planned. The acquiring company should be able to articulate its reasoning and objectives and manage the tactical and functional activities that will achieve those goals. 
  2. Manage people and cultural integration – Part of a successful acquisition plan involves managing people through the cycle of change as the companies merge. Without that, the culture clash can impact business operations and destroy value. 
  3. Maintain committed leadership – Even if top-down leadership is not the acquiring company’s style, collaborative senior management teams are essential to successful deals. The extent to which those teams align and commit to the strategy and objectives of the deal determines whether a merger holds together. 
  4. Adopt a large-scale change framework – Mergers and acquisitions are not tasks that can be phoned in or handled in a few spare moments. These are large-scale changes and they require a transformational process. 
  5. Due diligence – Overpaying in an attempt to one-up a competitor during a bidding war is always difficult to justify later. That’s why the acquirer needs to do a close analysis of the business they’re acquiring and take a hard look at the price they’re paying. 

Tending to a garden means monitoring the environment, nurturing the soil, keeping track of what’s thriving, what’s struggling, and what’s missing. If you decide to enhance your oasis by bringing in new plants, you need to prepare yourself, your garden, and the incoming vegetation for this transition. With proper planning and care, you can have a healthy growing season.

The same is true for mergers and acquisitions. It can be a powerful tool that encourages growth and adds value to a company. It can help a company break into new markets and enhance its capabilities. However, none of that can happen without careful management and planning. For more on valuations and M&A, see Veristrat

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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