Key Takeaways
1. M&A is a High-Risk Minefield, Often Failing to Deliver Value.
Yet, for all the bravura of M&A, such transactions also carry a high degree of risk as a result of the premiums paid and the organizational upheaval caused.
Despite impressive trends, mergers and acquisitions frequently fail to deliver promised gains to shareholders, with studies consistently showing that well over half, and often as many as 70%, do not succeed by various definitions. This paradox—where M&A is integral to global growth but often unsuccessful—highlights the critical need for a disciplined approach to beat the odds. Dramatic failures like AOL/Time Warner (losing 93% of its value) or VeriSign's $17 billion loss on Network Solutions underscore the severe consequences of mismanaged deals.
Common pitfalls include:
- Failure to deliver promised shareholder gains.
- Deals driven by personal reasons of boards, CEOs, or advisors.
- Momentum leading to deals not being dropped when they cease to make sense.
- Neglecting post-merger integration, the most difficult stage.
- Past success not guaranteeing future success.
Defining "success" is complex, encompassing shareholder value, sales growth, customer retention, employee retention, and cost savings, all measured over varying periods. The challenge for management is to reconcile the low probability of success with the strategic imperative to grow through M&A, making intelligent techniques indispensable for navigating this treacherous landscape.
2. Business Intelligence is the Indispensable Compass for M&A Success.
Any intelligence specialist will tell you that all things are knowable – it is merely a question of how badly you want to know and how hard you are prepared to work to acquire that information.
Intelligence is paramount in the high-stakes world of M&A, acting as a robust, dynamic tool that provides executives with the capability to make rational business decisions. It systematically acquires and analyzes data, information, and knowledge, contributing significantly to establishing and maintaining long-term competitive advantage, especially in hostile takeover scenarios. The lament after most failed deals—that certain elements were unknown—is a clear indicator of intelligence failure.
Avoiding catastrophes requires staying in close touch with the external environment, much like indigenous tribes and animals instinctively detecting weak signals of a tsunami. Corporations that ignore this balance between external and internal demands are almost certainly doomed to business tsunamis. The success of organizations in M&A starts with a deep understanding of the external environment in which these transactions take place.
By employing first-rate intelligence, companies can achieve a higher degree of commercial success from M&A transactions. This involves not just doing things better, like due diligence, but fundamentally changing the approach from the inception of the deal idea through to post-merger integration. Intelligence provides the crucial information that eyes and ears transmit to the brain, guiding participants through the M&A "minefield" with the greatest probability of success.
3. A Robust Intelligence Function Must Be Systemic, Not Ad-Hoc.
To quote Sun Tsu from the Art of War, ‘it will not do to act without knowing the opponent’s condition; and to know the opponent’s condition is impossible without intelligence.’
Intelligence failures often stem from a lack of a systemic intelligence function, leading to insufficient analysis for decision-makers. Companies like EMI, caught off guard by market shifts like YouTube and iTunes, exemplify this. A truly effective intelligence function, as conceptualized by Stafford Beer's Viable Systems Model (VSM) as "System Four," is responsible for all things "external and future," encompassing both information collection and projection (marketing, PR).
The intelligence function's role is to be the "eyes and ears" of the organization, gathering and analyzing information to provide a competitive advantage. While often outsourced on an ad hoc basis in modern business, a wholly coordinated and integrated intelligence function is rarely universally accepted, despite its historical importance (e.g., the East India Company). This fragmented approach leaves organizations vulnerable to surprises.
To avoid such vulnerabilities, organizations must initiate a review of their external interaction components, identifying gaps and disconnections. This involves accessing latent knowledge within staff, asking simple yet profound questions, and considering the strategic outsourcing of knowledge processing. Structural changes, such as co-locating marketing, IT, and R&D under a Chief Intelligence Officer, coupled with a cultural shift rewarding information sharing, are vital for building a mature intelligence function that delivers products like immediate, continuing, technical, and analytical intelligence.
4. Strategic Planning and Target Identification Demand Proactive Intelligence.
...good M&A is where opportunity meets strategy...
M&A deals must be rooted in a sound corporate strategy, not merely driven by the "thrill of the chase" or opportunistic suggestions from advisors. While opportunistic acquisitions can be valuable, they should either accelerate an existing strategy or lead to the development of a new one, always underpinned by comprehensive and continually updated knowledge. This requires an effective balance of advanced planning and informed opportunism.
Target identification is a continuous process, demanding that companies create and maintain a pipeline of potential deals. First-rate acquirers, like Cintas or private equity firms, invest months or years in cultivating relationships or conducting secret analyses, enabling them to act with speed and confidence when opportunities arise. This proactive approach ensures that potential bidders are not missed and time is not wasted on unsuitable targets.
Screening candidates involves a rigorous assessment against criteria such as industry position, size, strategic capabilities, profitability, risk exposure, asset type, intellectual property, management quality, ownership, and cultural fit. Business intelligence is crucial here, providing insight into market dynamics, competitive positioning, and stakeholder perceptions. Tools like scenario planning help evaluate potential future developments and their impact on target performance, ensuring that M&A activity is deeply embedded in the firm's "grand design."
5. Due Diligence is the Heart of M&A, Requiring Deep, Multi-faceted Intelligence.
Due diligence is about analyzing data the vendor provides in response to detailed requests. Business intelligence ensures you ask – and focus – on the right questions.
Due diligence is the critical process of investigating a potential target's details and industry, bridging the strategic review and completion phases of any M&A exercise. It's not just the buyer's responsibility; targets must also conduct due diligence on bidders to assess legitimacy and financial capacity. Failures in this stage, like Quaker Oats missing Snapple's sales drop or Ferranti's disastrous acquisition of ISC, highlight the catastrophic consequences of inadequate investigation.
Effective due diligence goes beyond merely verifying facts; it aims to uncover "black holes" while identifying opportunities for leveraging resources, realizing synergies, and planning post-merger integration. This comprehensive approach includes:
- Financial: Scrutinizing historical profits, cash flows, and balance sheets, adjusting for private company accounting.
- Legal: Checking asset titles, contracts, litigation, and regulatory compliance (e.g., Foreign Corrupt Practices Act).
- Commercial: Obtaining objective perspectives on markets, future prospects, and competitive position from external sources (customers, competitors, suppliers).
- Management/Integrity: Evaluating competence, past performance, and ethical standing of the target's leadership, often involving corporate investigation firms.
- Cultural: Assessing leadership style, corporate behavior, and values to ensure cultural fit, a major factor in M&A failure.
Despite its pivotal benefits, commercial due diligence is often neglected, with many firms relying solely on internal or vendor-provided information. This oversight, driven by overconfidence or time pressures, leads to buying companies that lack strategic fit or fail to meet profit targets. The integration of a permanent intelligence function, as demonstrated by Alchemy's rigorous approach to the MG Rover deal, ensures that due diligence is thorough, timely, and continuously updated.
6. Valuation and Negotiation are Arts Enhanced by Superior Foreknowledge.
For the participants in a deal, the final stage of the negotiations – replete with posturing, horse-trading, and wrangling – is best conducted with Sun Tsu’s ‘foreknowledge.’
Proper valuation is critical but remains an art, not a science, driven by numerous assumptions where small changes can have large impacts. M&A valuations differ from IPO or venture capital methods by incorporating control premiums (averaging 20-40%) and considering synergies. Buyers are always at an information disadvantage compared to target insiders, making business intelligence essential to fill these gaps and avoid overpaying.
Multiple pricing methods should be used and weighted, including:
- Liquidation value (floor price)
- Book value (useful for financial firms)
- Comparable market multiples (P/E, activity ratios)
- Net asset value (for asset-heavy businesses)
- Discounted cash flows (DCF) with scenario planning
- Payback method and capitalization of earnings (for quick estimates)
Negotiation is communication and decision-making between parties with differing interests, where "knowledge is power." Business intelligence unearths opponents' motivations, risk attitudes, and decision-making styles, enabling favorable positions. Tactics range from "bear hugs" (direct board offers) and tender offers (direct shareholder appeals) to proxy fights and toehold purchases (acquiring small stakes). "Clean teams" can facilitate early negotiations by managing confidential information disclosure.
Effective negotiation requires clarifying starting points, identifying resistance, finding agreement zones, and determining optimal solutions for both parties. It demands a focus on the end result, internal challenge teams, and a willingness to walk away from bad deals. Whether employing "soft" (partner-like) or "hard" (adversarial) styles, intelligence helps navigate the intrigue, posturing, and information leakage inherent in the final stages of any M&A transaction.
7. Post-Merger Integration is the Ultimate Determinant of Deal Success.
The success of the deal is ultimately determined more by the postmerger integration process than any other factor and therefore the negotiations should also provide adequate focus on the post-merger issues.
Closing a deal is merely the beginning of the arduous work of making the newly formed company function effectively. Post-merger integration (PMI) is the most critical phase, often overlooked in the rush to complete the transaction. A deal with sound strategic rationale and optimal pricing can still fail if PMI is poorly executed, while even a flawed deal can succeed with creative and effective post-merger management.
PMI is a complex change management process that must be dynamic and adaptable, assessing the speed of change, establishing clear leadership, and managing internal and external resistance. Integration planning should ideally begin at the deal's inception, with a dedicated integration manager present at all major pre-merger meetings to ensure continuity. Key decisions, especially regarding leadership and redundancies, must be made quickly to combat uncertainty, which is the "virus" of successful integration.
Successful integration hinges on:
- Leadership: Strong, visible commitment from the top, with a single, empowered integration manager.
- Engineered Successes: Early, visible wins to boost morale and demonstrate the new entity's power.
- Acting Quickly: Rapid decision-making to reduce uncertainty and prevent talent drain.
- Retaining Key Employees: Addressing individual concerns, offering retention packages, and managing cultural shock.
- Nurturing Clients: Proactive communication and monitoring to prevent customer defection.
- Effective Communication: Transparent, honest, and frequent messaging from senior management to all stakeholders.
- Cultural Integration: Addressing differences in leadership style, corporate behavior, and values to foster a cohesive new identity.
- Adjustment, Planning, and Monitoring: Preparing for surprises, maintaining flexibility, and continuously tracking performance against benchmarks.
8. Organizational Learning from M&A is Essential for Future Advantage.
Do firms learn from previous acquisitions? The easiest intelligence to collect and use is the information that already exists in-house.
M&A expertise can be a core competency and a significant competitive advantage for frequent acquirers like GE, Cisco, and Intel. However, many companies fail to institutionalize this knowledge, neglecting to measure the success of prior acquisitions or conduct formal post-deal reviews. This oversight means they are "doomed to repeat those errors," missing opportunities for organizational learning.
A formal post-acquisition review is the final step in the M&A process, yet also the first step in planning the next deal. This review, conducted by a dedicated team including members from the original deal and PMI teams, must audit strategic, financial, and organizational objectives against actual outcomes. It should track both cost-reduction and, crucially, revenue-enhancing benefits, which are often emphasized pre-acquisition but rarely measured post-deal.
Applied learning requires resilience and discrimination, avoiding both the trap of viewing the past as identical to the present and the belief that every new acquisition is entirely unique. Experience should guide, not dictate. For firms without dedicated corporate development departments, close advisors can serve as repositories for organizational learning, provided this role is formalized and consistently maintained, ideally by auditors who offer greater continuity.
9. Personal Survival in a Merger Requires Proactive Self-Intelligence.
It certainly is useful to know about survival techniques and tips that have proven helpful to others when faced with an upcoming or ongoing merger.
Mergers and acquisitions inevitably lead to job losses, often affecting 5-15% of combined employees, making personal survival strategies crucial. Employees face anxiety and uncertainty, often attempting to hold onto information to maintain indispensability, which conflicts with organizational intelligence-sharing needs. Senior managers, while focused on designing the new organization, must also manage the emotional impact on staff, offering reassurance and fair remuneration.
Individuals must proactively assess their career goals: whether to stay and leverage the merger for new opportunities or to leave, potentially with an attractive redundancy package. Mergers can serve as a "jump start" for a new career, and prospective employers often assume that talented individuals may seek new roles during such transitions. Preparing for this eventuality, even if considering staying, is a prudent step.
Key survival tips include:
- Prepare early: Get involved in merger planning to gain information and visibility.
- Don't rely on your boss: They are also focused on their own future and may be uninformed.
- Stay visible and productive: Demonstrate your value and commitment.
- Leverage your team: They can provide information and support.
- Network incessantly: Gather intelligence and build support both internally and externally.
- Retain clients: Make yourself indispensable by ensuring client loyalty.
- Be flexible: Show adaptability to new roles, locations, and corporate cultures.
- Prepare for the worst: Cut personal expenditures, reduce debt, update your CV, and explore external opportunities.
- Maintain a positive outlook: Focus on the future and the new organization's needs.
Last updated:
