Democracy may be alive and well in Joe Biden’s America but there’s no room for democratic principles like equality when it comes to M&A. Success requires a dominant home-base to take control, Paul Barrett writes.
The terms mergers and acquisitions are usually joined together hence the abbreviation, M&A, but it is possible (and often preferable) to have one without the other.
For example, buyers can have an acquisition strategy that does not involve integrating two businesses. A target can be left to operate independently.
Similarly, the merger of comparable businesses does not require one party to buy the other. There could just be a meeting of the minds and a commitment to build a stronger, better business.
The beauty of this strategy is that there’s no large capital outlay or ongoing debt burden in order for potential synergy benefits to be extracted. The hard part is finding the right partner.
But even then, it’s not all hearts and roses. As discussed in my previous articles, synergy benefits are elusive, which is why I liken them to the pot of gold at the end of the rainbow.
They play hard to get.
Over the past five years, AZ NGA and our underlying small-to-medium enterprises (SMEs) have completed over 70 transactions.
The majority of those transactions have been acquisitions. Some have involved mergers.
Of the mergers, some but not all have achieved their stated synergy targets.
Based on our experience, here’s what we’ve learned.
Like any S.W.A.T. operation, mergers need an effective leader, skilful people and precision planning.
It is impossible for advisers and accountants to do their day job well and manage the integration of two businesses. Whenever a company’s management team is distracted for a material period of time, home-base health suffers.
A smooth integration requires resources dedicated to the task. That could be a single person or a small team, depending on the size and complexity of a deal.
More than likely, accounting and advisory SMEs will need to go outside their organisation to find someone with the required operational experience, project management capabilities and interpersonal skills.
A key benefit of using an experienced external party is that they will be more realistic about what’s achievable and also more disciplined around measuring success.
Regardless of whether you choose internal or external resources, everyone involved in a merger should have clearly defined roles and responsibilities, and should be supported to focus purely on their specific job.
If other staff members volunteer their time and service (as is often the case because M&A is different and exciting), businesses should resist the temptation to drag them in. That is akin to recruiting a civilian to investigate a bomb threat. They’d have no idea what to do but they’d spend a lot of time and energy trying to do it and risk the entire operation. M&A is not a BAU activity, therefore, using existing staff usually ends up draining company resources for no material benefit.
Bulls-in-the-paddock syndrome can cause the most attractive, logical deals to fail.
When it comes to bulls, there is a natural hierarchy. When two bulls from different mobs are put together, they will fight to determine the boss. This can cause serious injury.
Similarly, M&A is not a love-in. Important decisions can’t always be made democratically.
Even if a merger represents the blessed union of like-minded parties with the same motives, values and aspirations, one party must be given the authority to take the lead if they hope to maximise synergies.
In most M&A transactions, this naturally occurs as there is a dominant buyer (home-base) and a seller (target). Even cashless transactions rarely involve two companies of exactly the same size and valuation. For example, if a company valued at $2 merges with a company valued at $1, the company valued at $2 will own 66% of the combined entity.
If a bull fight can be avoided, there’s a real opportunity to maximise synergies but it requires players to control their egos and focus on a common vision and goal.
Often one party is happy to follow a strong lead, especially if they are close to retirement or burned out. Equal partnerships can be problematic as the structure lends itself to a power struggle.
If both parties have huge egos that can’t be deflated, then pursuing an M&A strategy for synergies is the wrong motivation. M&A may allow them to expand their capabilities and capacity, and ultimately increase enterprise value, but it won’t lead to synergy benefits (and it probably won’t be fun and fulfilling either).
The most successful transactions are ones where a dominant home-base is able to make decisions with the target’s full support.
M&A is a huge investment for any business, therefore, tracking the return on that investment is critical.
The S.W.A.T. team should act like contestants on the television show, The Block. They must be disciplined in managing costs, tracking progress and meeting deadlines.
They should be accountable for setting and hitting key milestones along the way; the synergy equivalent of a kitchen or bathroom.
To maximise the probability of achieving success, progress should be monitored monthly or even fortnightly throughout the entire cycle, which is often several years. (AZ NGA has developed a calculator to forecast the financial impact of an acquisition over a ten year period.)
A culture of accountability keeps businesses and people on track towards their goals. It ensures that results are delivered.
This was the third article in a series on synergy benefits.
Read more of Paul Barrett’s articles in Professional Planner.