July 27, 2015
Merger activity is at a fever pitch, on pace to hit the record levels set in 2007. But are many of these deals doomed to fail? A recent article in The Wall Street Journal points out that fear is a major driver of the current M&A frenzy. Some companies are afraid that if they don’t strike a deal, they’ll become acquired or lose share to competitors that go on an acquisition spree, while others are driven into deals at the cajoling of activist investors. Perhaps there should be a greater fear of the failure of such deals, given that 83% of merger deals do not boost shareholder returns. How can a company avoid ending up in the deal graveyard? The best first step is preparation and awareness around some of the thornier issues that result from integrating two companies following a merger or acquisition:
- Technology can create a nightmare for companies when they combine. Among the most visible examples of late is the technological disruption that is still occurring following United Airlines’ merger with Continental – an integration that was supposedly completed in 2010. In an article posted to the CIO Journal, Richard Raysman and Francesca Morris of Holland & Knight outline the most critical elements for leadership teams to evaluate and manage in order to produce a successful outcome. As they point out, “even smaller companies often have hundreds of license agreements…multiple service providers, dozens of locations and development staff around the world.”
- Cultural ramifications are often underestimated in deals. For example, the typical rumors are flying of possible layoffs and office shake-ups following the closing of the Kraft-Heinz deal, with worries expressed about how employees might react to the new operational environment. Integration efforts can be rapidly unhinged if companies fail to properly manage employee reactions to deals, layoffs of co-workers and their transition to a new corporate infrastructure. In fact, cultural integration issues and unclear communication of a synergy’s objectives are among the top three reasons deals fail, according to a survey from Aon Hewitt.
- Stick to a solid strategy. This may sound obvious, but it’s often easier said than done. A recent Bloomberg article highlighted the unraveling of the ConAgra Foods – Ralcorp Holdings deal as a lesson in bad dealmaking. It notes that among the primary downfalls was that ConAgra bought a business in which it had very little experience, refused to walk away even after an initial offer for Ralcorp was rejected and continued to pursue the deal largely at the behest of activist investors. Rather than pursuing the deal on the basis of a clear and compelling business case, ConAgra became mired in a fear-based transaction that backfired for investors. While there is always a fair amount of risk-taking in deals, the integration effort should be a well-planned, well-managed activity, as my colleague Alex Nesbitt detailed in an article about key steps to assure post-merger integration success. The devil is in the details, and there should be someone tasked with leading that charge.
Proper due diligence upfront can help companies strike a good deal, but an equal amount of energy and diligence ought to go into the implementation. A merger or acquisition is one of the most significant changes a company faces, and needs to be appropriately nurtured past the finish line to ensure the vision gives way to a successful reality.