Mergers and acquisitions have already become common features in the business world. Such transactions are made by both global companies and small local ones. However, according to experts, only about 20% of them achieve their goals. Often, the organization being bought is rejected as a foreign body. Corporate cultures turn out to be incompatible. If top managers have made the decision to integrate, what business strategy should the management team follow for the merger/acquisition to be successful?
Why Do Most Mergers and Acquisitions Fail?
Among the most important reasons, experts name the following:
- the difference in corporate cultures of companies, difficulties in integrating human capital;
- errors in asset valuation (due diligence);
- the large debt of the acquired company, which is a heavy burden on the absorbing organization;
- the inability of the management team to achieve the expected synergy (for example, due to too much diversification or the size of the acquired company);
- excessive concentration of management attention on integration processes to the detriment of the core business.
Factors Affecting the Effectiveness of an M&A Strategy
It must be said that mergers and acquisitions are influenced by both external and internal factors that determine the specifics and effectiveness of the M&A strategy used by companies in their development.
The influence of these factors directly depends on the goals and objectives that the company sets. This may be the expansion of the core business or its diversification, gaining publicity as a necessary element for the company’s entry into the world market, or simple speculation caused by the desire to make money.
- Regularity of the market;
- Increase in market share;
- Company strategy;
- Business diversification;
- Effective sale;
- Business protection;
- Sale of core assets.
Internal Prerequisites for Mergers and Acquisitions
The main internal prerequisites for the implementation of mergers and acquisitions by the company, as well as the development of an M&A strategy, are expressed in the following factors:
1) achievement of certain financial and economic indicators that require further development of the company and its transition to a qualitatively new level, which cannot be achieved through organic growth;
2) rectifying the financial position of the company, when a merger with another market player will solve a number of insoluble problems of the company, as well as save it from possible bankruptcy;
3) elimination of an internal or external corporate conflict, when a company acquires a new form of publicity through M&A, which makes it attractive to investors;
4) the beneficial exit of the owner from the business through the partial sale and exchange of his shares for shares of the acquired company;
5) the desire of shareholders to receive income from speculativeness from M&A transactions.
Mergers and acquisitions are always multifactorial processes, affecting different areas of activity of the companies involved. Hence the variety of risks that must be taken into account when implementing M&A projects, such as:
- strategy and planning risks,
- corporate risks associated with the “legal shell” of the business,
- property risks related to the rights to assets,
- financial risks,
- environmental risks associated with the impact of changes in legislation, state policy, economic situation, regulatory authorities, etc.
One way or another, all risks in M&A are associated with possible losses, but the cost of strategic miscalculations is the highest.
Before setting goals, it is necessary to carefully consider the feasibility of external growth, as well as choose the M&A data room software solution to make the process secure and more effective. It is important to choose the right mechanism to achieve the goal so that it is not too costly. An overpayment can be caused by an erroneous determination of the price of the acquired company and the volume of additional investments (due to the mismatch of the company’s performance after M&A with assumptions and forecasts), an incorrect assessment of the attractiveness of the business (due to insufficient competence in industry specifics), errors in negotiations, and premature disclosure of information about the planned transaction.
Practical Recommendations for M&A
An M&A project must begin with the due diligence of a merger partner or a target company. The object of such an audit is the legal, marketing, technical, managerial, and other areas of activity of the audited companies. As a rule, legal due diligence is carried out separately, during which the history of creation and legal status of the company, the procedure for the formation and change of the authorized capital, transactions with shares and shares of the company, the eligibility of the company to own assets, liabilities not reflected in accounting, legal risks, etc.
It is necessary to ensure readiness for changes in circumstances (both internal and external) and show a prompt and constructive response to problems that arise during the implementation of an M&A project. Such readiness can be expressed in the form of the formation of a reserve fund to cover unforeseen expenses, the inclusion in transaction documents of provisions for withdrawing from the project under certain circumstances, and the development of alternative sources for replacing lost resources.
After considering the main external and internal success factors for M&A strategies, it can be concluded that it is very important to analyze the merger process and plan more. It is also important to take into account all the risks and opportunities to achieve maximum profit. So, after analysis, you can highlight the most important success factors:
- purposeful project work: setting goals in accordance with the strategic objectives of business development; forming a project team; careful planning; constant monitoring of the implementation of activities, and timely summing up of each stage;
- inclusion in the project team of a strong, competent HR director and the appointment of an HR project manager;
- constant communications and informing the employees of the integrated organization about all aspects of their activities and opening prospects;
- overcoming the “big brother complex” (dictation of the terms of the merger by the managers of the acquiring company), which is extremely unproductive.
And the main conclusion is that the success of the merger depends on people, which means that the management team is the architect and the key factor in the process.