Bringing organisations together through mergers and acquisitions, or carving them out through separations and divestitures, are among the most complex business activities an organisation can ever undertake.
In the last decade it has become increasingly common for the growth strategy portfolio to include M&A. Companies with excess funds searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value and it must have a cultural fit even when the decision financially makes sense.
What distinguishes companies that gain maximum competitive and stock market advantage from mergers and acquisitions-deal after deal-from those that do not?
Taking control of the rumour mill before it takes control of you and your transaction. Most rumour mills begin as a result of an information gap. Leaving the door open to water cooler driven information channels will often lead to the best and the brightest people heading for the exits, when it is those exact folks that need to be directly motivated, incentivised and retained. Address these three basic human concerns -
• What's going to happen to me?
• What's expected of me?
• What's in it for me?
Lack of clarity and execution of the integration process. A major challenge for any M&A deal is the post-merger integration. Identification of key employees, crucial products and projects, sensitive processes and matters, impacting bottlenecks. In addition, required capacity potential vs current bandwidth should be analysed. Key questions are -
• Are your company and target company resources already fully or over utilised, leaving no bandwith for the future to make the deal a success?
• Are the dedicated resources allocated and contingent budget set aside?
The acquirer should be aware of and acqaint itself with all the existing and potential liabilities (financial, commercial, legal, management, environmental, intellectual property, insurance) that it would get into.
Clearly defining a detailed acquisition criteria for each area where acquisition appears to be a vialble alternative to internal growth. Weighting the importance of each characteristic, either formally or informally, aids in the candidate screening process and in ranking candidates in order of merit.
Working capital adjustments
A working capital hurdle is intended to ensure that the buyer receives the expected mix of assets and liabilities in the transaction. It's possible to change the mix of current assets and liabilities without affecting income and EBITDA so that a seller could maintain its EBITDA but not deliver the promised mix. As a result, the buyer would end up with less future cash flow than it had bargained for.
Generally regulatory frameworks are ill-equiped to oversee dynamic and rapidly changing technology companies, but at the same time need to ensure that customers are protected and that there is a level of regulatory playing field for businesses.
M&A accounting – treatment of deferred tax assets, creation of deferred tax liabilities, negative goodwill, capitalisation of certain deal-related expenses, cost of extracting synergies etc. Accounting standards are not always followed as expected and lack of transparency to the shareholders on Return on Investment on the capital. And, management accountability for the reasons why the deal should go ahead, i.e. whether the value is created from revenue synergies or cost synergies? The key question to be addressed to the shareholders is whether the management has done a good job managing the assets in the company.
Based on our years of experience on several M&A-related projects across a wide range of industries and geographies—our mergers and acquisitions experts believe that the key to successful M&A is a repeatable model, a runbook; one that companies can return to over and over again to reap substantial rewards.
We encourage our clients to make M&A an extension of their growth strategy. Key areas we focus on are -
• Market research and fact based target identification
• Clarity on how value will be created.
We work with our clients to develop meaningful deal thesis inline with the organisation's growth strategy. Key areas we focus on are -
• Apply or leverage capabilities to add value to the target
• Expand capabilities or fill capability gaps to create opportunities that didn't exist before
Strategic due diligence and valuation
We identify the key sources of value from the deal that is significant for our client. Our focus is on -
• Identify areas where the variance of return or performance is relatively large and analyse further the cause and quantify the associated risk.
• Identify any hidden areas like legal conduct, regulatory obligations, aging IT infrastructure, that could impact valuation.
Merger integration planning
Although it is greatly beneficial, for a frequent acquirer, to have a runbook for M&A, no two integrations are the same. And, we work with the organisations to consider aspects from culture to IT in order to realise the full value of the deal. We highly recommend establishing an Integration Management Office (IMO) that provides a framework to all integration activies.
Merger integration execution
Merging two companies requires a long list of integration tasks. easidoo M&A specialists focus on integration where it matters-
• tailor the integration planning to the deal thesis, i.e. integrate where it matters, and
• act with deliberate speed
Post-merger integration optimisation
Once the M&A is complete, unified views of the combined organisational structure can help to refine processes, improve efficiency and reduce overall costs of the new organisation. Post-merger, easidoo consultants -
• Assimilate the cultures of the companies
• Follow the corporate governance and portfolio management
• Align resources with corporate initiatives and business goals
Deal values and volumes remain significantly down on the record levels achieved in 2015, given the political uncertainty in the US and Europe.
Values and volumes down but not out
Transaction values and volumes continue to be significantly down on 2015. The value of withdrawn deals has risen to an eight-year high, a reflection of increased activity by antitrust regulators but also the daunting complexity of some of the huge strateguc deals being undertaken. The sectors most affected are high-tech, financial servivces and industrials.
Politics takes its toll
Transaction markets grew progressively quieter sa the year unfolded, with some - notably Europe and Asia Pacific - considerably less active in Q4. Above all, this reflects investor nerves about the deepening political and economic uncertainity caused by a number of factors, including the UK's vote to leave the EU and the U.S. election result.
Mega deals decline as mid-sized transactions dominate
The overall volume of deals worth more than USD10 billion is 35% lower than in 2015, yet megadeals continue to be announced, as seen in Q4 with the proposed AT&T/Time Warner merger. But in some regions, notably the U.S. and Asia, we’ve seen good growth in mid-market deals.
Rise in Cross-border deals
The largest increase in foreign investment of US-based targets was from Asia-Pacific countries, which increased from 8 deals (or 6% of total deal volume) in Q3’16 to 22 deals (or 11% of total deal volume) in Q4’16.
We service large multi-national clients in technology, media, telecommunications, financial services and automotive industries.
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