The Road to Hell Is Paved With Good Intentions

(Or why some M&A deals succeed and others fail)

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In the huge consolidation through M&A which has gone on in the PR industry over recent years there have, as we all know, been winners and losers. It seems that for every happy marriage there is an unhappy one. Why is it, we wondered, that some M&A deals work wonderfully well whilst others don’t? So we sponsored Ashridge Business School to research the critical success factors in M&A within the marketing communications industry.

The research was carried out in 2003 across a sample of one hundred transactions between 1997 and 2000, out of a possible three hundred transactions. It was both qualitative and quantitative research involving questionnaires and face-to-face qualitative interviews with vendors and acquirers. It covered all the major international group buyers, public companies and private companies. The research was designed to discover what companies are getting right and getting wrong, and suggest ways of improving M&A performance in order to improve the total value realised by buyers and sellers.

General Findings

The research reveals that:

• A wealth of knowledge on M&A best practice exists and is readily available, however little of this is applied, generating deals that are often poorly thought through and executed, with unimpressive outcomes that frequently destroy shareholder value, for both buyer and seller

• Only 50% of buyer respondents rated their transaction success as good or better against set objectives

• The greatest opportunity for improvement centres on so-called “process issues”. M&A process issues include negotiation, pre-acquisition planning, information gathering, communication, price paid and method of payment, people issues and implementation.
  
  Many M&As neglect these in favour of an emphasis on cultural or “fit” issues. M&A fit issues include culture, size, diversification, previous acquisition experience, strategic fit (i.e. synergistic opportunities), demographic factors (i.e. timing vs. market cycle), organisation ages. In practice, a well managed process can turn a good fit “bad” and a mediocre fit “good” and is a controllable driver of M&A success. Fit is however important

• Respondents with most M&A experience were more likely to judge their latest transaction as successful. Many knew instinctively whether a deal would work, but admitted to difficulties in knowing how to pass this knowledge on to others

Ironically in a people business most buyers measure M&A success almost exclusively through financial measures, i.e. “lagging” rather than “leading” measures of performance. They also failed to embrace performance measurement beyond such traditional accounting measures – i.e. less than 3% (of research respondents). So whilst acknowledging the importance of applying more holistic performance measures for intangible assets, e.g. client and employee satisfaction, they rarely apply such leading indicators.

Culture and “fit” issues

Culture, “the way we do things around here” comprises a set of deep rooted assumptions and is extremely hard to change. Research findings confirm that if two enterprises are to have a successful relationship it is easier if:

• There is a cultural “fit” rather than a need for change

• Synergies are clearly and vigorously identified.

The least successful transactions, those which proved “harder to pull off”, were those driven by the following motivations:

• Unrealisable economies of scale (cited by respondents as a motivation in 10% of cases)

• Over optimistic assessment of financial synergies (cited in 10% of cases)

• Market entry (cited in 10% of cases)

Secondary research suggests that success is more likely when acquiring within the same or related sectors. The majority of transactions researched fall into this category. Clearly both buyer and seller have a vested interest in fit – each side will have a mental fit strategy; they will know the type of organisation they want to join up with, and why. However, too often the evaluation of fit was seen to be too narrow with the consequence, from the buyer’s point of view, that due diligence was restricted purely to financial and legal discovery.

“Process” issues – general observations

Process drivers which were measured included: tone of negotiation, pre-acquisition planning, adequate due diligence, enhanced due diligence, correct price, positive reaction of acquired employees, management of acquired employees’ expectations, post acquisition changes well executed, effective acquisition process, effective communication from senior management, effective communication from others. All these process drivers were rated higher in the ‘best’ transactions than in the ‘worst’. Successful implementation of post-acquisition changes exhibited the most divergence between best and worst transactions and the strongest overall correlation with M&A success.

Process is indeed key in M&A. Yet the research revealed a disconnect between the buyer’s perception of process and the seller’s view. Identified best practice reveals a non-adversarial approach, sharing experience and building towards common objectives. Both parties need mutually to identify critical success factors linking them via cause and effect relationships to build a coherent map representing how the common objective will be accomplished. Once such a success map is in place, then appropriate measurements can be applied. The map below shows the causal linkage of critical success factors.

In conclusion it can be said that no-one sets out to do a bad deal, a deal which destroys shareholder value. Yet it is clear that those involved in M&A are not necessarily measuring those factors which determine whether a transaction will be successful or not. It is crucial, as can be seen, to consider the employee and client perspectives which are at the heart of those businesses. There is a clear need to change attitudes to M&A success measurement. Consider also that a vast majority of deals are structured on an earn-out basis, where mainly financial targets are set. However, disenchanted employees and/or clients can quickly jeopardise performance. Linking earn-out incentives to key non-financial metrics such as client and employee satisfaction make good business sense for both transaction partners. But it’s a radical concept in a traditional marketplace.

04/01/12

Jim Surguy, Managing Director, Results Business Consulting