How to ensure your acquisition target on paper matches up in reality

When a company has proved that its original business model is successful by reaching a certain growth stage, it seeks growth by other means.

Rather than organically growing through business development and securing new customers or by developing and introducing new products, it chooses to merge with or acquire other companies, envisioning a future of accelerated growth and expanded market presence.

On first examination, this looks like an eminently sensible strategy.

Why pick up customers here and there through concentrated (but sometimes lengthy and costly) marketing and business development activities when customer accounts can be ‘bought in’ overnight?

Why spend time and risk investing in new product development when these can be acquired, ready to sell, with no technical risk of failed development, and with a ready customer base attached to them?

There are many equally positive reasons why mergers or acquisitions are considered :

  1. Economies of scale/cost savings
  2. Diversification
  3. Reduction in risk
  4. Access to talent
  5. Increased capabilities – vertical integration.

Yet, for all the clear advantages of mergers and acquisitions (M&A), the transactions do not always yield the anticipated benefits, leading to many sources claiming that up to 70–90 per cent of transactions ‘fail’

These are astonishing statistics, but of course, this does not necessarily mean that the new company fails entirely and leaves the market – it simply means that the transaction fails to deliver the anticipated benefits that were hoped for at the start of the process.

Many intermediaries in the M&A industry would claim that if the calculations are done correctly, based on good quality due diligence, one plus one should equal three (and sometimes more than three) – but in practice, things do not work out that way for many who attempt them.

So, what can go wrong?

There are a number of factors:

  1. Poor or incomplete due diligence
  2. Over-ambitious estimates/projections of synergies and cost savings
  3. Incompatible cultures
  4. High staff turnover post-transaction
  5. Earnouts not achieved
  6. Post-merger savings not realised
  7. Lack of, or conflict in, post-merger leadership and management
  8. Lack of a coherent joint strategy
  9. Poor timing of transaction
  10. Dynamics of human behaviour.

You will notice that the majority of the above issues concern people rather than transaction financials.

Financials are impartial, logical, easy to write down and evaluate, and in many ways indisputable.

People are the opposite, subject to their own needs overriding those of the business, illogical at times, not easily measured or evaluated, and not always on the same page when it comes to the promise that the new merged or acquired entity will bring.

Of course, I advocate that all the clients I work with conduct their full and proper due diligence on the financials.

However, my expertise is in the people element, and I truly believe that getting this right is equally, if not more, important.

Financials can always look good pre-transaction, but it is the people who will help you recover if the financials begin to let you down post-transaction, long after the ink has dried.

Do not neglect a full assessment of the target workforce, their people, processes and systems.

Be prepared to look deeply at your own people and processes too.

Why should you think that your side of the new entity has the monopoly on the best way of doing things moving forward?

Or the best people for the new entity and its changed journey?

Do you think that you have in some way been proven to be better by the fact you are the ‘acquiring part’ of the transaction rather than those being ‘acquired’?

This type of transaction is like woodwork – there is no point in spending time, money and effort preparing only one surface, without giving equal thought and preparation to the other surface.

The joint is only as strong as its weakest surface, and it needs time to be supported further and allowed to solidify.

You have taken two companies, each on their own distinct journeys, and brought them together.

If integration is carried out sympathetically then you are bound to lose people, some of whom you need and will miss on the new journey.

In these situations, it is those who are most capable who are the most mobile and likely to get new roles elsewhere if not handled appropriately.

By preparing both parties you are giving yourself more chance of success.

However, it’s easier said than done.

Mergers and acquisitions bring to the workplace people with a range of emotions including optimism, excitement, fear and uncertainty.

Integration takes time and no two days are ever the same in the early days of the integration process.

Your leadership team will be tested by facilitating the new entity’s operational practicalities, managing the many personalities involved, meeting their expectations and addressing their concerns.

Every merger and acquisition brings with it a new set of human-performance challenges.

Many leaders lack experience in M&A integration, are new to the merger and acquisition process, learn on the job, make dozens of mistakes and very rarely get the people element right.

It doesn’t need to be like this.

If you would like more information on how to effectively integrate your people into your next merger or acquisition by maximising the talent and resources at your disposal, please contact me to discuss your proposed plans, identified challenges and people integration concerns.

I would be delighted to share with you my experience of helping client leaders to help facilitate the people perspective element of the merger and acquisition process.

Best wishes on your journey, wherever it may take you.

John Stein, Founder of the Winning Formula.

p.s. You may wish to register on my website for the Merger and Acquisition white paper planned for publication shortly.