Connecting the Dots – Part 1

Connecting the Dots – Part 1

Successful M&A secrets; mergers and acquisitions

PART ONE

A series of articles by BTD Founding and Managing Partner Carlos Keener

Study after study still puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. Some however have managed to turn acquisition and integration into a true competitive differentiator. What makes these firms consistently successful at M&A, and what can the occasional acquirer learn from them?

Getting M&A to deliver has always been hard.

The enticing promise of new customers, enhanced capabilities and of course increased profits is all there for the taking, but the taking is rarely as easy as originally hoped. 

Most who have seen even a few acquisitions will recognise some of the classic symptoms post-close:

  • Operating costs that stubbornly go up instead of down;
  • Painful jags as new processes and systems are introduced;
  • Chronic management distraction;
  • Loss of some of your best people – just when you thought the dust had settled.

That’s not to say that all M&A encounters such turbulence, but even those that don’t still frequently fail to deliver all that was promised. According to a recent paper by Harvard Business Review, study after study still puts the failure rate of mergers and acquisitions somewhere between 70% and 90%[1].

And here’s the thing: despite years of academic study, corporate experience and maturing best practice, for most firms this situation isn’t improving. Current studies of long-term M&A success largely mirror those conducted a decade or more ago.

Despite the years, the research and multiple cycles of M&A boom and bust, why has so little changed?

Behind this picture something interesting emerges: while the majority of today’s organisations still find M&A success elusive, some have managed to break from the pack, turning acquisition and integration into true competitive differentiation. Organisations such as Microsoft, GE Capital, Xstrata and others keep acquiring and consistently generate long-term value from these deals.

What makes these firms consistently successful at M&A, and what can the occasional acquirer learn from them?

Dozens of papers, articles and books published over the last 10-15 years describe best practices in acquisition integration and we agree with much of what they say. Deal objectivity, financial modelling, comprehensive communications, a focus on people, clear definition of vision and risk, structured planning – these and more are indeed vital to a successful deal.

But across all these, two inconvenient truths about the M&A industry, business practices and cultures that underpin most M&A underperformance are rarely mentioned:

  • Acquisition and integration are viewed, planned and delivered as two discrete activities. The pre-close community – both in-house and external – generally supports this divide;
  • Like any good diet, following M&A best practice is harder than it looks. Most firms unintentionally encourage their own managers to avoid it.

So, the real question is this: are you satisfied with the current performance of your M&A strategy, and is it improving as quickly as you need it to?

If not, this may be the best time to take action. The post-recession climate is no longer giving firms the luxury of growing their way out of a bad deal, or one that is poorly-integrated. This impacts deal sponsors as much as businesses: Even during the ‘good times’ of the last M&A boom of the 1990s, 47% – almost half – of CEOs in acquiring businesses were actively replaced by their Boards within five years of deal announcement[2]. Several recent high-profile deals show that this trend will continue. Customers and investors reward successfully-executed inorganic growth but punish signs of business inertia or distraction.

Carlos Keener, November 26, 2012

The full article Connecting the Dots can be downloaded as a pdf by clicking here.


[1] The Big Idea: The New M&A Playbook; Harvard Business Review, 2011

[2] CEO Turnover after Acquisitions: Are Bad Bidders Fired?; Journal of Finance, 2006