Why Are We So Bad At M&A, And What Will Make Us Better?
In good times and bad, M&A remains one of the best ways to get ahead of the competition and increase opportunities – and returns – for businesses. It also represents an immense commercial activity that drives significant macroeconomic value across the globe. But why are still so bad at it? Below Finance Monthly hears from Carlos Keener, Founding Partner at BTD Consulting, on M&A tactics and the value in improving on our own.
Even during the ‘Great Recession’ of the last decade, the worst since the 1930s, the poorest year for M&A saw over 35,000 global deals representing $2.25tn – equivalent to more than 3% of global GDP. M&A impacts national economies, individual businesses, and everyone involved.
Yet far too many deals still fail to achieve their objectives. By most measures, long-term M&A success rates remain very low compared to other growth or investment activities. Underneath many celebrated cases of outright merger collapse lies a general prevalence of underperformance, one that has remained unchanged in over 30 years. An Accenture report, Who says M&A doesn’t create value, published in 2012, actually celebrated the view that as many as 58% of all acquisitions added shareholder value 24 months post-close. Problem solved? We think not.
We do not believe such figures deserve the complacent optimism they receive. If you ‘play the M&A odds’ and do no better than your peers, your business is likely to be walking away from approximately half of a percent of its enterprise value with every single deal. That could easily add up to millions if not tens of millions of pounds.
Even so, this is about more than just the numbers. Underperforming acquisitions damage shareholders, careers, brands, communities and opportunities for companies and people alike. Executive survival in serial acquirers is notoriously short: according to one study, disciplinary replacement of CEOs is 77% higher than in non-acquisitive companies.
This endemic level of failure rarely prompts serious remedial action or increased rigour the next time there’s an M&A opportunity. The reason stems from the unique ‘gain today, pain tomorrow’ nature of deal-doing which can be typified by a few characteristics such as:
- Not a perfect world: Business is inherently risky, and M&A especially so. When that is the world view, some failure is simply seen as ‘coming with the territory’.
- Not today’s problem: The long-term outcomes of most deals, regardless of whether they are good or bad, are usually only apparent years later. But corporate, board and investor attention spans are short.
- Not my fault: Outside corporate management, it’s nobody’s job to care about the long term. Regulatory bodies focus on potential competitive impact, not the likelihood of deal success. Traditional external deal advisers are not interested in or responsible for what happens post-close. Shareholders and boards are too far removed from the detail to constructively influence deal decisions. New executives are always keen to draw a line between them and any past errors.
Studies of M&A and integration best practice are widespread and largely focus on tangible, concrete ways to improve individual steps along the process. They might advocate more due diligence, earlier integration planning, increased focus on culture or better communications. These can certainly help individual cases, and yet overall levels of M&A success remain largely unchanged. Best practice is available, understood, widely applied, and yet it is clearly insufficient.
Our own experience and research suggests that success rates are stuck because in most cases both organisations and the external groups that support them fail to understand and grapple with the leadership behaviours that really underpin M&A performance. These behaviours embody the culture, mindset, motivations and actions necessary for sustained success. Our detailed research report Inconvenient Truths identifies 10 critical leadership behaviours both pre- and post-close that impact M&A performance. Here are three of the ten to consider before embarking on your next deal:
- Avoid anything that generates deal fever: Over 90% of professionals surveyed believe deal fever has a significant, if not critical, impact on M&A performance - and we don’t mean a positive impact. Does your M&A process consistently eliminate the personal agenda, and discourage equating ‘deal doing’ with ‘deal success’? Ensure you have a clear understanding of the motivations – hard and soft – of the deal team from the outset.
- Minimise the influence of politics and egos in rational, objective deal debate: This is easy to say, but difficult to implement. In our study, 90% of executives at least occasionally withheld objections to a deal where there is widespread group support for proceeding. And 29% do this most of the time if not always. It is critical to use your deal process and your influence at the top table to set the right tone. This means building an environment for open, constructive debate, allowing everyone around the room to have a valid voice, and preventing any one individual from dominating the discussion.
- Ensure those doing the deal are accountable for delivering its benefits: As one Corporate Finance VP told us, “Getting the deal done is all we do; integration isn’t really of interest to us.” But without this, the pre-deal team will typically only have a passing interest in whether benefits are realised, while the post-deal business may not support the deal from Day 1. Making sure the group assessing a potential deal includes those who must make it work in the long term is key, as is giving the executive responsible for post-close success the ability to veto the deal itself.
All of this might seem obvious. But these points are rarely tackled head-on, and in part that’s because they can by difficult to address. A strong, robust M&A process can help encourage these ‘good behaviours’, or at the very least highlight when they’re not being followed. Those who think this might not be worth the pain and effort might want to know that according to our study, leaders who successfully follow our 10 ‘good habits’ consistently see M&A deliver long-term benefit 72% of the time. That is more than four times more than those who don’t follow the habits. They also saw an increase in share price of 46% over the three years of our study, which is more than twice that of their ‘badly-behaving’ peers.