Did you know that the majority of mergers and acquisitions destroy shareholder value?
Why? Because almost always one or both parties don’t have a clear strategy or rationale as to what they want to achieve. Nor have they genuinely worked through if a merger or acquisition is the best way to achieve their goals. Very often they don’t have sufficient access to a suite of experienced, battle-hardened advisers from the onset to help them navigate what invariably becomes a complex process. Finally, and perhaps most importantly, insufficient attention is given to what happens after the deal in terms of integration to a new operating blueprint.
The road to M&A success is littered with disaster. In the Australian financial services sector, many will recall the fallout from AMP’s acquisition of GIO in the late 1990s, NAB’s decision to abandon Homeside in the United States, IAG’s divestment of failed UK acquisitions and QBE’s need to write down or sell off a myriad of poor acquisitions undertaken in the last decade. The pattern is repeated across other sectors and also in other countries.
Whether an organisation is considering merging or acquiring a company in Australia or in another jurisdiction, there appears to be a consistent set of reasons. Economies of scale, entry to new markets or geographies, getting access to complementary new products or revenue sources, access to physical assets, brands or IP that are difficult to replicate or to get more control over the supply chain or distribution. In extreme cases, it is a defensive strategy to make their company less digestible as a takeover target, probably the worst reason to do a M&A.
Preparing for a M&A
Before going down the M&A path companies should ask themselves: Are acquisitions or mergers the best way to achieve the strategic goals of the organisation? If the answer is yes, securing a team of good advisers who are not conflicted – a real issue in Australia because our market is relatively small - and having good search and selection criteria are priorities. It is a rare organisation indeed that has all the internal expertise to drive a successful merger or acquisition. Invariably, you need the resources of a Big Four accounting firm, an investment banker and an experienced legal team to navigate the pitfalls of due diligence, contracts, deal negotiations and the like. Then comes the tough part, actually developing an operational blueprint for execution post-deal and successfully implementing the integration. Welding the different advisers into a cohesive and collegiate team and keeping them out of sight is a particular challenge. I realise that sounds a little sinister, but there are very good reasons why, and that brings me to what inevitably becomes a balancing act – the communications.
When do you tell people what? Assume you are going to have to communicate your intentions sooner rather than later. In an ideal world, most would prefer to seal the deal before they talk about it. The reality, however, is that if you are in a listed company environment, under Listing Rule 3.1 there may be an obligation to inform the market sooner than you would like. I can’t tell you how many times staff, clients or customers of an organisation engaged in merger or acquisition and divestment discussions first hear about it when they read the press, or find out about it on social media. Such leaks can have serious impacts on staff morale and engagement and may undermine future integration efforts. They could also raise continuous disclosure issues, with ASX contacting the company to seek either a market announcement or a trading halt.
To manage communications risk, have communications plans ready to go for every contingency at every stage. Keep the number of people ‘in the know’ as small as you can, keep them out of sight, use code names, control distribution of documents, have every member of the team sign confidential agreements and keep your communications clear, articulate and up-to-date.
M&A transactions are among the riskiest initiatives any organisation can attempt to undertake. History says you essentially have to beat the odds by a significant margin to create value as opposed to destroying it. I wish you good luck.
Hear more from Paul at Mergers & Acquisitions: Risky Business on Thursday, 27 October 2016 in Sydney.