Evolution – A Window to my mind

London’s Cass Business School recently released a research which highlights the perils facing executives tempted to use the financial crisis to buy struggling rivals, or distressed companies, at apparently bargain prices. The study looked at almost 3,000 acquisitions of distressed or insolvent companies, across various industries, over the past quarter century, from 1984 to 2008. It found acquirers who bought distressed or insolvent companies suffered a lower or deteriorating return on equity (ROE) in the three years after the deal, and the buyers underperformed those who bought healthy firms. The other aspect which the research found was that these deals involving distressed or insolvent companies tends to complete significantly faster, hence putting extra pressure on management teams. The ill-fated acquisitions of imperilled banks Merrill Lynch and HBOS by Bank of America (BAC.N) and Lloyds (LLOY.L), are recent high-profile examples.

As highlighted in my earlier post, M&A drivers could be for expanding customer base, market share, top line growth, new market entry, or to eliminate a competitor. There are also two other reasons that drives M&A, which are to build competence as well as to make a significant changes to the business model. Examples of these are like Scandent, Intelenet (a joint venture of HDFC and Barclays), and Wipro (who acquired Spectramind, Nerve Wire and Quantech to augment their competency).

Well, there are many reasons for a buyer to seek out companies to acquire and there are equally many reasons for companies to sell out, either for size and scale benefits, or simply for survival.

But unlike marriages, in an M&A deal, divorce is not an option.

In business schools, we read about the various financial methods used to evaluate and price the deal. We read about how to identify potential synergies and assess the deal. But what business schools do not teach us are the “what” and “which” aspects of the deal.  I call these the before and after aspects:

1. Before the proposed deal is closed, how should the Board review and reach a consensus? The answer lies with the following questions:
   1. What is the clear strategic perspective driving this deal?
   2. Which part of that strategic perspective is aligned to our corporate vision and mission?
   3. Which part of this deal consistent with our long-term objectives for our customers, markets and products?
   4. What are other alternative investments available as options?
   5. What are the expectations and objectives of the target?
   6. What the projected performance gains in line with the premium being paid? and when will we realize performance gains emerging from the result of this merger / acquisition?
   7. What will be the reaction and impact to our partners or competitors, who are likely to be affected by the deal?
   8. What are the critical milestones in a 12-24 month implementation plan?
   9. What added investments will be required to support the plan?
   10. What are the pieces of either company that are good candidates for sell-off or split-off?
2. After the proposed deal is approved, how should the integration be planned? The following are important aspects of the integration process which needs to be thought through carefully:
   1. Structural integration – At the highest level, we would need to look at consolidating leadership teams, vision and business philosophy alignment, cultural alignment, strategic alignment, and organizational structure.
   2. Personnel (people) integration – How do we normalize two different organizations’ compensation structures, performance management systems, job roles / responsibilities, employment grades, and how do we craft out adequately the communication plan, processes, and an employee retention program (knowing that people tend to leave in times of uncertainty).
   3. Product / Services integration – granted that both organizations may have overlapping or distinct products or services, therefore, it is essential to look into an overall branding strategy, sales force integration, integration and streamlining the products and services (what to modify, what to throw away, what to remain), channel and partners strategy integration, and supplier integration.
   4. Delivery & Operational integration – a review of the delivery processes, operational processes, resources, capabilities of both parties, and alignment of these processes, systems, capabilities into a single common processes; this includes integrating operation support technology and functions.
   5. Identity integration – finally, very often, the elements of overcoming cultural differences, establishing a common identity and a sense of belonging are critical. It will be a disaster to foster a first-class and second-class population in the merged company, as this will lead to a perceived bias, inequality and likelihood of higher resignations and employee departures.

Tags: acquisition, Customer acquisition, Customer retention, merger, strategy

This entry was posted on Monday, September 21st, 2009 at 17:52 and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.