Mergers & Acquisitions Integrate or Wait? That Is the Question (Part I)
Even though in the past 18 months everything seems to have changed, the fundamentals of successful M&As have not.
In the world of M&A, the COVID pandemic had two distinct effects on deal volume in the first half of 2020, when M&A activity ground to a relative standstill, and in the surge that started in Q4 of 2020. In fact, deal volume in April 2020 was 80% lower than in December 2019, and many of the deals were borne out of necessity to help companies in sectors hit hardest by the lockdowns (such as entertainment, travel and hospitality) stay in operation.
In contrast, according to data from Morgan Stanley, during Q4 2020, there were a record 1,250 M&A deals globally, totaling more than $1 trillion. The waning of the pandemic, and theĀ beginning of economic recovery in many developed countries has helped M&A activity bounceĀ back, but a convergence of economic and business drivers have pushed M&A to record highs.
Historic low interest rates have boosted buy-side economics, and the need by many companiesĀ to pivot in response to COVID, has made M&A an attractive and fast path to acquiring new skillsĀ and tools. Additionally, while there was consolidation resulting from last yearās downturn, someĀ sectors saw significant growth during the pandemic, incentivizing those who accumulated significant cash to find viable investment opportunities. Finally, the popularity of alternative dealsĀ such as partnerships and minority stakes has enticed new players to enter the fray, andĀ mitigated the risk for some weary investors.
Looking ahead to a more normalized economic environment, we expect a number of M&A trends to persist. These include a continuation of interest in alternative deal structures; an increase in what can be called āspecial sauceā type deals such as when a company buys a skill,Ā or a way of doing business that the acquirer seeks to preserve post-transaction; and theĀ dominance of āgrowthā deals as opposed to āsynergyā deals.
Notwithstanding the robust M&A activity, it is still unclear when most employees will return toĀ offices or other in-person activities. Yet, as more deals continue to materialize, companies willĀ undoubtedly be tempted to proceed āfull speed aheadā and attempt to integrate remotely. AsĀ past decades of M&A experience and research have shown, successful post-deal integration isĀ critical to realizing deal value and returns. Given how challenging integrations are under theĀ most favorable conditions, and how difficult it is to successfully execute an integration, the ideaĀ of adding the remote element to it and expecting no hits to desired outcomes is more āwishfulĀ thinkingā than it is realistic.
For the vast majority of cases, remote integration will prove not to be a good idea, and takingĀ the leap anyway heightens the already substantial risk of deal failure. So, the fact that it can beĀ done, does not mean it should be.
The more things change, the more they stay the same.
The COVID crisis has imposed major limitations on how businesses operate and forced them toĀ adapt to an entirely new working paradigm. Nonetheless, the pandemic has not changed theĀ fundamentals of M&A that have persisted through numerous market and economic cycles. TheĀ fact remains that 70-80% of deals fail to deliver the desired shareholder results either due toĀ poor due diligence, poor integrations or a combination of both.
One of the biggest shortcomings of many due diligence processes is the lack of focus on ā orĀ underestimation of ā the cultural fit between the acquirer and the entity being acquired. Effectively navigating cultural challenges is a massive driver of the ultimate success of a deal.Ā But often, the financiers conducting due diligence either dismiss culture as a āsoft issue,ā orĀ unrealistically underestimate cultural gaps. This, coupled with poor ā or sometimes lack of āĀ communication, creates a vicious cycle that leads to confusion, distrust among stakeholders,Ā stress, and ultimately, low productivity and loss of critical talent.
Integrations can be extraordinarily complex from an operational perspective, yet the deal making stage almost never includes the actual operators of either business andĀ decision-makers are often so focused on getting the deal done that ā like the under-emphasisĀ on culture ā operational challenges are glossed over and integration planning doesnāt even startĀ until after the deal is closed and announced, leaving all the heavy lifting of uncovering andĀ solving operational challenges to the integration process.
Once formal integration begins, there is almost always a honeymoon period when both partiesĀ are genuinely excited and want to make the union work. However, the ārealā progress ofĀ integrations happens once this phase is over, as more difficult issues are uncovered and start toĀ be addressed. A sound integration approach helps compress the time between the āhoneymoonā and the āgetting-realā stages.
Related content:
Grow Your Business Through the M&A Pipeline
