Acquisitions and divestiture are natural steps in the life cycle of a company. As companies mature, they have the opportunity to develop their assets by acquiring competitors in order to regain momentum or consolidate their position in the market. On the other hand, divestitures or partnerships can also be a valid strategy to regain momentum.

In both cases, this step is crucial for the entrepreneur, and it is therefore imperative to be aware of the damage that poor deal execution can do to the integrity of the firm.

Academics have been studying the critical factors that lead to a successful deal for years and the conclusions are still not entirely clear. However, a literature review (Gomes, Angwin, Weber, & Yedidia Tarba, 2013)¹ identifies the most influential criteria identified in M&A deals from 1997 to 2013. An additional post-merger criterion is IT management, which was overlooked in the literature review.  Table 1 summarises the different critical factors pre- and post-merger.

Table 1: Critical factors Pre- and Post-Mergers

Pre-merger criteria:

Pre-merger criteria focus on the fit of the target with the acquirer’s strategy. The general criteria are to ensure that synergies exist, that the quality of the management team is excellent, and that the culture is similar to that of the acquirer. Even if the target appears to be a perfect fit, the acquirer should not overpay, as this is considered to be highly value destructive and is one of the most common reasons for M&A failures.

The acquirer should also assess the size of the target accordingly. The size of the target and the acquirer should not be extreme opposites, as this leads to underperformance.

Finally, there should be an evaluation period during which the companies assess the strengths and weaknesses of their future partners in order to establish a trusting relationship and reduce asymmetric information. To build this trust, the style of discussion needs to be adequate and transparent with regard to the future of the merged companies.

Ensuring full transparency about the new management’s intentions towards employees and management would avoid potential conflicts of interest later on. In addition, the acquiring company needs to retain the key players to ensure the retention of knowledge within the merged firms. A carefully designed remuneration scheme is therefore a mandatory criterion.

Once the pre-merger criteria have been addressed and/or agreed upon, the deal can be signed and the acquisition process can be implemented. 

Post-Merger criteria:

The first post-merger criterion identified is the integration strategy. Without an appropriate integration strategy, the expected benefits will not be realised. If the integration is too little or too much, the risk of value destruction is important, as cultural clashes may occur. 

Another crucial criterion is the performance of the post-merger leadership. The new leadership needs to set the direction of the company and manage the acquisition of new assets into the existing company. The speed of this asset acquisition is also very important and should be adapted to the profile of the acquisition. For most of the cases studied, a constant and rapid pace is to be prioritized.

From a logistical point of view, it is recommended to set up a team to ensure that the acquisition never loses momentum. The acquirer should allocate sufficient resources to the team in charge of the transition but shouldn’t overlook the day-to-day business activities.

As mentioned in the pre-merger criteria, another critical area is communication during the merger. Precise and transparent communication is essential to the deal’s success, especially regarding the new management’s intentions and the strategy that the company is now pursuing.

Human resources management is critical to preserving and developing human capital. The challenges of the post-merger phase may prevent synergies from being realized through the sharing of resources and the transfer of skills.

The same can be said for IT integration. Bain&Co (2019)² found that top performers in M&A tend to integrate the IT infrastructure into the overall corporate strategy. In doing so, IT integration is already in the planning. This should allow for rapid integration and early capture of synergies.  

Finally, the cultural difference between the acquirer and the target should not be too far apart, as cultural clashes could arise (although no clear relationship could be drawn from the studies, as each M&A deal has its own unique characteristics).

Conclusion:

According to academics, if the criteria are properly addressed, the deal should be a success. However, even if all of the following factors are addressed, it is still possible for the deal to be unsuccessful due to uncontrolled economic conditions or events outside of management’s control.

To maximize the success of a deal, all of the above criteria must be carefully addressed. As an entrepreneur, the best approach is to find the right M&A adviser who can ensure full coverage of the critical factors and provide expertise on the overall deal structure, interactions, and oversight of the various parties involved in the deal. Your M&A adviser will ensure a smooth transition throughout the M&A process.

Should you have any questions about an M&A transaction? Contact us.

References:

1. Gomes, E., Angwin, D. N., Weber, Y., & Yedidia Tarba, S. (2013). Critical success factors through the mergers and acquisitions process: revealing pre‐and post‐M&A connections for improved performance. Thunderbird international business review, 55(1), 13-35.
2. Bain&Co (September 12th, 2019). Mastering Process and Systems Integration After a Merger.

Written by François Mathieu, Associate