Mergers and acquisitions are typically viewed as significant events in business because of the value defined by the negotiation, closure of the transaction, and other elements. Beyond the valuation, negotiation, and closing of the transaction is where M&A research from several decades has demonstrated that the value of M&A occurs after the M&A transaction has taken place. The strategy for the M&A transaction, the way the M&A organization will integrate and operate as one company, is what will ultimately determine if the value created by the M&A is realized in a financial sense or is lost.
One of the greatest misunderstandings related to M&A is the misconception that the completion of an M&A transaction will result in the growth of the acquiring organization automatically. However, research indicates otherwise. The research published in the Harvard Business Review shows that roughly 70%-90% of M&A transactions ultimately do not meet their strategic objectives and/or financial objectives. In most instances, the reason for the failure of an M&A transaction is not due to poor negotiation during the closing of the transaction; however, it is due to not having the appropriate strategic and financial alignment as an organization and/or having an insufficient level of planning with respect to how the M&A will be integrated into and operated as one company.
Strategic Validity is the fundamental quality that must exist for an M&A transaction to be successful and deliver value to the stakeholders of the acquiring organization. Bain & Company conducted a global M&A research project and determined that organizations that establish a valid rationale for the M&A transaction prior to the M&A transaction have a significantly higher chance of becoming more successful than their competitors post-M&A. When the rationale for the M&A transaction is based only on the desire for scale, speed or competitive pressures, there is a significant potential for organizational leaders to experience difficulty aligning priorities when the time comes to plan the integration of the two organizations as one company.
The failure of 83% of M&A transactions to improve shareholder returns can be attributed to factors arising from issues within the integration process according to a recent KPMG study. Cultural differences, ambiguity regarding who has the authority to make decisions regarding the new company and a lack of uniformity across operating processes are three reasons that impede synergies expected from an M&A transaction. These three issues are frequently not apparent from the beginning of the transaction but rather emerge over time, creating significant challenges for organizations that have lost momentum in the integration phase of the M&A process.
“People-related” issues are the most significant area of risk to successful integration. According to the PwC M&A Integration Survey (2016), over half of respondents indicated that cultural differences were the single biggest reason for challenges experienced during the integration phase. Uncertainty surrounding the M&A transaction can create disengagement and talent loss, especially for top-tier talent, if there is a lack of adequate communication and alignment with managers.
Leadership alignment is critical to successfully navigating the complexities associated with an M&A transaction. McKinsey & Company conducted a study that found that organizations that have strong alignment between leaders, as well as early engagement in the integration process, perform much better at achieving the anticipated synergies from the M&A transaction than organizations that do not achieve these two objectives.
M&A transactions should be treated as ongoing transformation efforts, not merely short-term transactional events. Several studies have shown that the realization of value from an M&A transaction typically occurs three to five years after the merger is completed, further emphasizing the need for ongoing resources to be allocated toward integration activities.
When organizations take the time to align the values, leadership style, and the operational model of their company, they are much more likely to benefit from their investments in the long term.
The main focus for any merger or acquisition should not be solely on the combining of balance sheets or financial leverage; rather, it is about bringing together the overall strategy, employees, and mission of both companies. Numerous studies have shown that the combination of these components when M&A is approached with clear strategies in mind and executed with a careful process, creates a fierce opportunity for continuing growth and providing long-lasting competitive advantages.