M&A: A marriage of convenience

By Rocio Summers

​Last month I wrote about the instinct for growth that all human beings share. It looks like at a certain point in their lives, most of them also feel the impulse of finding a partner and eventually get married. Some, even more than once! But in the case of enterprises, this is clearly a marriage of convenience. And the very remarkable goal is to achieve something bigger together than the sum of the parts.

In his beautiful book, "The Wisdom of Finance", professor Mihir Desai, dedicates a full chapter to Mergers and Acquisitions titled: “No romance without finance”. With his characteristic fine humor, Mihir takes us in a trip around Hollywood movies (Working Girl), jazz music (Charlie Parker and his band playing “romance without finance”) to the Renaissance Italy of the Medici and their arranged coupling practices. He finally makes us land on some examples of disastrous mergers: AOL and Time Warner in 2000 and some others more successful like General Motors and Fisher Body in the 1920s. Again, in a humorous manner, he describes the last one as the transition from flirtation, arrangement, the need of a deeper commitment and finally marriage and love.
After all these fun stories, we know what the lesson is: synergies are often overstated, and the costs of integration are typically understated.

Another great professor at Harvard Business School, Felix Oberholzer-Gee used to repeat in his Corporate Strategy lessons, the 3 tests any merger needed to pass before deciding to go ahead:

1. The value test
2. The ownership test
3. The organization test.

All of these are critical and before venturing into an M&A process, all of them need to be analyzed with a critical mindset, and the organizations need to be prepared for this.

1. The value test.
This test refers to the rule of thumb that One plus One must equal Three in order to proceed with the “marriage".
When looking for the right partner, we need to really be looking for these synergies with a realistic approach. Sometimes the synergies may refer to costs savings due to supply chain efficiencies, shared information technology, improved sales and marketing, R&D, patents, reduction of overhead, etc. Sometimes, they may come through a revenue upside: complementary products that can be bundled or complementary geographies and customers, allowing the merged firm to access a broader demographic and producing higher revenue.
Even though sometimes some of these synergies may seem clear, effective integration is key to make them happen in an efficient manner.
2. The ownership test.
Continuing with the parallelism with marriages, this test would be like questioning whether a marriage is needed versus remaining “friends with benefits”. It really is prudent to consider whether a strategic alliance or a good agreement is a better solution than a merger and integration. Why? Just because the costs of integrating can be huge and the benefits not as obvious as expected at first.
3. The organization test or the cultural fit.
To me, the cultural fit is probably the most important. Organizations are living entities full of people. Ignoring culture is a big mistake that will lead to the most catastrophic results in business. And as culture is a significant part of the strategy, it needs to be taken into account when precisely we are taking the most strategic decision for our business.
 
Inorganic growth through M&A is an excellent way to consider expansion and achieving great things. But it needs to be done with caution. There are three major keys to success:

1. Find the right partner. As usual in growth, don’t lose perspective. The alliance needs to be in line with your strategy and vision. The synergies need to be realistic and desired, and the cultures need to be compatible.
2. Do your due diligence. The due diligence is a cash flow oriented approach to financial statement analysis that focuses on the critical factors affecting the target company’s historical operating results and cash flows, as well as the ability of the target to generate sustainable, recurring operating cash flow. Be critical, audit the financial information and projections, examine the tax situation and liabilities, pay attention to IT, cyber-security, HR, operations and legal due diligence.
3. And finally, start working on the post-merger integration from the beginning of the process. You will need to make decisions regarding overlapping supply chains, product mix channels and operations. You will need to integrate two differing cultures, compensation packages, IT, etc. A smooth PMI will be the key to success in your “marriage”.

For each of these steps, there are experts in the field that will help you achieve your goals. Count on them and plan it well because the risk you are running is too big to be left to good luck.
 

At RSIBC, we partner with the best in class experts to guide you through the whole process of M&A in a seamless and painless way.