How and from what moment should individual business units participate in the transaction?
It all depends on how the business of the acquired company corresponds to the current activities of the buyer. Business units of successful buyers were involved in the acquisition of companies with similar businesses at the initial stage of the transaction and at the integration stage. In addition, they were twice as likely to participate in transactions throughout their entire duration – from the moment of choosing a candidate for a takeover, during due diligence and negotiations until the very completion of integration.
Of course, the involvement of M&A specialists is necessary: they ensure a clear and consistent implementation of the transaction. However, if they independently look for opportunities to create synergies and do not fully involve the relevant business units in this, then it is quite possible that there will be dissatisfaction in the company and the team of specialists will be accused of setting unrealistic goals. Many successful acquiring companies believe that the business unit’s leading role in the core company acquisition process can significantly increase the size of the expected synergy effect, as well as the likelihood of its realization.
It is important that companies that successfully conduct mergers involve their business units in transactions at the due diligence stage. Sometimes they formally set up working groups, mostly made up of business unit leaders, M&A team members, lawyers, and other professionals (such as tax or environmentalists). These working groups get the right to manage the process up to integration. During the due diligence phase, they are particularly active in helping management identify and quantify opportunities and risks.
Unlike their unsuccessful competitors, who prefer to outsource their M&A specialists, companies that successfully execute such deals tend to be self-reliant. In both types of companies, top managers responsible for mergers and acquisitions held these posts at the same time. However, executives from successful companies have been with them for longer, albeit in different roles (see Chart 2). A leader who is well aware of the company’s culture, its people and specifics, clearly understands the needs of his organization, and he is more likely to find objects for absorption that really correspond to them. This also guarantees him the support of influential representatives of the business units.
In the case of buying a non-core business for the buyer’s business—a so-called transformative deal—experienced players typically assign M&A professionals to instill core skills in their company into an organization in the new industry. Business units are little involved in this kind of transactions. Most often, transformative deals are initiated by mergers and acquisitions specialists – they, as a rule, see possible new directions for development better than representatives of business units.
Here is what one of the leaders told us: “The main thing is to collect as many ideas as possible. I ask employees to actively look for new ideas. Our challenge is to identify new opportunities for transformative growth.”
However, sometimes it makes sense to involve business units in transformative transactions as well. One of our survey participants said that his company wanted to extend its unique distribution know-how to another industry. The success of the deal depended on whether the sales staff could sell the new products to existing customers. The employees knew little about these products, but their involvement in the deal from start to finish was able to assess the revenue potential of the synergy, prevent churn as much as possible during the transition phase, and ensure that the new products are fully marketed by the sales team after the deal is closed.
Expectations: Realistic and Not Realistic
Often a company, when profitability falls, its market share shrinks, or it encounters other difficulties in its core business, tries to solve all problems by acquiring a more prosperous competitor. The buyer hopes to acquire the know-how and management of a competitor and thereby strengthen his position.
Despite the apparent harmony of such logic, it can lead to a dead end. We know from experience how difficult it is for an inefficient buyer to dramatically improve its performance by acquiring a leading competitor and borrowing its skills and capabilities. Unfortunately, unlucky buyers often set themselves this goal. The leaders of many companies of this kind told us that they mainly wanted to adopt the best business practices of their competitors. In addition, they usually expect too much from mergers and acquisitions; when asked to select their main reasons for acquiring from a list of possible reasons for an acquisition, on average they named three – although representatives of companies that skillfully carried out mergers and acquisitions indicated two.
For example, one retail company wanted to acquire a competitor to expand its store chain, improve their operation and improve merchandising. She hoped that the strong management of the acquired company would quickly rectify her situation. The market reacted disapprovingly. Analysts immediately noted the negative sales balance of the acquired company and the dynamics of its profitability, casting doubt on the appropriateness of the generous premium paid by the buyer. The share price fell by almost 5%. According to the frank admission of our interlocutor, the acquired company turned out to be too clumsy and the buyer did not gain much as a result of the transaction. The goal of acquiring human capital was not achieved, and now both companies are in a state of confrontation.
This is not to say that you should never buy other companies for the sake of their skills and capabilities. Indeed, all the executives we interviewed made such deals, believing that in this way they would be able to improve their business methods. But the fact is that smart buyers are looking for objects through which they can strengthen their own skills and assets, enhance their unique features. It is also important for them that the deal is profitable for the acquired companies. One executive summed up his company’s acquisition strategy this way: “We analyze what we do better than our competitors and strengthen our skills through acquisitions.”
In general, all this shows how important it is at the stage of due diligence to look for and analyze in detail exactly the opportunities, and not pay attention only to operational indicators or create a financial model to estimate growth, loss, or internal rate of return. The experience of the transport company, which over the past five years has made more than ten major transactions, is very convincing. Its specialists carefully analyze transport routes, trying to find opportunities to attract new customers or improve the efficiency of transportation by changing traffic routes. While such a detailed analysis is usually difficult to do in the short time frame of a deal, it can be very helpful.