Flipping the Model: The Most Important Question in M&A
In 2014, global M&A deal volume experienced a massive rebound. The total number of reported M&A transactions reached 31,427 globally, with deal value rising 57% to $2.94 trillion. Particularly as we experience strong macroeconomic conditions, high levels of cash among strategic acquirers and low interest rates, acquisition can look like a favorable way to fill current gaps in the enterprise, access a new customer base, and gain capabilities for accelerated growth.
Which is why it bears reminding that the financial transaction of an acquisition may be the least risky piece of an effort that is more likely than not to fail. History proves that it is easy to buy a company, but hard to perform a successful M&A. Every year, even as snapshots tell us acquisition rates and values are up, concurrent studies put the failure rate of the transactions between 70% and 90%. Take Daimler as an example. Following their acquisition of Chrysler, Daimler experienced continuous losses reaching into the billions, forcing them to separate the companies after only a decade.
That’s not to say there are no success stories, but scenarios like these warrant consideration of why some M&A transactions work for the long-term and so many others don’t.
At the heart of the answer to successful integration, we believe, are people and time. Time both in the sense that we should not rush into acquisitions simply because financial waters are friendly, but also in the sense of going into M&A with a clear view of the future.
A smart acquisition strategy takes into account what markets and customers may look like in three to five years. A brilliant acquisition strategy begins with a careful process of defining every part of the company you want to become in the future and then nurturing a culture of people motivated by knowing where they fit into the vision.
First, the Why
Change is a learned skill that must be supported and nurtured. An acquisition asks that two groups of people join beneath one corporate umbrella, each bringing its own skills, personalities, and ambitions. That cultural merger takes time. It must be deliberate. It must be CEO-led.
When leadership begins the process of profiling the company to be, they immediately lay the groundwork for this new team of people to take collective accountability for helping the organization reach a shared destination. The C-suite assumes the role of evangelists for the future. With a clear vision and strategy, effective transition management and open communication between stakeholder groups, they are positioned to lead those who must buy into the vision and share responsibility for working toward the desired results.
Toffler Associates suggests that acquisition is tactically a financial engagement, and strategically a human one. To achieve a more substantive effort that ultimately succeeds over the long term, we recommend a process that begins with taking the time to clarify the why of the transaction well into the future.
1. Set the vision Why is the acquisition attractive now and how will it play out in three, five, and ten years? Once the vision is defined, the c-suite must communicate it, often and through multiple channels, across every layer of the organization.
2. Support the culture What kind of organization will be born from this process and how can the c-suite keep its teams engaged – particularly those who are layered or located farthest from corporate leadership?
3. Know the Market How the new brand serves customers both at launch and for the years following requires a clear vision of market demands and organizational capabilities.
The What and How
The need for adaptability and agility is greater than ever in this innovation era. Future-focused businesses constantly strive to develop new ways to answer questions. In this environment, it’s natural to jump to what (needs to be done) and how (to do it).
We suggest that M&A does not fit this model – we must first identify why an acquisition is imperative to a long-term vision. From that point, we can better understand what (we want to offer, be known for, do for the market, etc.) and how (to merge financial systems, processes, branding, people, etc.). Without deep analysis of the company we want to become, it’s too simple to sell the financial potential of a transaction and just as simple to find ourselves lacking the ability to satisfy that promise.
For decades, Toffler Associates has approached opportunities and solutions as fundamentally human considerations. We have seen that the best way to achieving long-term sustainability is to bring stakeholders together to consider the current and future state of business, and only then apply discipline to architecting a solid roadmap toward a shared vision.
M&A activities are no different. Companies must first understand what the integrated company needs to be to compete in the future. With a clear vision in place, organizational leadership can develop a strong culture and teams able to succeed, and a foundation that is equipped to adapt over the long term.
It’s time to remember that mission and vision trump data in a strong forward-thinking strategy.