M&A: 8 ways to make a success of a takeover

Firms that pursue takeovers should look to create value, not headlines. That’s one of the lessons I’ve picked up from some analysis of successful takeover strategies listed in the 2010 KPMG survey of global M&A. Here is a brief summary of their recommendations for approaches which are more likely to result in a takeover or merger..

(1) Don’t start with the deal (start the detail planning early)

The worst time to start evaluating the potential benefits and drawbacks of the deal is when the transaction is just about to be completed (or worse, just after). Integration planning needs to start as as soon as possible and it needs to be wide-ranging (i.e. not just limited to financial and marketing aspects).

(2) Define the strategy

Obvious really, but still essential. The buyer needs to have a clear and agreed understanding of the strategic rationale for the deal.

(3) Don’t just focus on costs

Cost synergies are important, but they shouldn’t be the only focus. It is important to work hard to identify and evaluate potential revenue synergies as well so that shareholders are better informed when they analyse whether to support the proposed deal.

(4) Focus due diligence on the future

The process of due diligence is often too focused on understanding the past performance of the target business. However, many takeover targets operate in markets which are changing rapidly - how reliable is the past in predicting performance in the future? For example, due diligence should critically analyse the competitive environment of the target, including the prospects for market growth.

(5) Is a takeover really the right answer?

A vital question to ask. Is a takeover the best option to deliver the growth objectives of the business? Are alternative external growth options a better bet (e.g. joint venture, licensing deals, strategic partnership etc). KPMG make the important point that some management teams become committed to takeovers too readily without critically evaluating whether an acquisition is the right tool.

(6) Recognise the hard truths about the soft issues

KPMG report a statistic that “45% of Fortune 500 CFOs blame post-M&A failure on unexpected people problems”. The key soft issues to address include choosing the right management team post deal, handling differences in culture between the buyer and target, and managing communication about the deal.

(7) One size does not fit all

An interesting one this - and a great “depends-on” evaluation point for students to make in an exam essay. There is no such thing as a standard takeover or merger. Every transaction has significant individual elements that need addressing in order to make it a success. Maybe a key customer needs to be brought on-board. Maybe there is a risk of the loss of highly-skilled and business-critical employees. Perhaps there is a strong entrepreneurial culture in the target business which needs to be embraced and nurtured in order for value to be created. Every takeover and merger is different - each requires careful thought and planning.

(8) Balance risk and reward

Another great point for evaluation. A business should not become over-reliant on acquisitions to sustain growth. As KPMG point out, being busy with takeovers is not the same thing as being busy creating value for shareholders. Once bought, every business needs detailed attention to make it even more successful.