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Thursday, 18th April 2024 |
| Critical success factors for international deals |
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| Gerard Flood writes that integrated pre-deal planning is even more critical in cross-border deals, and cautions that operational details should not get left behind in the attention on deal structuring. |
The value of international cross-border M&A in 1999 reached a record high of $800 billion. Over the past 10 years cross-border M&A has risen fivefold, up from $159 billion in 1990. Confidence in mergers and acquisitions has never been higher. Building market share, gaining access to new markets and capitalising on strategic opportunities during a period of industry consolidation are proving to be key motives for M&A activity.
For Irish companies, a limited domestic marketplace coupled with low interest rates, the availability of private equity, exchange rate stability within the eurozone and globalisation means that increasingly M&A is an attractive and sensible option to safeguard the long term prospects of the business.
The keys to success
Traditionally senior executive attention has often been concentrated on such areas as identifying the right targets, pricing and deal negotiation, raising finance and tackling the legal and regulatory issues surrounding the deal. There is often a tendency to focus on these structural issues in order to ‘get the deal done’, and consider the detailed operational issues afterwards. Although pre-requisites to successful deal completion, they do not in themselves generate success. Recent research by KPMG showed that companies focusing their attention predominantly on arranging finance or on legal issues were less likely than average to have a successful deal.
KPMG recently carried out a comprehensive study of the largest cross-border deals completed between 1996 and 1998 internationally to identify the critical success factors underlying M&A. Success was defined as adding tangibly to shareholder value relative to average industry trends. While the sample reflects the practices of blue chip corporations, we believe that the lessons which emerge are of equal relevance to smaller companies. The results were used to arrive at six ‘keys to success’:
• Detailed synergy evaluation
Most companies now realise that without synergies, a deal is unlikely to result in any significant additional growth in shareholder value. Pre-deal synergy evaluation is one of the prime keys to deal success. This requires a thorough process of synergy evaluation beginning as soon as possible in the pre-deal phase, involving detailed work with operational managers to confirm the ‘deliverability’ of synergy assumptions and provide the reassurance during negotiations that the identified benefits are robust. Such an understanding also plays a vital role in ensuring that an appropriate valuation is placed on the target.
• Planning the management team
Management plays a pivotal role in creating conditions that lead to a successful integration of a target. Companies that prioritise the selection of the management team at the pre-deal planning stage are more likely than average to have a successful deal. Evidence would suggest that for ‘bolt-on’ acquisitions, success rates are improved if the management team is replaced. On the other hand, for a fully integrated business, success rates are often enhanced if managers in the acquired company are retained and incorporated into the new management structure. Staff from the target bring essential knowledge to the merged management team, and their presence gives a sense of continuity to employees in a situation which often can bring uncertainty.
The process for appointing the new management structure must be seen to be transparent and above all fair. It is vital that the team selected are comfortable working together and buy-in to a shared and integrated vision of the future.
• Resolving cultural issues
Business ‘norms’ tend to vary significantly around the world, and are a key issue to be considered in cross-border deals. Acquirers face significant challenges in undertaking cross-border deals where there are cultural and linguistic disparities between participants. If companies are to be fully integrated, the best aspects of both legacy organisations will need to be incorporated into a single new culture focussed on the future of the combined business. Deals are more likely to be successful if they focus on resolving cultural issues, and those acquirers who leave cultural issues until the post-deal period severely hinder their chances of deal success.
• Planning target integration
Integration project planning works out the mechanics of how synergies will be attained, and also how the combined business will be stabilised to preserve current value in each entity. Companies that put priority on integration project planning early in the process increase their chances of a successful deal. Given the risk of negotiations breaking down, it is tempting for companies to hold off or curtail this process until the deal is completed to avoid ‘wasting’ management time. Yet postponing or limiting this project planning may mean that companies do not have adequate time to do this properly after the completion of the deal, and time is lost planning when tangible benefits should be in the process of being realised. In addition synergy expectations may not be delivered.
• Communication
The need to ensure efficient and consistent internal and external communication is well known in deal success. Unless key stakeholders, from shareholders to customers and suppliers are appropriately informed during the deal process, their positive buy-in may be lost. Poor communication with own employees is often the greatest risk to deal success. Own employees are often forgotten, as acquirers concentrate on communications to staff in the target company, yet they are equally likely to feel anxious about the change to the business.
• Due diligence
Due diligence is the most important non-optional pre-deal activity. Forward looking acquirers use an approach to due diligence which often encompasses a range of investigative tools designed to systematically assess all the facts impacting on value. This can include market reviews, risk assessments, and the assessment of management competencies as well as areas to concentrate on for synergies or operational impact.
• Integrated and co-ordinated pre-deal planning
To maximise the chances of success, all of these areas need to be brought together in a single integrated pre-deal process supported by senior management. The results will help shape deal negotiations, and assist the post-deal integration programme.
In an environment where high premiums are being paid, shareholders expect significant synergies from their transactions to justify the pricing. This makes it all the more important to put in place a thorough pre-deal planning process which gives organisations a better understanding of the value of what they are acquiring, how the target will be integrated and what synergies can be realised and in what timeframe. This planning helps successful companies pay an appropriate price for the target, and achieve swift and substantial value extraction on completion of the deal. |
Gerard Flood is a partner in KPMG Corporate Finance.
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| Article appeared in the March 2000 issue.
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