In a business climate marked by escalating global competition and industry disruption, successful mergers and acquisitions are increasingly vital to the growth and profitability of many corporations. Yet research shows most mergers fail – destroying shareholder value and costing companies billions in dollars.
Take the example of Thomas Cook, which collapsed spectacularly this September. Many in the media were quick to point the finger at Brexit. But, digging a little deeper, there's Thomas Cook's 2007 merger with MyTravel, which the Guardian called "a disastrous merger"
and the Telegraph said "sowed the seeds of the company's downfall."
Recent numbers paint a bleak picture: In May 2019, 12 years after the merger, Thomas Cook announced it was writing off 1.1 billion pounds after revaluing MyTravel, at the same time it posted a 1.5 billion loss.
So, why do so many companies continue to pursue these value-destroying deals? And how can managers and boards increase their odds of M&A success?
That is the multibillion-dollar question at the heart of IESE Business School professor Nuno Fernandes' latest book The Value Killers: How Mergers and Acquisitions Cost Companies Billions--And How to Prevent It.
The book is based on a holistic analysis of successful and unsuccessful transactions, and offers a timely, practical guide for how to avoid the common M&A pitfalls, and instead create value.
The main reason companies are losing billions of dollars through M&As? The fact that most acquisition targets are overvalued, says Fernandes. And this overvaluation arises due to deals' perverse incentives, CEO hubris, and poor preparation, among other things.
To avoid more companies suffering the same fate of value destroying deals, Fernandes offers five rules managers should follow to "maximize the odds of M&A success."
Rule 1: Don't rely on investment bankers for valuation
Company valuations are always part of investment banks' offerings, but you must think of the perverse incentives at play here. Fernandes sums it up succinctly: "Because investment banks receive much larger fees when the deals are closed, bankers are always on the side of the deal, not the company's side."
Whenever possible, "companies should develop valuations in-house" and/or "with help from unbiased third-party advisers," Fernandes advises. That holds even if your company is relying on an investment bank (or banks) for other key M&A-related services.
Rule 2: Avoid 'strategic' deals
Too often "strategic" is an empty catch-all word to mask a deal that doesn't make financial sense, in the professor's view. Traditional companies acquiring money-losing startups may describe their deals as "strategic," as seen in Time Warner-AOLs fiasco, for example. Keep that historic, value-destroying merger in mind to stay skeptical.
To best avoid bad deals, Fernandes recommends turning to the board of directors, among others, to help answer three key questions, which are basically: Why merge? Why choose this company? And, Why now? The answers must make financial sense.
Rule 3: Link the before and after"
Too often, the people making promises about merger synergies are not the same ones in charge of putting those synergies into place. For example, MyTravel's CEO and other key players were out the door within months of the Thomas Cook deal.
Fernandes writes: "Ideally, companies should assign the same team members to every phase of the transaction, including the post-merger integration." And when that's not possible, due to resource constraints, he advises that it is still "critical that the 'owners of the synergies' be involved before the deal is closed." A continuous process, well managed, is key to integration success.
"Golden Rule 4: Think like a financial investor"
As an investor, would you buy shares of a company at any price? Have numbers that make sense in mind for an acquisition target. That means setting a "walk-away price" and sticking to it. Do not enter auctions or "fall in love with deals."
Overpaying is the single biggest predictor of a merger disaster. How to avoid it? A team composed of cross-functional managers can help, in order to put a check on "confirmation biases, impulsiveness, and even hubris" at the very top of the corporate ladder. Another tactic is to compose a "think tank" of trusted outsiders, such as retired managers, to offer up challenging points of view that counter "group think."
Rule 5: Move fast and communicate transparently"
Mergers can take a terrible toll on employees, especially the most promising ones, and on customers, too. In short, "in the business world, uncertainty is nobody's ally." For that reason, Fernandes stresses that bad news is often better than no news. Get ready to answer questions even before the final answer is known.
Along with transparent communication, speed is key. Even while waiting for regulators' green light, start work on the upcoming integrating challenges without neglecting the day-to-day operations.
The five rules above are based on case studies, scores of executive interviews and further research. By following them, managers can help steer their company away from another M&A disaster.
[This article has been reproduced with permission from IESE Business School. www.iese.edu/ Views expressed are personal.]