Post-merger tales: Why a deal can fail to create value

Numerous studies globally have shown that about 70 to 80 percent M&A deals do not deliver their intended objectives and fail to create shareholder value

Updated: Feb 16, 2018 01:14:36 PM UTC
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Over the past few years, the mergers and acquisitions (M&A) in India has seen robust traction and steady growth, notwithstanding the uncertainty and headwinds globally. The deal value during 2016 has reached a record high at $56.2 billion since 2010. This has been predominantly driven by the need of domestic companies to consolidate and deleverage their balance sheets. Further digital disruption across numerous sectors is driving businesses to adapt innovative technologies to address changing consumer preferences and digital demands.

Whilst announcements of transactions is a constant theme headlining the newspapers, in reality, a large number of these acquisitions fail to deliver shareholder value. In spite of undertaking detailed pre-deal diligence and assessments, numerous studies globally have shown that about 70 to 80 percent deals do not deliver their intended objectives.

Post-merger integration (PMI), or the lack of thereof, is one of the main reasons underpinning these failures. There are various reasons why deals are unsuccessful in creating value post-merger. Some of the major reasons are:

Lack of clearly defined vision for the combined entity Companies fail to articulate the desired integration strategy and blueprint for the merged business to stakeholders. Further key success factors are not identified and communicated widely across the organisation

Poor integration planning and governance structure
Being occupied in closure of the deal, companies miss out on planning the integration in advance and creating well-defined program governance structure with clearly defined roles and responsibilities across all functions.

Inadequate cultural integration
Not enough focus on cultural alignment, employee engagement and change in management early on, results in loss of critical talent thus impacting the outcome of the integration program.

Insufficient focus on engaging with external stakeholders
It is important to keep the customer, partner and vendor regularly informed through effective communication strategy. This helps in minimising business disruption and ensures value preservation.

Lack of focus on synergy realisation
More often than not, mergers fail to create significant value due to the inability of the organisation to assess, realise, measure and track cost and revenue synergies from the deal.

One of the main cause for deals not delivering value to their full potential post-merger is failure to realise significant synergies.

Whilst a number of acquirers focus on scale synergies (e.g. procurement cost reduction, asset rationalisation and headcount reduction) and scope synergies (e.g. product portfolio optimisation, revenue cross-selling and new product introduction), a few are able to derive significant higher value through transformational synergies. A transformational approach to integration gives the ability to fully leverage the scale and size benefits of the combined organization whilst presenting the combined business with an unparalleled opportunity of adapting a new operating model, thus future proofing their businesses from the ongoing digital disruption.

Newer aspects like digital disruption and technology convergence are driving a rapid change in the approach being used for PMI. Some of the examples of disruptive technologies which can be considered to drive transformational synergies include:

Robotic process automation (RPA)
Automating back office process such as purchase order processing and financial reconciliations are using ‘software robots’, which not only accelerates integration but significantly reduces manual intervention, ensures repeatability and reduces errors.

Artificial intelligence (AI)
Enabling migration of customer service to digital channels by using ‘chatbots’ for customer interaction in customer service centres which not only delivers improved customer experience but also provides the ability to significantly scale up operations at reduced costs.

Big data analytics
Data analytics enables management to take informed and real-time decisions. Using analytics to process vast amounts of data such consumer behavior and preferences to identify cross-sell opportunities or analysing procurement spends to identify sourcing synergies can deliver significant benefits over and above conventional scale synergies.

Digitising workforce planning, using predictive analytics to forecast attrition, automating employee life cycle management or leveraging social media analytics to gauge employee and customer engagement can help drive the best out of the combined human capital.

Realising transformational synergies however, requires a non-traditional approach to integration. These transformational changes could significantly impact human capital, business processes and systems across the combined organization as these changes would be irreversible. Detailed risk mitigation strategies will need to be thought of and implemented.

As companies continue to pursue acquisitions proactively to protect their business from the ongoing disruption, undertaking a transformational approach to synergies and integration can help realise full potential from the transaction whilst creating long-term sustainable value.

By Naveen Tiwari, Partner, Head of Operational Transaction Services at EY India

The thoughts and opinions shared here are of the author.

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