Tag Archives: Mergers and acquisitions

Can Mergers & Acquisitions be More Successful?

Board meeting room

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Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

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Will your business survive the upswing?

An article I saw today in SmartPlanet.com confirmed what I’ve been feeling for some time: businesses have over-done the cost-cutting and are poorly placed for the economic upswing.

The fact that leading economists and business leaders around the world have declared an end to the recession is great news. However, even though nobody is talking about a ‘V-shaped recovery’ or quick upswing, the Forbes study of 200 large companies cited in the article showed that leading executives believe the level of cost cutting undertaken will severely restrict their future growth prospects.

As I posted a few weeks ago, short-term business thinking has done enormous damage – and unfortunately this thinking carried through the recession with companies cutting costs as hard and fast as they could with little thought for the future.

While I don’t have the statistics to hand that the Forbes study has, my own observations indicate that perhaps the report is conservative: it showed 22% of executives believing their recruiting/retention policies were not aligned with their strategic goals, while a quarter indicated their training and development programs were similarly misaligned. My observations indicate this figure to be significantly higher – here in the Middle East, training and recruitment all but ground to a complete halt for the first 3 quarters of this year, right at the time when forward-looking companies should have been upskilling and upgrading their staff.

This really points to the core of the issue – the study showing that nearly all (93%) companies had updated their strategies and priorities to address the slowdown, but only 51% admitted to having a plan in place to guide strategy once the economy turns. Granted, the almost all rest said they were working on a plan, but is it not too late?

Certainly it seems that companies around the globe have missed great opportunities to position themselves strongly for the upturn and this is sure to lead to many failures as those that have done so take new leadership positions – as has been the case following every previous recession. The difference this time being, of course, that the recession was far deeper than any we’ve seen in a couple of generations, so the post-recession fall-out is likely to be worse, too.

Perhaps some companies can still save themselves by moving quickly to position for the upswing – taking on top-performing staff, embarking on aggressive training and taking advantage of the opportunities for mergers and acquisitions – but they can’t afford to wait any longer. Investors, too, are likely to severely punish those companies they see as being unprepared for the upswing.

The question now is whether your company will be one of the new leaders or will fail to survive?

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