M&A is an important means to achieving business transformations, enabling companies to enter new markets and reach new customers, to increase market share and extend product portfolios, as well as to realise cost savings and acquire key talents. All acquisitions share the common objective of adding value to the transformed entity. However, PwC research shows that two out three acquisitions fail to deliver the expected returns. This article provides reasons for that and guidance on how to make acquisitions successful.
Business transformations through M&A
M&A is common for business transformations on a global basis as well as in Switzerland, where all industry and service sectors have transacted transformational deals. The media, retail and financial services industries have been especially active, as their traditional business models have been most disrupted by digitalisation. Examples in the media world are Ringier’s acquisitions of anabis.ch, Scout 24 and jobs.ch, and Tamedia’s purchases of riccardo.ch, tutti.ch and homegate.ch. In retailing, Migros’ acquisition of Digitec/Galaxus and Coop’s acquisition of nettoshop.ch come to mind. The financial services industry has seen fintech acquisitions and investments by almost all Swiss banks.
One common theme with acquisitions is buyers’ high expectations with regard to business model and profit improvements. However, according to PwC research (“Success factors in post-merger integrations”, 2017), two out of three deals fail to create the anticipated value.
Dealmakers participating in PwC’s survey named four main reasons for this unsatisfactory outcome:
- not achieving synergies
- delays in the integration process
- inadequate management of cultural change
- lack of strong project governance
Strong performance in these four areas differentiates successful dealmakers from unsuccessful ones. Companies performing highly in the four dimensions are far more likely to achieve their set goals regarding return-on-investment (ROI) objectives. ROI is a good indicator of the success of acquisitions, as it combines multiple success factors. The four dimensions are strongly interlinked, and companies that perform well in one also tend to excel in the other three. This holds especially true for companies boasting strong project governance. They are able to achieve their set timelines, synergy targets and expectations regarding culture and change significantly more often.
Interestingly, frequent acquirers do not outperform occasional acquirers. Companies that acquired five or more firms during the last three years were as likely as occasional acquirers to achieve synergy expectations and to complete the post-deal integration project (PMI) within the defined timeframe. In fact, frequent acquirers much more often experience business interruptions, complex legal regulations and IT incompatibility than occasional acquirers do.
Success factor: realising synergies
Synergies are key in nearly every deal and a necessary precondition to creating value. Deep functional integration contributes to generating synergies. PwC research shows that successful dealmakers tend to integrate more deeply than less successful acquirers. While it is common to integrate support functions, fully integrating core functions is challenging but promises higher synergy results. PwC recommendations:
- Design the target operating model of your combined business as early as possible. It will guide all your functional integration activities as well as maximising the benefits of the acquisition.
- Think about how to create value through a deep integration of your businesses, especially in core functions. Dealmakers that integrate at a deeper level are more likely to realise synergies to the full.
- Keep your focus on synergies. Actively managing and tracking them is essential. Set up separate dedicated workstreams and appoint a chief value officer who assures transparency regarding synergies, guides the transformation process and keeps the organisation and senior management engaged.
Success factor: speedy integration
Dealmakers that manage a speedy integration benefit from the positive effects of an acquisition sooner, enabling them to quickly return to managing the daily business. If the integration process drags on, employees can easily feel frustrated. PwC research shows that successful dealmakers complete most of the integration within one year of closing. Among the first business functions to be integrated are finance and HR, as well as customer-facing functions promising quick wins and early synergies. The challenge lies in finding the optimum balance between speed and quality of the integration. PwC recommendations:
- Plan your integration early, translate your deal rationales into a focused integration strategy and operating model and ramp up your team, ideally before signing. It will save you valuable time after closing.
- Be ambitious with the integration timeline. Six months is usually enough time to integrate support functions. Only in a few cases will the integration of functions, for example in the case of complex heterogeneous core functions, take longer than one year.
- Determine the optimum speed of the integration process. Bear in mind that there is a trade-off between quality and speed.
Success factor: managing cultural change
Culture and change management are among the most unpredictable factors of deal success. If an integration fails, poor culture and change management are often to blame, as a majority of dealmakers struggle with this area. Unlike financial and operational aspects of a deal, culture and change are more difficult to measure and control effectively.
PwC’s survey shows that establishing culture and change management in the integration process and timing change measures correctly are among the most important success factors. Companies that put culture and change management at the heart of their integration process perform better. Almost all companies that achieve their culture and change management expectations also manage to stick to their initial timelines. PwC recommendations:
- Be aware of cultural differences and carefully assess which change interventions will be required to foster the working culture to which you aspire. You might consider active planning and systematic tracking of culture and change management measures. However, you do not necessarily need a formal process to be successful if leadership with experience of change is in place.
- Drive your culture and change management through top and senior management to engage and motivate employees throughout the entire integration process. Be sensitive about the timing of change measures and ensure frequent and consistent communication.
- Always pay attention to identifying key stakeholders and critical talents within your acquired business. Offer monetary and non-monetary retention packages according to each individual’s needs and create meaningful roles.
Success factor: strong project governance
Implementing strong project governance is essential for deal success. It strongly correlates with integration speed and with successful culture and change management. Companies that reach their synergy targets and achieve their expectations regarding culture and change management are very likely to have robust project governance in place.
The PwC survey shows that most companies understand how important it is to involve top management in the integration process. However, including employees from both the target and buyer in the project organisation is also key but much less common. Companies which establish robust project governance are more likely to consider risks and ensure business continuity. They tend to finish the integration process as planned, resulting in a more rapid impact on ROI, better capitalisation on post-deal opportunities, and lower levels of employee dissatisfaction and organisational uncertainty. PwC recommendations:
- Make sure to set up the project governance and organisation well in advance. Thoroughly consider and decide as early as possible within the acquiring company how to involve leadership and employees from the target company in the project organisation.
- To establish effective governance, pay sufficient attention to achieving the right balance in steering and decision-making committees.
- Define pragmatic guidelines on decision-making and on how to assign the right resources to the right activities at the right times.
Conclusion: thorough target assessment is key
The common basis for the success factors outlined above is thorough pre-deal target analysis and assessment, since knowing and understanding the target is essential. The more the acquirer knows about the target, the better and earlier integration and other measures can be planned and organised. The goal has to be to begin executing the defined measurers immediately after closing. All unknown and new facts that surface post-acquisition require unanticipated attention and extra effort, which inevitably affects the timing and efficiency of the envisaged onboarding process. PwC recommendations:
- Valuation analysis: Perform a thorough valuation analysis based on dynamic financial modelling and market benchmarking. Traditional discounted cash flow and market multiple methods are digitally enhanced today and provide the basis for determining the purchase price. The latter is, however, mainly dependent on the competitive tension among potential buyers and their respective willingness to factor in expected synergies.
- Due diligence analysis: Perform a thorough financial, tax and commercial due diligence. Expand such analyses to include pension, environmental, IT and people topics if deep dives into such areas seem appropriate based on a preliminary review. In this context, new technology and young companies may require specific analysis of patent portfolios, other intellectual property or IT infrastructure. These days, such analyses are supported by advanced data analytics processes.
- Transaction structuring: Determining the appropriate transaction structure is critical. Besides the standard tax and financing considerations, questions of whether and how to integrate targets play an increasingly important role. Organisational cultures at many young and innovative targets may not be suitable for integration into the acquirer. This may require new contractual concepts and ownership/compensation structures, including shareholder, licensing and service level agreements.
Acquisitions are certainly a means to achieving business transformations, but it takes significant time and effort to find the right target, execute the best deal and successfully integrate (or not) the target. The chances of a deal succeeding are greatly improved by seeking external support where sufficient in-house capabilities are not available. PwC is an expert in all transaction-related matters, and we look forward to hearing from you in the context of your upcoming M&A projects.
Martin Frey, Head Corporate Finance, PwC Switzerland & Peter Kasahara, Partner and Leader PwC Digital Services, PwC Switzerland
