Creating value through M&A

As global competition increases, companies buy other companies. Owners demand more top-line growth as a way to increase shareholder value. Some owners believe that acquisition transforms their business – it can give competitive advantage through new value preposition and focused business strategy. Yet over two-thirds of all mergers and acquisitions (M&A) fail to produce the projected synergies and financial numbers. Why is that?

On behalf of PwC, Mergermarket and Casa Business School surveyed early this year 600 global senior corporate executives from across industries and geographies. They asked executives about their experiences with value creation through M&A. Here are the highlights of the findings:

Ninety-two percent of acquirers said they had a value creation plan in place for their last deal, but only 61 percent of buyers believed their last acquisition created value. Furthermore, 53 percent underperformed vis-à-vis their industry peers, on average, over the 24 months following completion of their last deal based on Total Shareholder Return (TSR).

From a seller’s perspective, 42 percent of divestors likewise said their last sales generated value, relative to the value that business would have created had it not been sold. Around 13 percent said their last divestment generated significant value, and 35 percent said their last deal actually lost value. Additionally, 57 percent of divestors underperformed vis-à-vis their industry peers, on average, over the 24 months following the completion of their last deal, based on TSR.

Thirty-four percent of acquirers said value creation was a priority on Day One (deal closing) in their last deal but 66 percent of dealmakers say value creation should have been a priority right from the start. Simply put, some acquirers focus on integrating the hard tangible assets (e.g. financial, accounting, and operations systems) to achieve value. But they neglect the soft but equally important intangible assets (e.g. people and culture). Problems might also stem from acquirers’ inability to create synergy, paying too high a premium, selecting inappropriate targets, and ineffective integration processes.

A careful selection of targets and effectively implemented acquisitions can achieve synergy and create value. For example, the difference in sizes between the acquiring company and the target company influences value creation. If the target company is much smaller than the acquiring company, it is unlikely to affect value creation. However, if the target company has capabilities complementary to those held by the acquiring company, an opportunity for synergy creation exists. But as the difference narrows and value creation grows, integration often becomes a problem. It leads to value loss, even if the two companies are of similar size.

While gaining competitive advantage through M&A is a business strategy for growth, continued success depends on how acquirers understand the importance of deal selection, deal management and governance, and post-deal integration. Let’s look at these three considerations that emerged from recent research:

1. Stay true to strategic intent. Organizations should approach deals as part of a clear strategic vision and align deal activity to long-term objectives for the business. While 86 percent of buyers said their latest acquisitions created significant value, they also said it was part of a broader portfolio review rather than mere opportunity. Thus, bringing a more strategic lens to M&A planning and execution means understanding where the business needs to strengthen to deliver on its ambitions.
2. Be clear on all elements of comprehensive value creation plan, which is not a checklist, but a blueprint. Make sure that a thorough and effective process for conducting the deal exists with the necessary diligence and attention in the value creation planning process across all areas of the business. Consider how each of these value creation processes supports the business model, synergy delivery, operating model and technology plans. For acquisitions with significant value lost relative to purchase price: 79 percent did not have an integration strategy in place at signing, and 63 percent did not have a technology plan in place at signing.
3. Prioritize culture at the heart of the deal. Talent management and human capital affect how businesses can deliver value. Eighty-two percent of companies said significant value was destroyed in their latest acquisition and they lost more than 10 percent of employees after the transaction. Businesses must invest time and resources in the process to succeed. For instance, over two-thirds of companies that said their latest deal subsequently created significant value relative to the purchase price also had an integration strategy in place during signing. The ability to bring cultures together should be a key factor in deciding whether the deal goes ahead, or not.

A successful M&A process uses these best practices: thorough evaluation of the target companies’ strategic interest and of the potential synergies; resource and cultural management; and solid communication strategy that help facilitate change management and achieve ideal balance and raise value creation.

As M&A deals in the Philippines are expected to accelerate in 2019 based on the relatively robust economic outlook, investors are once again challenged to carefully assess how they will manage their acquisitions. It is crucial to develop a strategy that prioritizes value at every stage of the deal, start early, and be thorough in considering every opportunity. They should make sure that deal mechanics add value, key talents remain engaged in integration, and a clear strategy is in place.