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Pravir Malik

AS INDUSTRY continues to integrate with the global economy, the issue of mergers and acquisitions will continue to grow in importance. Recent trends in M&As around the world reveal that this area is fraught with difficulty and there are lessons to be learnt for Indian companies which seek to enter the foray.

For example, in a survey of Fortune 1000 companies conducted by Braxton Associates, it was found that less that 30 per cent of acquisitions were successful. The Economist reports that in a survey of 300 major mergers conducted over a 10-year period, in 57 per cent of the merged companies, the returns lagged behind their industry average.

Yet, some companies such as GE and ABB have had highly successful track records of acquisitions. Further, they view acquisition as a process that can be repeated and improved over time. In contrast, too many businesses deal with an acquisition as a one-time event and, therefore, do not benefit from prior experience. In looking at these and other successful M&A-prolific companies, there are several strategies that emerge.

First, it is important to identify the envisioned end-state as soon as possible. And there is power in working from an envisioned end or future-state. In doing so, the normal barriers — intra-or inter-company politics or information technology fiefdoms — more easily lose their hold on M&A dynamics.

Additionally, whether an acquisition will continue running as an independent business, or be completely absorbed into a parallel business of the acquirer's, has to be clearly thought through and articulated.

Rapidly realising the future-state becomes the most important thing, so that businesses that move quickly will more likely in an M&A. ABB, for example, puts new management in place on Day One, and reporting systems in place by Week Three.

It is also important to note that people issues will take more time and attention than technical or business process issues. Hence, the earlier issues such as retention and reporting relationships are addressed, the better the chances for overall success.

It is also advisable to establish the transition organisation or committee that will have the ultimate authority to make decisions regarding the methods and timing of post-M&A integration. This committee should oversee all transition projects and approve all capital and major operating expenditures of the acquired company during the integration period.

Very often, several groups may vie for control of capital and expenditures and, hence, establishing such a transition committee becomes more than ever important. At the same time, the committee should not be bogged down by unnecessary tasks. Hence, it is important to develop a process of delegation that enables the committee to focus on major issues and not get overwhelmed with making too many detailed decisions.

In fact, businesses that succeed in handling multiple acquisitions have staff who specialise in this area. More problems occur in businesses that try to impose acquisition activities onto select personnel, already stretched with other primary responsibilities. Building an ongoing acquisition integration capability will, therefore, be a source of competitive advantage.

On the cost-estimation side, it is easy to err with respect to systems and technology integration, which are usually a significant percentage of the overall integration budget. In many cases, they have, in fact, turned out to be over 50 per cent of the costs of integration.

There is a tendency, however, to substantially underestimate these costs, and it is not uncommon to end up with final systems and technology integration costs well in excess of 400-500 per cent of the initial figures. It is, thus, best to include IT professionals on the teams charged with estimating integration costs and constructing pro-forma budgets for the combined entity.

It is also important to have an exit strategy. Market changes, regulatory delays, political uncertainties, risks of war, and an increasing realisation of the risk of failure mean that a significant number of announced acquisitions will not close.

It is, in fact, increasingly common to come across newspaper articles, regardless of location, where boards and the investment community appear to be getting more sceptical about announced deals, and where companies are more easily willing to cancel deals already announced.

It is hence essential to continue operations in such a manner that the to-be merged companies will remain viable in case the deal collapses.

Excellence in the process of M&A can bring big rewards for shareholders. General Electric, for example, expert in the M&A game, has seen its market cap exceed $300 billion.

Further, a study by McKinsey and Company has found that companies that do succeed at mergers beat the stock market by 50 per cent. Therefore, success of M&A is important, and strategies that increase such chances for success need to be mastered.

(The author is founder of Aurosoorya, a firm specialising in creativity and innovation. His e-mail address is thefuture@aurosoorya.com)

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