The post-COVID M&A rush will be filled with failed deals, for one simple reason
The Coronavirus Pandemic has already put its stamp on the world economy. Much like previous financial crises of our generation in 2001 and 2008, 2020 and 2021 (and perhaps beyond) stand to be dire years for businesses and individuals worldwide. What comes in the wake of this particular crisis is anyone’s guess, but one sign of promise is that event-driven bear markets tend to snap back quickly.
Economists worldwide are at odds over whether global recovery will be V-shaped, U-shaped, L-shaped, K-shaped, or somewhere in-between, but there does appear to be a majority consensus that there is a sustained light at the end of this tunnel of uncertainty.
As the world emerges from this crisis, the foundation exists for an uptick in transactions. The first wave of deals is likely to be driven by need, as companies look to shore up supply chain problems or get their operations back on track. I also expect to see M&A driven by opportunity, with corporates and sponsors alike seizing upon newly refreshed growth sectors, such as healthcare and technology, and target companies’ valuations becoming more attractive after a decade of outsized multiples.
Underlining all these trends, you still have large corporates such as Microsoft, Apple and Google sitting on record cash reserves and private equity firms holding a massive USD $2 trillion of dry powder ready to deploy.
Which is to say, I’m bullish on mergers and acquisitions coming back as we emerge from this crisis.
Here’s the sucker punch: many of them will fail.
While the methodology varies on how experts measure the success or failure of M&A, the consensus is that anywhere from 70–90% of acquisitions are considered failures.
The examples are numerous. Microsoft wrote off 96 percent of the value of the handset business it acquired from Nokia for $7.9 billion in 2014. News Corporation settled for a $35 million sale of MySpace in 2011 after it acquired the business six years earlier for more than 15 times that amount. Many others fill the graveyard of good intentions.
Despite these figures, investors and executives alike will still pursue mergers and acquisitions. After all, the appeal of acquiring capabilities, talent and market share over developing them is understandable.
So what can be done to mitigate the risks?
Surely, there are the non-negotiables of a strong investment thesis and well-researched due diligence to ensure a fair transaction is reached and a plan exists to allow for value growth. These are critical, and strong deal teams earn their salaries for just this exercise. But these are table stakes.
The key element often missed or glossed over? A strong communications plan.
This exercise should start well before the deal is completed. It should involve executives at both acquirer and target company. The goal of the exercise is to list all of the barriers to realising enhanced value after the transaction is completed.
This list should be as comprehensive as possible, and I’m predicting some of the priority obstacles include things such as:
- Culture clash means employees struggle to implement post-integration plans;
- Redundancy fear means employees act defensively to protect their jobs as opposed to proactively to help their employer recognise synergies;
- Clients/customers are confused about the benefits of the transaction for them and feel ignored
From this exercise, a communications plan should be developed to address these concerns. Here’s how to do it.
Outline the stakeholders needed to address the concerns identified earlier. It usually looks something like this: employees, customers/clients, vendors/partners, investors/shareholders, media, etc. You should have a strategy and tactics for communicating to each of those identified audiences.
Here’s one important part of that process. Your most significant stakeholder group is always your employees.
I’ve advised on communications plans for dozens of transactions, and that is always the case. They are the ones who will implement the value-add plans post-transaction, but they are also the ones who can either knowingly or unknowingly undermine the integration.
Construct a timeline for communicating the “what/why/when/how” to your stakeholders, and how you’re going to do it (meetings, internal campaigns via company platforms, press releases, media interviews, social media, etc.). Messaging and tactics will vary depending on the transaction, but transparency and engagement are key. Explain what changes will be coming, and, more importantly, why they will be implemented. Tell your stakeholders what role they will play and the value they will bring to the organisation (and, in turn, the benefits they and/or their business will receive).
Lastly, and to bring it back to the cultural event affecting us all with the Coronavirus pandemic, consider your messaging under the existing environment and ensuing aftermath. Are employees more sensitive to job retention than they were before? Are customers/clients more interested in solutions and safety/security than new product/service offerings and opportunity? Just as attitudes and priorities changed for individuals and businesses after previous crises, it’s right to assume they will after this one as well.
These communications plans will take time and some resources, but they should be considered as integral to a successful transaction as legal support, due diligence, and other long-accepted transaction costs.
Executed well, they will mean the difference between success and failure of a merger or acquisition, and that 70–90% failure rate will decrease substantially. Now that’s another curve-flattening effort I think the global economy can get behind.
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