A common theme in M&A is that a majority of deals destroy shareholder value. Often, acquirers overpay and fail to realize projected synergies. However, with the right preparation, and execution while taking a systematic approach, deal success is very much achievable, argues Timothy Galpin.
As the author of several books on M&A, he is considered one of the leading voices in the field. He teaches the Mergers & Acquisitions program at the Amsterdam Institute of Finance.
The analysis of potential synergies is typically done by investment bankers, using advanced models, and assumptions about potential cost savings and potential revenue. Though they are very good at what they do, their assumptions often lack real world information, says Galpin.
“Basically at every client I’ve worked with, we accelerated the synergies.”
Tim Galpin, Saïd Business School / University of Oxford
Underestimation of synergies
One would expect this to lead to overestimation of the synergy potential, however the opposite is often the case. “It’s kind of counterintuitive, but once you get the operators looking at the transaction in detail, they often find more synergies. As long as they are then given license to make the decisions they feel they need to make, and management has the stomach on the cost side, you can accelerate projected synergies.”
Galpin has been working as a consultant across industries for almost three decades and has seen this over and over again. “Basically at every client I’ve worked with, we accelerated the synergies. Because it was well organized and coordinated, and the detail was attended to, we exceeded the target in less time than planned.”
Integration infrastructure
Before accelerating, the right conditions have to be created, Galpin stresses. He advocates ‘prudent speed’, not ‘reckless speed’. In practice this means an integration infrastructure and an agile management process should be set up.
“As you are planning and implementing the deal you’ve got to make all kinds of decisions. Decisions around capex, personnel, operations, and technology. You have to regularly monitor the planning and implementation so you can adjust along the way. That means information has to quickly and efficiently go up to the executive steering team, and decisions back down to the integration teams.”
“Critical is to start early with the preparations for the post-merger integration, that is before the deal closes.”
Tim Galpin, Saïd Business School / University of Oxford
Best practice: start early
Critical is to start early with the preparations for the post-merger integration, that is before the deal closes. “That’s a best practice. The earlier you start your planning, the more you can do on day one. On the flipside, the worst practice is to delay the post-merger integration planning and kickoff.”
The post-merger integration is the most important phase when it comes to realizing the projected value. However, M&A success is also determined by what happens in the pre-deal and deal phases. Galpin works from a three-phase, ten-stage Deal Flow Model. In the pre-deal phase, the key is to formulate the right strategy, identify targets that fit that strategy, conduct due diligence and prepare for the next phases. In the deal phase it’s about valuing, negotiating and ultimately, closing.
Build M&A muscle
The organizations that are most successful at M&A, are the so called programmatic acquirers. These are businesses that regularly do deals and have inorganic growth as a central element of their strategy.
“By doing this over and over again, they build their M&A muscle. There’s two kinds of categories to that muscle. There’s what’s called tacit knowledge, the talent that you have on your team that knows how to make deals work. It’s the operators who know how to do good due diligence and integration, but also the bankers, attorneys, and consultants. The second key component is the playbook, the codified knowledge, the tools, templates, checklists, the talent uses so that this becomes something that’s repeatable.”
Data shows these serial acquirers outperform, says Galpin. “They are entering new markets, adding products and services, and expanding their portfolio. They even outperform on organic growth because they’re doing growth quicker.”
Limited M&A-experience
On the other hand, there are those organizations that have little M&A-experience and only do the occasional deal. “These are ones that typically fail. They’re doing a deal once every five years or so. This is like when you try to play football on the weekend, and pull a muscle because you’re not ready.”
The transformational deal is another kind of deal where buyers risk destroying shareholder value. These deals typically involve a merger between companies of almost equal size. It could be two 50 million euro companies coming together, or two 50 billion euro companies, it’s about the relative size, Galpin stresses.
“In that case everything has to be negotiated. Who’s going to be the CEO, who else is going to be in the C-suite, what technology you’re going to use. At all levels you have two sides competing. It’s always the human capital issues, the culture, the politics, the game playing, that screws it up.”
Culture is the oil
That brings Galpin to what is ultimately the critical issue determining success of any integration, cultural issues. “Deals are about financial evaluation, analysis, legal aspects, operations, technology, all these things, but at the end of the day, it’s about relationships. The culture piece is the oil that makes a deal work.”
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