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Value Creation through M&A

The 3 Ps of Mergers & Acquisitions

The statistics on the failure rates for mergers and acquisitions (M&A) are sobering. Harvard Business Review found a few years ago that between 70-90% of mergers and acquisitions fail, yet companies still spend about $2 trillion on them each year.

So why pursue M&A? The answer is that when done very well, M&A can be a powerful source of long-term value creation for a company. The key to doing it right comes down to the 3 Ps:  Principles, Process, and People.   

Principle: Strategic and Financial Rationale

By Principle, I am referring to the strategic and financial rationale for the deal. Would the potential acquisition allow you to accelerate strategy and make a meaningful difference to customers, and ultimately to your long-term growth and profitability? If the deal passes the strategic rationale bar, you then must consider whether M&A would be the best route forward, or whether there is an option to build vs. buy. In the competition for capital, a robust process for option evaluation is critical. The chosen path should be the route that provides the highest risk-adjusted return on capital, taking into account capital requirements, speed to market, and execution risk.

Process: Diligence and Evaluation

Process starts with the rigorous deal selection and alternative evaluation outlined above; it then extends into due diligence and ultimately, to integration--should you decide to move forward with the deal. A key to the due diligence process is to leave bias at the door and let the data inform the decision. You can’t fall in love with a deal – if what you find in the diligence process would change the value of the deal, you need to be prepared to renegotiate or walk away. And importantly, the team conducting the diligence should be the same team that will be charged with integrating the business and running the business going forward. This ensures that the right questions are being asked, possible integration challenges are discovered early, and ultimately the people charged green-lighting the decision are the ones who are ultimately responsible for its success.

People: Integrating People Effectively During M&A

Lastly, and not to be overlooked, is the People side of the equation. For starters, there are the obvious people-related elements to consider during the evaluation process that we just discussed: having the people who will integrate and run the business conduct the due diligence so you know what you are getting. But it goes well beyond this. People are the lifeblood of the company, so it is imperative that you have well-thought-out and well-communicated plans for the assimilation and integration of the new teams. Uncertainty and fear are the greatest killers of success, so you need to make sure that, as quickly as possible, people from both the acquired business and the acquirer have a clear view of what the future holds. And when the dust clears, the new team members need to be welcomed in with open arms so that they feel that they are part of the larger organization from day one. 

Creating Value for the Long-Term

One of the keys to long-term value creation is smart, effective capital allocation. M&A done well can be an important and value-creating use of capital, but companies need to ensure that they keep the bar high for selection, evaluation, and integration of any potential deal. At the heart of this lies a principles-driven selection process, where M&A is viewed through the lens of strategy enablement, a rigorous, data-driven evaluation process and people-centric integration plan. Building an M&A approach around these key items can make all the difference between success and failure.

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