Blog Article

M&As: a match made in heaven?

Posted by David Derain

David Derain

It’s no secret that mergers and acquisitions (M&A) are a risky business. From the boardroom to the negotiation table right through to integration, the M&A process gives plenty of opportunities for Murphy’s Law: the worst things will happen at the worst possible times to lead deals astray or even to derail them completely.

Veterans of M&As know that in today’s complex business environment, M&As are less about companies and their physical resources and more about those elements that are less easily monitored or measured; I am talking here about intangible capital aspects such as brand, human capital, leadership, organizational structures, and so on. From our experience, we know that intangible capital is vital to M&A success. Based on collaborative research with Mergermarket, our latest research Managing intangible capital in M&A explains how M&A practitioners can avoid risks by managing both tangible and intangible capital using an effective, decisive approach.

The impact of M&A
The research reveals firstly what is truly at risk during M&A deals and how to accurately quantify value lost from these deals. Secondly, we explore the areas where senior executives must focus in order to prevent loss of value in M&As and, ultimately, yield its entire value.

Most acquirers have very little understanding of intangible capital in relation to a deal’s overall value. Our research has shown that 70 per cent of executives involved in M&A believe it is just ‘too difficult’ to obtain intelligence on a target company’s intangibles.  As a result, the driving focus for many leaders centers on the mandatory aspects of the integration, such as finance and IT infrastructures.

What’s the story in Asia-Pacific?
Asian dealmakers were busy last year. According to Mergermarket data, merger and acquisition deals in Asia totaled US$426 billion in 2012, a 14 per cent increase from 2009. The bullish outlook means we can expect further consolidation among Asian industries, with companies hoping to increase market share, enhance competitiveness and improve bottom lines through inorganic growth. Yet, the growing confidence for M&As does not negate past experiences, which warn that approximately two-thirds of these transactions will fail. Instead of achieving objectives that were raison d’être for merging in the first place, studies show that nearly 60 per cent of deals transacted between 1992 and 2006 left acquiring firms with eroded shareholder value. Clearly, the long-term value of M&As is not guaranteed.

What did we discover?
Hay Group’s research into M&As in Asia-Pacific has discovered four core drivers that a deal requires to yield long-term value:

  • candor (when top management advocates communication that is honest, open, timely and accurate)
  • courageous follow-through (where top management must demonstrate perseverance in adapting to new circumstances, adopting a common fighting stance towards overcoming obstacles, and never taking “no” for an answer)
  • calculated risk (where both entities share similar proclivities towards calculated risks, and are prepared to commit themselves fully to smooth the transition process and accelerate M&A success)
  • compatible response (when both parties ought to have a similar time-frame when they enter into an execution plan).

Of the four, we found candor and courageous follow-through accounted for 32 per cent of an organization’s active intangible capital, while 33 per cent of variation in active intangible capital was attributed to calculated risks and compatible response. Including effective leadership and open communication among employees as well as shared risk profiles and deal approach, these drivers have a proven effect on yielding the benefits and synergies that M&A has to offer. In essence, they are the plus sign in the holy grail of M&A that helps 1+1=3.

Where next?
As corporations in Asia-Pacific continue to make forays abroad, a comprehensive understanding of intangible capital and its drivers needs to become the cornerstone of their outbound strategies. Only then will their aspirations of being truly global, truly world-class businesses be realized.

Read the full Managing intangible capital in M&A report >>

 

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