How to deal with the 4 types of M&A activity
By Bryan Hattingh
While value creation might be the fundamental credo of the mergers and acquisitions that make the headlines, the end result is often value destruction. Most mergers fail to reach the value goals set by top management, with the two parties which join forces generally disappointing their constituencies, under-performing, and destroying value in more than half of the cases. Today's rapidly changing business world makes intense demands on those involved in the combination of two separate, highly distinct companies into one solid organisation. BRYAN HATTINGH, CEO of leadership solutions group Cycan, says there are various types of mergers and acquisitions and that companies would do well to consider the principles behind each before signing on the dotted line.
Mergers and acquisitions (M&As) take place in starkly different circumstances. These circumstances can significantly impact the way in which deals are approached, executed and managed. They introduce different degrees of risk, largely pertaining to and influenced by the leadership and human capital components.
There are four categories of M&A activity defined in terms of
Lifeline, mutual consent, resisted and indecent assault, which are based on the relations of co-operation and resistance between the two companies, lifeline being the most co-operative interface between acquiring and acquired firms and indecent assault the most adversarial.
Here the situation is usually that the seller is experiencing financial difficulties presented by lack of capital or cash flow, which can be terminal. Another possibility for local companies is that the seller may be forced to address the requirements of black empowerment and employment equity in a timeframe unrealistic to the current life stage of their business, such that they cannot do so on their own.
Alternatively, it could just be that the company lacks the capability to continue to operate without fresh external input. Invariably, it comes down to the issue of money - companies require enough working capital so they can employ the necessary sales and support capability.
In this scenario, a company may seek a suitor, or a suitor may see the potential and pursue the company. Because of the financial challenges the business is facing, the seller may be too eager, and give away too much for too little. That eagerness often disappears once the honeymoon is over. When the business is back on track and performing well, and the rose-coloured lenses have been removed, the seller suddenly discovers the realities of having a shareholder who has control of an inordinate share, and/or a different set of expectations for the business.
The better the company does, the more the seller resents having surrendered so much. What is forgotten are the challenges the company faced at the time of the acquisition.
So even though this scenario is one of "lifeline", there are major risks confronting the newly formed entity. How well was the original owner running the business? Does the investor merely provide cash or is there a greater value-add? Most often investors only want to be strategically involved, and not operationally.
When the degree of willingness and keenness to bring in a saviour is too great, issues such as culture fit, strategic alignment and business intent are often sidelined. The investor may have stringent performance criteria, and the seller may end up becoming more of an employee than an entrepreneur or business owner. The potential for relationship breakdown here is enormous, as is the resultant loss to the business and to its investors.
2) Mutual consent
Most M&As are by mutual consent. Both parties are looking for a win-win situation in which their combined synergies can yield greater profit and business success for all involved. But the fact that a merger may be collaborative, and that the companies have a genuine interest in doing business with each other does not negate possible risks from a leadership and human capital perspective. The assumption that cooperation will occur simply because both parties are committed to the venture can result in insufficient communication and discussion that could help minimise risk.
With many consenting deals, the seller is often approached unexpectedly, while the buyer has set out with a clear set of objectives. This can add to the risk of the transaction, as it may not be thought through as meticulously as it should be. In this scenario, the seller may be led like a lamb to the slaughter.
Simultaneously, the acquiring company needs to look beyond cash flow, balance sheets and future projections to what makes the business successful. Success is dependent on the company's leadership, and the ability to retain the people who are key to the company's ongoing success. The motives for acquisition should be transparent to both parties: is the company being bought for its profits, intellectual property, or customer base?; and whether the business he is buying is peripheral or central to the acquiring company. Which of these constitutes the motives will determine the risk profile.
If there are a number of buyers, then the M&A is resisted. The risks here are high, as typically only one of the two parties has a strong interest in concluding the deal.
Take the Paracon bid to buy Software Futures as an example. What began as a deal of mutual consent became one of resistance based on price. The deal fell through as a consequence, although integration had been initiated, including at client level. Consider, for example, the impact of the opportunity cost on management.
In most resisted cases, the seller is the reluctant party and is usually unable to fend off eventual takeover. Because of this reluctance, the deal is likely to become more protracted, with a concomitant impact on people.
Rumours run rife, and insecurity becomes the order of the day. This type of merger activity is characterised by poor communication, largely because both parties are bound to confidentiality or because management is uncertain of the way forward. In this scenario, people feel as though they are living in limbo and attrition runs high.
4) Indecent assault
This typically involves the acquisition of one company by another against its wishes. Often termed a hostile takeover, it is accomplished by buying controlling interest in the stock of the acquired company. An indecent assault might be motivated to eliminate competition, to sell off the assets of the company for more than the takeover payment, or to temporarily inflate the price of the stock. Oracle's Peoplesoft bid is a case in point.
In his book "After the Merger: The Authoritative Guide for Integration Success", Price Pritchett describes the risk curve and resistance incline eloquently - showing that the risk curve arcs from high in rescue situations, is moderate in collaborative mergers, and reaches a high point again in hostile situations.
Regardless of the type of M&A activity, the biggest risk to success and increased shareholder value remains the people management aspect. Recent studies point to the belief that human versus financial factors are the primary cause of M&A failure. Several researchers have theorised specifically that employees from the acquired entity have a low level of commitment to the new organisation post-acquisition.
Both parties must think and plan ahead around the motivators for doing the deal and the direction they want to go. They must have a clear, mutually agreed vision and be able to offer their people a compelling future value proposition relating to the way forward.
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Business and management consultancy Cycan specialises in executive resourcing and leadership solutions. Its four core service lines are retained executive search; executives on call; merger, acquisition and change management optimisation; and executive coaching. The solutions offered in all four of these service lines are structured and deployed using a comprehensive set of methodologies and tools on a risk-sharing basis with clients. They are underpinned by an end-to-end array of human capital audit, measurement and development tools, and non-proprietary technologies. With CEO Bryan Hattingh at the helm, Cycan's executives collectively have more than 100 years' IT industry experience, 60 years' executive search experience, and 70 years' experience in the start-up and management of businesses.