Considering M&A? Here Are 3 Critical Pre-merger Considerations

Editor's Note: Take a look at our featured best practice, Post Merger Integration (PMI) Best Practice Framework (28-slide PowerPoint presentation). This document provides a guide and framework for best practice in post merger integration. Post merger integration is the process of combining two separate companies in a way that quickly creates the most value and fulfils the expectations outlined in the acquisition vision. The framework [read more]

Also, if you are interested in becoming an expert on Post-merger Integration (PMI), take a look at Flevy's Post-merger Integration (PMI) Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

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Takeovers can turnaround companies in a short period of time, but there is a significant degree of risk to be anticipated and mitigated prior to undertaking such transactions.  Lack of careful deliberation of the potential risks, insufficient planning, weak execution, and lack of focus on Post-merger Integration are the major reasons why many Merger & Acquisition deals fail to achieve their desired goals.

The course of an M&A transaction has to be set at an early stage, way before the actual deal closure.  The period prior to the deal approval by the regulatory authorities and while due diligence is being done is most critical, and should be utilized by the leadership to clearly define the goals of integration, the potential risks, and a layout for the execution of the actual integration process.  It is the right time to perform a structured evaluation of 3 core pre-merger considerations associated with such deals, i.e.:

1. Strategic Objectives
2. Organization & Culture
3. Takeover Approach

Understanding these PMI Pre-merger considerations helps the stakeholders ascertain the unique challenges and constraints related to M&A transactions and make informed decisions.  These considerations assist in developing a systematic approach to undertaking a Post-merger Integration (PMI)—which is devoid of any “gut decisions,” and ensures realization of synergies and value.  These considerations set the direction and pace of the post-merger integration process.

Now, let’s discuss the 3 core considerations in detail.

Strategic Objectives

Organizations undertake Mergers and Acquisitions as a way to accelerate their growth rather than growing organically.  The foremost core consideration associated with an M&A transaction is the strategic objectives that the organizational leadership wants to achieve out of it.

M&A deals take place to fulfill one or more of these 5 strategic objectives:

• Reinforcement of a segment
• Extension in new geographies
• Expansion of product range
• Acquisition of new capabilities
• Venturing into a new domain

The PMI approach needs to be tailored in accordance with the desired strategic objectives of the deal.

Organization & Culture

The senior management should be mindful of the significance of organizational and cultural differences in the two organizations that often become barriers to M&A deals.  Small companies, typically, have an entrepreneurial outlook and culture where there aren’t any formal structure and the owner controls (and relays) all the information and decision making.  Whereas, large corporations typically have formal structures and well-defined procedures.

A takeover of a small firm by a large entity is bound to stir criticism and disagreement.  M&A process often faces long delays between the offer, deal signing, and closing—due to antitrust reviews or management’s indecisiveness— triggering suspicion among people.  This should be mitigated during the PMI process by orienting the people of the small firm with the new culture and giving them time to transition effectively.

For M&A deals to be effective, leadership needs to carefully evaluate the behavioral elements of the organizational culture and contemplate the overriding principles guiding a company.

Takeover Approach

Integrating the operations of two companies proves to be a much more difficult task in practice than it seems theoretically.  Organizations have the option of selecting the takeover approach most suitable for them from the following 4 methodologies–based on their organizational structures, people, management, processes, and culture:

1. Direct Hit
2. Hiatus
3. Deferred Decisions
4. Quick and Unsympathetic Disposal

Interesting in learning more about the takeover approach and the pre-merger considerations in detail?  You can download an editable PowerPoint on Post-merger Integration: Pre-merger Considerations here on the Flevy documents marketplace.

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M&A is an extremely common strategy for growth. M&A transactions always look great on paper. This is why the buyer typically pays a 10-35% premium over the of the target company's market value.

However, when it comes time for the Post-merger Integration (PMI), are we really able to capture the expected value? Studies show only 20% of organizations capture projected revenue synergies and only 40% capture cost synergies. Not to mention, the PMI process is typically very painful, drawn out, and politically charged, often resulting in the loss of key personnel.

Learn about our Post-merger Integration (PMI) Best Practice Frameworks here.