Even though in the past 18 months everything seems to have changed, the fundamentals of successful M&As have not.
In the world of M&A, the COVID pandemic had two distinct effects on deal volume in the first half of 2020, when M&A activity ground to a relative standstill, and in the surge that started in Q4 of 2020. In fact, deal volume in April 2020 was 80% lower than in December 2019, and many of the deals were borne out of necessity to help companies in sectors hit hardest by the lockdowns (such as entertainment, travel and hospitality) stay in operation.
In contrast, according to the latest Refinitiv deal report, 2021, global deals have soared to a record $2.4 trillion, up 158% from the same period last year. The waning of the pandemic, and the beginning of economic recovery in many developed countries has helped M&A activity bounce back, but a convergence of economic and business drivers have pushed M&A to record highs.
Historic low interest rates have boosted buy-side economics, and the need by many companies to pivot in response to COVID, has made M&A an attractive and fast path to acquiring new skills and tools. Additionally, while there was consolidation resulting from last year’s downturn, some sectors saw significant growth during the pandemic, incentivizing those who accumulated significant cash to find viable investment opportunities. Finally, the popularity of alternative deals such as partnerships and minority stakes has enticed new players to enter the fray, and mitigated the risk for some weary investors.
Looking ahead to a more normalized economic environment, we expect a number of M&A trends to persist. These include a continuation of interest in alternative deal structures; an increase in what can be called “special sauce” type deals such as when a company buys a skill, or a way of doing business that the acquirer seeks to preserve post-transaction; and the dominance of “growth” deals as opposed to “synergy” deals.
Notwithstanding the robust M&A activity, it is still unclear when most employees will return to offices or other in-person activities. Yet, as more deals continue to materialize, companies will undoubtedly be tempted to proceed “full speed ahead” and attempt to integrate remotely. As past decades of M&A experience and research have shown, successful post-deal integration is critical to realizing deal value and returns. Given how challenging integrations are under the most favorable conditions, and how difficult it is to successfully execute an integration, the idea of adding the remote element to it and expecting no hits to desired outcomes is more “wishful thinking” than it is realistic.
For the vast majority of cases, remote integration will prove not to be a good idea, and taking the leap anyway heightens the already substantial risk of deal failure. So, the fact that it can be done, does not mean it should be.
The more things change, the more they stay the same.
The COVID crisis has imposed major limitations on how businesses operate and forced them to adapt to an entirely new working paradigm. Nonetheless, the pandemic has not changed the fundamentals of M&A that have persisted through numerous market and economic cycles. The fact remains that 70-80% of deals fail to deliver the desired shareholder results either due to poor due diligence, poor integrations or a combination of both.
One of the biggest shortcomings of many due diligence processes is the lack of focus on – or underestimation of – the cultural fit between the acquirer and the entity being acquired. Effectively navigating cultural challenges is a massive driver of the ultimate success of a deal. But often, the financiers conducting due diligence either dismiss culture as a “soft issue,” or unrealistically underestimate cultural gaps. This, coupled with poor – or sometimes lack of – communication, creates a vicious cycle that leads to confusion, distrust among stakeholders, stress, and ultimately, low productivity and loss of critical talent.
Integrations can be extraordinarily complex from an operational perspective, yet the deal making stage almost never includes the actual operators of either business and decision-makers are often so focused on getting the deal done that – like the under-emphasis on culture – operational challenges are glossed over and integration planning doesn’t even start until after the deal is closed and announced, leaving all the heavy lifting of uncovering and solving operational challenges to the integration process.
Once formal integration begins, there is almost always a honeymoon period when both parties are genuinely excited and want to make the union work. However, the “real” progress of integrations happens once this phase is over, as more difficult issues are uncovered and start to be addressed. A sound integration approach helps compress the time between the “honeymoon” and the “getting-real” stages.
With that in mind, it is not difficult to imagine the risk of remote integrations. Post-closing operational and cultural challenges are even more difficult to assess remotely, and the temptation to just do enough to “tick the box” can become irresistible to those who have little operational experience, and for whom culture is usually not a top priority in the first place.
Moreover, the connective tissue between the organizations is created through the integration journey when personnel from each company start to establish relationships based on perceived, shared collective interests. Much of that interpersonal rapport occurs outside of formal, structured meetings. And despite the technological advances in video conferencing, people still cannot have an impromptu stop at a colleague’s office for a chat, or have an informal side-bar conversation in the middle of a meeting via videoconference. And it is during these unplanned moments that real issues are uncovered, and rapport is built.
Beyond this, remote collaboration tools – while much improved – still do not adequately allow people across multiple geographies to co-create effectively. There is no substitute for being in a physical room in a creative workshop with multiple working groups to address and resolve challenges while ensuring everyone is heard. Add to this the fact that most people have long ago crossed the threshold of Zoom fatigue, leading to lower than needed engagement to deal with some of the most vexing issues of an integration.
This will significantly increase the temptation to rely on integration “playbooks,” and except in cases with the most basic of integrations, formulaic approaches that are not tailored to the individual companies ultimately do not work. While it may appear that issues are being checked off the to-do list, there is a real risk that it is being done superficially. Confirmation bias can lead to a false sense of progress that minimizes problems that can lay dormant and then emerge as major stumbling blocks later on when it is far more difficult to correct them. Stated differently, getting things done via Zoom has worked because it has had to – faced with no other option companies and employees have adapted. But there is a huge difference between maintaining business continuity for teams that know each other and are working with operating processes they are familiar with, and integrating two completely different entities via video conference platforms.
What to do, what to do:
With all of these dynamics at play, the decision of whether or not to undertake the amplified risk of remote integration should be taken based on an objective dissection of the risks involved.
Here are four risks to be ware of:
Is the integration simple, with no nuance? Is one company being asked to follow the other’s operating environment as is – “our way or the highway” – or are they trying to preserve elements of both companies and actually integrate into an improved new entity (e.g., “secret sauce” integration)?
Is there significant similarity between both companies operationally? This should not be based on how much overlap there is in vision, target customers or geographical footprint, but on a determination of the similarities in operating processes. This will help reveal potential flashpoints before embarking on an integration.
Are the cultures of both organizations complementary, and do employees behave the same way? This should not be based on observation, but should on the use of analytical tools that can define both cultures and identify differences in how the operating staff behave day-to-day, not how they feel or what they said during due diligence.
Weighing the above, is the integration really urgent? Ask yourself: what are the consequences if it doesn’t happen right now?
Most integrations will be – by their very nature – complex. If leaders determine that their integration is an exception – simple, without nuance and with operations and cultures that are so similar that only minor tweaks are needed – then conducting a remote integration may be feasible if managed well. Similarly, if it is determined that integrating is absolutely urgent, then executives have no choice but to proceed with remote integration and take steps to mitigate risks to the extent possible. But in both above cases, proceed with caution and be fully alert to the pitfalls.
If the answer to any of the questions above is no, then defer integration until it can be done properly – which at this point is months, not years from now. The correlation between failed integrations and failed deals is too high to brush aside, especially given how difficult it is to objectively answer the above questions with confirmation bias and personal incentives in play.
CEOs and their executive teams who are pursuing M&A during this period when employees remain remote or at best in hybrid work mode will need to apply even greater discipline in making decisions about integration, and do so without many relevant historical paradigms from which to draw insights. Many traditional management consulting firms will counsel that remote integrations are being done effectively during this unprecedented period, but not enough time has elapsed to substantiate this belief and history has shown us that the stakes are too great to proceed based on wishful thinking. Look before you leap.
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