M&A: Keeping an Eye on the Big Picture

The world’s corporate dealmakers are busier than they have been for a while. As the Insight Daily reported recently, deal volumes are up, and especially in the technology sector which is often an industry at the forefront of business trends. Cue lots of excited commentary in the media about an M&A renaissance.

Firms are flush with cash right now and understandably want to invest in growth, including spending on M&A (as they should be doing), but we are not going to see a sudden rise in activity, certainly across the rest of 2010 and probably longer. Slow and steady growth is far more likely, and there are two good reasons for this:

1. Firms still face a lot of uncertainty in their markets, both at home and abroad. That doesn’t mean they won’t pay for highly attractive targets, but it is unlikely they will want to enter any kind of protracted bidding war. Santander’s recent buying spree, including via auctions, is a notable exception to this trend, but the bank suffered less than most of its rivals during the credit crisis and is rightly making the most of its position now.
2. Private equity (PE) activity is also creeping back up (witness the recent buy-out of Burger King by 3G Capital) but, as the Burger King piece acknowledges, PE dealmaking will not reach anything like the heady heights of the pre-recession era. PE firms are wary of committing too much cash in this uncertain period, and still have a lot of debt that will expire in 2012-2014 and needs refinancing (see the first of “Three Worrying Credit Supply Risks” in this piece). This will certainly mean corporate buyers will be involved in fewer bidding wars, and will keep activity subdued overall.

Don’t Get Bogged Down in the Details

The other piece of advice likely to be rolled out during a bout of M&A activity is that most corporate deals “fail”. But, as this research points out, it’s probably because most analyses focus on the spectacular failures of large deals and miss the much larger number of small successful deals. This coincides with what has been our advice for many years: firms are better off doing numerous small deals than focusing on large blockbusters.

Nevertheless, it is certainly difficult to ensure that deals return all the value that managers hope for when they add a target to their pipeline. As this head of corporate development told us:

“Buying a company and getting its systems integrated is one thing, but converting it into a great business is much harder.“

From our 15 years of experience in working with corporate dealmakers, one of the most likely areas to cause problems is the hand-off from due diligence to integration, as shown by chart 1.

Chart 1: Sources of deal error Percentage of respondents citing each reason as the primary source of errors in the M&A process

The good and the bad thing about integration teams is that they are details-obsessed. It is unfair to criticize them for this as it is the heart and soul of their job, but the problem is that if integration teams focus exclusively on merging functions and processes, they can lose focus on the strategic reasons for doing the deal in the first place.

Making Integration Work

It is important to get the balance between details and strategy right during integration. Companies that integrate well improve their return on deals by an average of 14% relative to laggards.

To improve integration efforts, ensure your firm’s integration team doesn’t make functions and processes the primary focus of the integration plan. Instead, organize the plans around the strategic drivers of the deal.  Corporate Strategy Board clients should use this case study to see how one firm organizes its integration teams around the value drivers of a particular deal. And they can also take a leaf out of this manufacturer’s integration playbook to see how it customizes its integration processes to account for the complexities of specific deals.

All CEB clients can ask other clients a question in our dedicated M&A online forum, and should contact me or leave a comment if they have questions.