The current Covid-19 triggered economic crisis means the rest of 2020 (and most of 2021, one suspects) will be one of transformation and economic contraction. We will see fortunes made and lost. Given the average business cycle in the past 150 years has been 5-8 years, the world has been due a correction for some time. Clever investors like Warren Buffet started putting aside cash in late 2019 in order to be ready for the inevitable asset sale we see in every downturn.There will be bankruptcies, pivots, restructurings and of course a plethora of mergers and acquisitions.
Exciting and scary times ahead, then, given that between 70% and 90% of mergers and acquisitions fail to achieve projected targets according to Harvard Business Review.
Having worked in M&A back in my Deloitte days I had the privilege to see a number of successful mergers as well as witness some of the typical risks first hand. Advising on a number of small to medium size mergers and acquisitions since then it has struck me how little of the traditional big merger methodology and theory is applicable outside of the much publicised mega mergers of listed entities. Here is a list of five common pieces of advice on how to make a merger a success – and why I advocate doing the exact opposite with small to medium sized companies.
- Get rid of the acquired management team: According to conventional merger theory you have to get rid of the acquired entity’s management. For small mergers I would advocate the exact opposite. Do your best to keep both management teams on board. Owner managed businesses in particular often have one or two passionate individuals who have been there from the start and who do five jobs for the salary of one. A sure recipe for disaster: you buy their shares and they disappear into the sunset, leaving with valuable information and relationships.
- Rebrand: In a word don’t. There are better ways to leverage the brand equity of two small companies than embarking on a costly (both in terms of money and management attention) empire building ego trip to bring everything under one brand. Focus on business continuity then on business synergies instead.
- Focus on cost synergies: I once worked on merging two industrial painting sites in Estonia and one of the promises was to reduce back office headcount. There were two obvious candidates for termination in the acquired site. The ladies in question had no formal qualifications, did not (on paper) do anything that could not be automated. The finance director invited me in to see what the ladies actually did. He pulled aside a curtain to reveal two elderly ladies sitting on stools, removing dried paint from hooks on which the products circulated through the spray paint line with small metal hammers. “The salary cost of removing paint in this way is half of the cost of using solvent. The ladies also do payroll, accounting and as a bonus they make sandwiches for the guys in production for free. They are the mother and aunt of our production manager. You fire them, everyone gets angry.” Focus on adding value instead, not cutting cost.
- A robust governance model: Yes, knowing who decides what is important. But a structure of steering group meetings coupled with project workstream meetings, KPI review meetings, alignment meetings and board meetings has the potential to kill excitement and momentum. In smaller companies all of the above meetings would roughly be attended by the same people. You would end up skating the slippery slope between “Analysis Paralysis” and “Death by Admin”. A simple weekly meeting aligned with a daily check-in on progress is all the first 200 days need.
- Focus on business synergies not cash flow: if you are big enough borrowing is (almost) free. When you are smaller cash flow problems can very quickly mean the end of your business. Day one after the merger or acquisition should see you going through all direct and indirect spend and renegotiate all supplier contracts. New payment terms will allow you to free up cash for anything that needs immediate attention including freeing up cash for business synergies once the merged business has been stabilised.