Over the last few years, many businesses have turned to mergers and acquisitions (M&A) to generate growth or enter new markets. However, if past performance is any indicator, a large percentage of these acquisitions will turn out to be failures.
Smart Business spoke with Christopher F. Meshginpoosh, Director at Kreischer Miller and a Certified M&A Advisor, to learn more about how companies can maximize the probability of success in M&A.
How do you define success in the context of M&A?
While there are a number of quantitative and qualitative measures of success in business, the one that cuts across all industries and geographic boundaries is return on investment. Unfortunately, numerous studies have shown that M&A returns usually fall well short of initial expectations and actually destroy more value than they create.
How can owners and executives increase the probability of providing a reasonable return on investment?
Recognize that M&A is just one of many capital allocation alternatives at your disposal. Building long-term value should involve the constant evaluation of all available uses of capital, including capital investments, share repurchases, mergers and acquisitions and joint ventures, among others.
In some cases, particularly when the M&A market is hot, investing capital in your plant may make more sense than buying a businesses at inflated prices. The best buyers act like great investors — they do not fall in love with any one idea, but employ a disciplined approach that involves looking at the potential return from all available alternatives. M&A may be the best way to maximize value at a given point in time, but you should carefully consider all other options.
What is the most common mistake you see?
Paying too much. The difference between a failed acquisition and a successful one often comes down to nothing more than timing. When the market is hot and your competitors are all buying businesses, the pressure to jump into the M&A frenzy can be immense.
However, that is exactly when you want to be the most cautious, because even a profitable target can destroy shareholder value if you pay too much for it. You have to constantly remind yourself that success will be measured based on your return.
If the purchase price is high because of competing offers, then the target may have to generate unreasonably high cash flows in order to provide an adequate return. Conversely, if you buy when the market is soft, you have much more margin for error. That is why it is no coincidence that the most successful acquirers are those that are willing to wait years for the right deal to emerge.
Assuming a company chooses to pursue an M&A strategy, how time-consuming is the process?
Ask almost anyone how well their first acquisition went and you are bound to get an earful.
Due diligence efforts alone can be all-consuming, requiring an assessment of financial trends, people, operations, customer relationships and intellectual property.
Additionally, you need to consider valuation, negotiate terms, develop integration plans for all major functions and develop communication plans for key stakeholders. Who handles all of this? Far too often, companies lean too much on outsiders for the lion’s share of the work. Don’t get the wrong idea — advisors can provide substantial value in the M&A process.
However, management teams should have enough bench strength to own the process from planning through post-merger integration, enough experience to understand the key value drivers and enough objectivity to make sure they close the right deal. ●
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