How to Make More M&A and VC/PE Deals Succeed

In the first three months of 2015 UK based companies spent £14.3Bn on acquisitions(1). UK venture capital (VC) and private equity (PE) firms invested £4.2Bn in 2013(2) backing companies. This in the full knowledge that:

  • Between 70% and 90% of mergers & acquisitions (M&A) fail
  • 55% to 75% of VC and PE investments lose money and only 6% are home runs (5+ times return).

Why? Because corporate CEOs are attracted by the chance to boost financial performance or long term growth and successful acquisition offers, and they believe in their teams’ ability to be one of the winners. And because VC/PE companies know they can expect to hit enough home runs to show a very competitive IRR to their fund investors (typically 15%(2)).

So how great would it be if there were a way to shorten the odds in both cases? The evidence says there is.

Four Reasons Why Deals Fail:

Companies are very accomplished in understanding a target’s products/services, market position and financials. But astonishingly few look equally hard at often the main reasons for the target’s success: its people, culture/organisational structure, and decision making processes. This lack of human due diligence (HDD) has been shown by study after study to be the big missed opportunity behind many failed deals(3). HDD not only prevents failure, it can boost success.

1 – Talent Flight

If you’re a talented senior executive and your future post merger/acquisition has not been clarified to your satisfaction, what are you going to do? It’s tempting to believe this is less of an issue in VC/PE investments where leadership is fully involved in the deal, and there is the safety net of replacing underperforming management teams (never the preferred option and usually about damage limitation). However uncertainty effects every employee and is a powerful motivator to leave early. It’s a truism that the most talented are the most job mobile. Talent flight at all levels is a major contributor to deal failure.

2 – Employee Reaction

How do they feel about the deal? Uncertainty, dislike of the deal, not agreeing with the reasons for it, can lead to employees not collaborating with organisational/process change, resisting culture shift, and not buying into targets. Unless the acquirer is only interested in assets, the cooperation of employees is essential to any deal succeeding. Failure to assess and/or secure their engagement with the deal is a common reason for hoped for returns not materialising.

3 – Morale Collapse Destroys Performance

If how the two structures are to integrate isn’t clearly understood and communicated, especially if there’s no clear lead on which culture is to prevail, decisions become paralysed, people go cautious and defensive, rivalry and jockeying for position proliferate, leadership clashes cause demotivation, disengagement takes hold, and discretionary effort declines. As people’s focus turns inward nearly two-thirds of companies lose market share in the first quarter after a merger/acquisition. By the third quarter, the figure is 90%(4). Morale collapse is a major factor in failed M&As.

4 – Culture Choice Error

70-90% of US M&A deals fail because management gets this choice wrong(5). There’s often a tacit assumption that post deal culture should follow the financial power. Natural enough, but with a little thought it’s clearly not appropriate in cases where the reason for the deal is eg to revitalise your business model by teaming up with a talented creative, development or sales team. Their culture should become the norm – they have what you want, if you try to shoe-horn that into your existing processes, decision schemas or structure, you’ll almost always kill the goose. Sound obvious? It takes very high self esteem in a management team to get it right, and that’s not as common as one would expect. Think about that 70-90% again.

How To Make More Deals Succeed:

In short a combination of HDD and positive psychology based interventions (PPI).

Human Due Diligence

In a recent study comparing failed and successful deals 90% of the successes deployed pre-announcement HDD, but only 30% of the failures did so(5).

  • HDD enable identification of key employees to be retained & planned action to secure them
  • HDD enables employee surveys to assess employee support/resistance
  • PPI can then be deployed immediately post announcement to shift sentiment where needed
  • HDD enables cultural assessment to predict potential synergies or clashes & confirm which culture should prevail.
Positive Psychology Interventions

Multiple studies have shown that PPI boosts individual productivity, optimises change orientation, and lifts organisational performance. For example:

  • Evidence based PPI increases individual performance & resilience by enabling sustained change in default thinking and behaviour patterns, and by releasing trapped performance potential as a matter of routine
  • Growth in shareholder value in PPI inspired positive cultures is 38% higher in the long term
  • PPI creates aspirational levels of engagement and discretionary effort
  • PPI boosts confidence & self esteem so employees face change & perceived uncertainty with equanimity, and are thus more likely to assess situations on merit than according to uninformed preconceptions
  • The result is that PPI secures meaningful culture change more reliably than conventional approaches. How far change is embraced also depends inter alia on factors directly improved by PPI:
    • enrolment and buy-in – which is boosted by positive leadership style and appropriate HDD
    • explanatory style, eg optimism increases appetite for change, reduces pessimism

The evidence strongly suggests that combining HDD and PPI is a powerful approach to improving M&A and VC/PE investment success rates and returns; ie a way to shorten the odds.

1 Office of National Statistics
2 BVCA Autumn 2014
3 Bain & Co
4 Harvard Business Review
5 HBS professor Clayton Christensen

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