Successful Mergers and Acquisitions

Successful Mergers and Acquisitions (M&A) refer to those M&A instances where the parties involved mutually agree to the terms and conditions and proceed with the merger or acquisition as decided and demanded by the situation at a certain point in time.

In the process, two companies either collaborate and work together as one entity or one of them might be ready to be acquired by another for the right reasons. Some of the well-known M&A instances reported recently include Adobe-Figma, Microsoft-Activision Blizzard, ASM-Firmenich, and Prologis-Duke Realty.

Successful mergers and acquisitions are instances that occur for the right reasons. The Dell-EMC merger of 2016 is one of such most significant instances in the history of the global technology industry. As Dell-EMC merged into one, the global technology industry cheered. After years of steady courtship, the deal finally saw the light of day. However, the fate of this merger is yet to be seen. But have you ever thought, about why are some mergers successful while some have gone sour? The reason is simple. Those mergers which have happened for the right reasons have stayed on, while those which came together for the wrong reasons or were executed badly have gone kaput.

Like every long-term relationship, it's imperative that mergers also happen for the right reasons. For example, when two companies hold a strong position in their respective areas, a merger targeted to enhance their position in the market or capture a larger share makes perfect sense.

Source: originally published by Booz & Company; Strategy-business.com

However, companies fail to realize this. Many consider mergers as a last-ditch effort to save their flagging position. We just read what happened in the Microsoft-Nokia case. Both these giants faced severe threats from Android and Apple, so the merger was more out of desperation. So the result is a failed attempt. But if we see the case of Adidas-Reebok, we can understand that these were two brands that had a strong presence in their field. The combined forces augmented their footing in the market and led to a successful merger.

#1 - Have an eye for risks

A merger is an extremely significant move for each company involved. It's a tight ropewalk, and even a small slip can lead millions down the drain. Timely identification of weaknesses, risks, and threats, whether internal or external, can save huge M&A costs and efforts. Internal risks can be cultural friction, layoffs, low productivity, or power struggle at the helm. In contrast, external risks are low acceptance of products through combined synergies, a sudden change in market dynamics, regulatory changes, etc. Yes, it's not possible to be so impeccably far-sighted, but precision in dealing with things is a must.

#2 - Cultural compatibility

While absolute cultural congruence is not always possible, it is always advisable to find the closest fit while planning a merger. First, both companies must recognize their similarities and, more importantly, acknowledge their differences. Then can they strive to create a new culture that reflects the corporate beliefs to the core? Finally, creating a brand new identity with employee support leads to a sense of belongingness and persevered efforts towards a shared goal. So for employees, it's a new culture, new goals, and a new future.

#3 - Maintaining key leadership

As much as it is required to identify the correct reasons for the merger, it must retain the correct people after the merger. The success of a merger hinges on a seamless transition and effective implementation. Unfortunately, many companies take too long to set the key leadership in place, thus creating confusion and apprehension. Choosing whom to retain and whom to let go of is a dicey game. But this is where judgment skill has to play a role. If the pillars of each company are retained judiciously, the path becomes easier. However, if employees feel out of place from the beginning, they may drift apart, leaving a big vacuum in the newly merged company.

#4 - Communication is the base

Studies by McKinsey proved that "management of the human side of the merger is the real key to maximizing the value of the deal." Effective employee communication and culture integration are the most difficult to achieve but have maximum importance in merger success. International Association of Business Communicators (IABC) indicated that most of the merger communication budgets globally had been spent on external communication rather than internal communication. Conveying the decision to merge at the appropriate time helps reduce a lot of uncertainties both in the pre and post-merger stages. Uncertainties lead to speculation and weaken trust. Grapevine only results in loss of productivity. The more open the communication, the better it is.

Primarily value creation or value enhancement is the goal of any merger. These are business combinations, and the reasons are based on financial elements. Let's take a quick look at some of the reasons behind mergers.

#1 - Capacity augmentation

One of the most common causes of a merger is capacity augmentation through combined forces. Usually, companies target such a move to leverage expensive manufacturing operations. However, capacity might not just pertain to manufacturing operations; it may emanate from procuring a unique technology platform instead of building it all over again. Capacity augmentation usually is the driving force in mergers in biopharmaceutical and automobile companies.

#2 - Achieving a competitive edge

Let's face it. Competition is cut-throat these days. Without adequate strategies in its pool, companies will not survive this wave of innovations. As a result, many companies take the merger route to expand their footprints in a new market where the partnering company already has a strong presence. In other situations, an attractive brand portfolio lures companies into mergers.

#3 - Surviving tough times

Tweaking the adage, let's say," Tough times don't last, tough companies do." The global economy is going through a phase of uncertainty, and combined strength is always better in tough times. When survival becomes a challenge, combining is the best option. In the crisis period, 2008-2011, many banks took this path to cushion themselves from balance sheet risks.

#4 - Diversification

Sensible companies do not believe in keeping all eggs in one basket. Diversification is the key. By combining their products and services, they may gain a competitive edge. In addition, diversification adds products to the portfolio, which is not part of current operations. A classic example of this is the acquisition of EDS by H.P. in 2008 to add services-oriented features in their technology offerings.

#5 - Cost cutting

Economies of scale are the soul of most businesses. When two companies are in the same line of business or produce similar goods and services, it makes perfect sense for them to combine locations or reduce operating costs by integrating and streamlining support functions. It becomes a large opportunity to lower costs. The math is simple here. When the total cost of production is lowered with increasing volume, total profits are maximized.

Let us pick two examples and study their cases of the many mergers that grace the headlines every day. Then, let us delve and find out whether they were successful or met with a harsh fate.

Let us consider successful mergers and acquisitions examples to understand the M&A cases through the case studies:

Case Study 1: Adidas-Reebok

Adidas-Salomon AGÂ 2005 announced its plan to acquire Reebok North America in 2005 at an estimated value of $ 3.78 billion. Adidas offered to pay over a 34% premium over the last closing price for Reebok. It was a mouth-watering deal for Reebok, as it was also facing tough competition from Nike, Adidas, and Puma.

The footwear market in North America was mainly dominated by Nike, with a 36% share. Therefore, increased market share and cost-cutting through synergies were clear-cut strategies for Adidas and Reebok. With its quality products and Reebok with its stylized quotient, Adidas planned to capture the scene.

Combined core competencies formed a revamped portfolio which had:

Nike had a 36% market share in August 2005. After Reebok's acquisition, the market share of Adidas-Reebok in the U.S. catapulted to 21% from 8.9%.

Source: icmrindia, NAFSMA

Revenue from the footwear segment of Nike, Adidas, and Puma from 2010 to 2015 (in billion U.S. dollars)

Source: Statista

Sales revenue increased by 52% in 2006, representing the highest organic growth of the Adidas group within the last eight years. It was the first time in the group's history that it crossed the benchmark of EUR 10 billion.

Causes

#1 - Cultural blend

The culture of Adidas and Reebok effortlessly merged and gave a new identity to the organization. Distinguishing factors were many. Adidas was originally a German company, and Reebok was an American entity; Adidas was all about sports, while Reebok redefined lifestyle. However, proper communication, clear strategies, and effective implementation did the job.

#2 - A perfect blend of Individuality and Union

Maintaining both brands (keeping established market share). Adidas-Reebok is one such merger where both the companies managed to create a portfolio of new offerings while keeping their individuality intact. There exists a threat of cannibalization where one brand eats into the others' consumer spread. However, Adidas Chairman and CEO Herbert Hainer clearly stated: "it is important that each of these brands must retain their own identity." While Reebok capitalized on its strong presence with the youth, Adidas focused on its international presence and high-end technology.

#3 - Economies of scale

Adidas benefitted from enhanced distribution in North America, where Reebok already has a strong foothold. Increased operations naturally translated into reduced costs across each front of the value chain, such as manufacturing, supply, distribution, and marketing.

There are many mergers that, however, meet with an adverse future. They failed to perform pre-and post-merger analyses, and both companies ended in chaos. One such case in the recent past has been the Microsoft-Nokia merger.

Case Study 2: Microsoft-Nokia Merger

When Microsoft was getting stifled by Apple and Android devices, it merged with Nokia as a last-ditch attempt in 2013. Joining hands with an already existing device manufacturer seemed more convenient than creating the business organically.

However, the deal proved to be a sour one. Microsoft has shifted much of its $7.5 billion acquisition into other divisions of the company, announced mass layoff for Nokia employees, cut down its output of smartphones per year, and eventually wrote off the entire acquisition price in a $7.6 billion impairment charge.

Meanwhile, Nokia's market share declined from a peak of 41% to its current level of 3% despite Microsoft's support.

Causes

source: Business Insider

Desperation doesn't lead anywhere

Rather than growing through a shared vision or common passion, both Nokia and Microsoft were shoved into a corner and considered the other as their Knight in shining armor.

Failure to understand market trends and dynamics

Even after two years of Windows Phone-powered Nokia handsets, Microsoft's operating system captured a mere 3.5% of the smartphone market. It was a strong indication that developers are unwilling to invest resources in creating applications for Windows-based phones. The mobile phone industry is not just about hardware and software. Applications, e-commerce, advertising, social media applications, location-based services, and many other things matter today. Unfortunately, the software on the phone wasn't compatible or appealing enough for the entire ecosystem.

So it's pretty evident that mergers are fraught with complications. Without thorough due diligence and careful executions, these big-ticket mergers are sure to be doomed. It's a phase of transition, and any transition in business is not easy. There are disquieting questions in every stakeholder's mind. Layoffs, customer integration, leadership change, and product portfolio revamp are a lot to deal with.

It is commonly believed that the failure rate among mergers and acquisitions is a whopping 83%. A merger is considered successful if it increases the combined firm's value. But an important aspect to consider is that to sustain the positive benefits of any merger, the post-merger integration is successful.

There is no secret recipe for most successful mergers and acquisitions like most things in life. A well-etched strategy, an astute management team, and an eye for detail are what encapsulate the essence of a successful merger. While strategy is important for most mergers, cultural compatibility is the soul of the merged entities.

There are so many mergers and acquisitions that happen every year. As per the IIMA institute, more than 45,000 transactions occurred in the M&A landscape in 2015. The valuation of these stands at $4.5 trillion or more.

Source: Institute for Mergers, Acquisitions & Alliances (IMAA)

The acquisition of Time Warner Cable Inc by Charter Communications Inc in May 2015, valued at $77.8 billion, became the largest U.S.-based M&A deal of the year 201, followed by the Dell-EMC merger of $65.5 billion.

Source: Statista.com

Most of these mergers gather immense media attention, while some happen in a hush-hush way. But that's not what is important. What matters is how many of these stand the test of time and how many remain a memory at best. Before finding out more about this, let us first try to comprehend why mergers happen in the first place. Why do two independent entities come together to forge a new relationship when they can make their way on their own? Sounds akin to marriage. Well, yes. Mergers, just like marriages, have a lot at stake. It is a make-or-break situation at the end of the day! One miscalculation can cascade into trillions of losses. Thus, it must be avoided.

This article has guided successful mergers and acquisitions, its key drives, with examples and case studies. You can learn more about Mergers & Acquisitions from the following articles –

• 4 Examples of Acquisitions
• M&A Books
• Synergies in M&A
• Investment Banking Mergers and Acquisitions