Book

Winning at the acquisition game

It is difficult to win at the acquisition game. 

Four decades ago, in his classic book Competitive Strategy, Michael Porter made this claim and the statement still holds true today. Since Porter’s declaration, there has been ample evidence demonstrating that M&A creates significant post-deal performance issues for acquiring, “buy-side” firms.

Recent examples of value-destroying transactions include Bayer’s ill-fated $63bn acquisition of Monsanto. Since completing the deal in 2018, Bayer’s market value is now half of where it was in 2015. Likewise, since acquiring Anadarko for $55bn US in 2019 Occidental Petroleum’s market capitalisation has fallen from about $42bn US on the day the Anadarko deal completed to roughly $12bn US now, and the firm has cut its dividend by almost 90%, their first dividend cut since 1991. A broad analysis of 2,500 deals found that more than 60 percent destroyed shareholder value.

Value is only realised ... through effective implementation

The poor results from M&A have been attributed to a variety of management missteps across the process in: M&A strategy, target company (seller) identification, due diligence, valuation, negotiation, integration and measurement. In the current era of transient competitive advantage, digital transformation, disruptive innovation, excessive valuations, and industry convergence, realising value from M&A will only become more difficult and complex.

While mergers and acquisitions are a multi-staged and cross-functional process, too often corporate leaders view M&A as a financial exercise to expedite their growth strategy. This approach increases the likelihood that results-preventing implementation problems will arise in the subsequent, post-transaction stages. Although analysing, planning and assessing value prior to transaction close is important, any seasoned CEO who has been through at least one M&A will recognise (and has likely learned the hard way) that value is only realised after deal close through effective implementation. 

The need for an end-to-end view

Combining M&A experience with a systemised and documented M&A process has been found to improve success. An analysis of 228 US bank mergers taking place over a ten-year period from 1997 to 2007 found that combining two key factors, experience and a clear M&A methodology, enhances deal performance. The first factor, which the researchers call 'tacit knowledge' consists of M&A experience and exists largely in the minds of executives, managers and employees. The second factor, which they term 'codified knowledge' consists of written procedures that a company articulates in the form of routines or norms which guide actions and decision-making throughout the M&A process, both pre- and post-transaction close.

Despite evidence that a systematised M&A process improves deal success, other research has found that almost two-thirds (60 percent) of surveyed executives indicated their firms do not have a comprehensive end-to-end M&A process model. What is needed then is a management-oriented model providing an integrated and actionable end-to-end view of the M&A process.

 

Deal flow model

An organising framework for successful deals 

An end-to-end view of the M&A process consisting of ten stages across three phases is presented in the Deal Flow Model (above). An early version of the model originated over 20 years ago as a framework to help firms organise their M&A approach. In the ensuing decades, the model has been applied and refined during numerous mergers, acquisitions, and joint ventures, across various industries and geographies.

For the sake of clarity, the Deal Flow Model is illustrated as ten distinct stages across three phases. However, as veteran dealmakers know, M&A is not a simple sequential process. Common M&A terms (i.e. pre-deal, deal, and post-deal) also imply a chronological approach to M&As.

In reality, however, there are no clear lines between many of the stages identified in the model. The stages actually involve multiple overlapping activities, with the process stages often implemented in a different sequence. For example, beginning the “post-deal” integration planning of organisational cultures, people, processes and systems prior to transaction close (pre-deal) is best practice in most circumstances.

Likewise, while often identified as a “post-deal” activity, M&A communications to various stakeholders (e.g. investors, employees and communities) should begin in the pre-deal phase. While each deal may be sequenced a bit differently, firms can use the model as an organising framework to record, catalogue and categorise their M&A process tools, templates and talent across the ten stages. 

Achieving deal success will always be difficult. Using the Deal Flow Model to successfully mobilise and integrate organisational capability and avoid missteps will help firms gain a unique advantage and “win” at the acquisition game.

Timothy Galpin's book Winning at the Acquisition Game: Tools, templates and best practices across the M&A process, Oxford University Press 2020, presents the materials, insights, tools and templates which comprise the comprehensive, cross-disciplinary Mergers and Acquisitions course taught in the MBA and Executive MBA programs at the Saïd Business School, University of Oxford.