M&A activity is near record levels and we see no signs of abatement in the near term. Stock values are at near record highs, corporate balance sheets are flush with cash, and interest rates are near historic lows. Couple these facts with the reality that many corporate titans face increased shareholder pressure for to grow their businesses amid a tepid organic growth environment, and you have the recipe for a sustained period of M&A activity.
The myriad stories of the crisis in the Middle East brings to mind a set of surprising parallels between that regional [now global] conflict and our domestic corporate M&A market. The challenge many European leaders tussle with in absorbing the tens of thousands Syrian and North Africans seeking refuge in Europe is not dissimilar to the challenge we find among our clients seeking to maximize shareholder value through an increasing wave of merger activity.
As we all know, mergers can be highly complex efforts with a dizzying array of considerations. From identifying the right target to realizing synergies committed to The Street, corporate managers face a daunting managing through a multitude of decisions on their way toward creating value via strategic growth. Here, we distill some of the considerations into four key focal areas:
On a strategic level, the rebelling religious/ethnic groups in the Middle East are not materially different from large corporations…they seek to consolidate power and win the long game. Rebel group and corporation combinations yield greater arsenals (guns vs. marketing dollars), more buying power (troop rations vs. office supplies), and greater negotiating leverage with adversaries (militaries vs. regulatory bodies).
In either case, it is of paramount import that all merger decisions align with the one’s long-term strategy. A misstep can take a party (rebel group or corporation) far off course with disastrous implications for long-term value. Take the United States’ “merger” with Saddam Hussein 1983. With a short-term objective to squelch the strength of a growing Iranian threat, the United States backed Saddam’s armies with military intelligence, economic aid and covert supplies of munitions. Our efforts paid short-term dividends with Iran’s capitulation in the late 1980’s; however, we all now know what ROI the US and society, as a whole, gained from this move in the long-term. Business schools are rife with case studies illuminating how corporate managers, like the US government in the case of Saddam, picked poor M&A bed-fellows to their long-term peril. It’s easy for corporate CEO’s (like US Presidents), operating within serious time constraints, can make merger decisions which drive short-term shareholder value at the expense of long term enterprise value. It’s worth noting here that the average Fortune 500 CEO tenure is 4.6 years. Such leaders must make bold decisions but need a strong and balanced board of directors, with lenses that look much further out, to temper such decisions with the long-term view. Generally, deals aligned with the long-term strategy of the business tend to be more successful than more opportunistic transactions.
Like Russia’s recent maneuvers in Syria, beware of rogue executives who seek to either protect their chiefdom or consolidate power during transformational initiatives. While senior management struggles with the puzzle of head-count decisions they encounter as they design the “newco” organization, thoughtful merger integration managers are ever mindful of those who seek to protect “their own” at the risk of better talent coming from the other side. Cold, hard, and analytical objectivity is key when deciding which people will survive the merger and in what positions.
While the org chart shuffle ensues, an overarching consideration is cultural fit. Even in those deals where the acquiring firm has a history of successfully assimilating acquisitions, managers must consider the potential adverse implications of culture clash. Russia’s tactics may enhance their influence with Syria’s President, Bashar al-Assad, but these moves are a long way from winning the people of the region. The Middle East is among the extreme regions on the planet, from a cultural perspective.Cultural integration would be a Herculean effort for Putin and team. Heck, they’re experiencing enough challenges dealing with their own brethren in Ukraine!
Corporate leaders with cash-laden balance sheets and access to cheap money are on a tear to acquire the innovation and growth prospects that accompany technology companies. However, only the astute are aware of the challenge that awaits those who combine old-world business models with those of the new. In these situations, sensitivity to the complexity of matching acquirer and target culture will be a key factor in releasing the true value of acquisitions. Just consider the examples of the infamous AOL/Time Warner deal. While the financial due diligence showed signs of a promising outcome, a similar evaluation of cultural fit may have foretold a different story. Years of intense culture clashes (amid a host of other issues) doomed this combination.
Refracting cultural fit form a different angle, we consider leaders of large corporations who face increasing pressure to rapidly achieve global scale. With international mergers the culture challenge takes on a different, more complex, form. Not only do players have to consider corporate cultural- but now ethnic cultural differences. Consider the failed Alcatel / Lucent combination; wherein Lucent (American) and Alcatel (French) lacked clear integration issue resolution plans and struggled with an array of ethno-cultural challenges ranging from language barriers and time differences to divergent [cultural] approaches to crisis management. The result: millions in lost value.
From an economic perspective, few would argue that winning the long game in the Middle East translates largely to controlling the vast oil reserves of the region. Consolidated power in the region would yield immense economies of scale and financial synergies that might position the architect to become the next regional [if not global] hegemony. Long-term success, in the region which includes the cradle of civilization, will take the most clever strategic planning, tactical execution and luck as ever has been seen in human history. And to the victor would go the spoils…hence the centuries old, hyper intense turmoil in the Middle East.
Corporate managers, chasing the never-ending quest of earnings growth, look to M&A for much the same. Deal structure, transaction mechanics, and thorough due diligence can lend to the success of a deal. However, those who participated in and learned from the aforementioned failed deals might point to other keys to unlocking the value of any deal, some of which may include:
- Successful leadership which a) ensures alignment of the deal with the strategic direction of the business; b) ensures the M&A team bus has the right players sitting in the right seats, all operating to a shared vision and plan; and c) ensures the driver of the bus has and takes ownership of detailed directions for course corrections along the way
- Intense merger integration management to a) ensure that thorough due diligence has been undertaken (before a deal is approved) and b) ensure very detailed deal and integration plans are designed and adhered as the corporation move down the M&A path
As we referenced in a prior LX Insight, the best made plans change when met with reality. However, having the right people on the bus, marching to a common plan, and tracking to that plan a very detailed level, will go a long way to maximizing the value of the deal.