Why Most Mergers and Acquisitions Don’t Add Shareholder Value

During a recent meeting of 40 M&A professionals, I facilitated a discussion around the results of a 1999 KPMG study on the success of Mergers and Acquisitions in large companies. This study indicated that 83% of mergers and acquisitions fail to increase share holder value. The M&A professionals who participated in this discussion represented middle market mergers and acquisitions. Members of the group were asked three questions:

1. What are the key reasons for these results?
2. What impact does this have on intermediaries?
3. Can overcoming these results differentiate your business?

Overall Summary: Intermediaries in M&A transactions play a strong role in the success of a transaction, which affects their compensation. Pre-close planning, post close execution and cultural differences are the three primary reasons deals don’t increase shareholder value. 12 years after the KPMG study, the results of this discussion indicate that there is little difference in the reasons mergers and acquisitions don’t achieve expected results in large companies or middle market companies. I asked the attendees the following question: What are the key reasons for these results? The following observations and reasons are summarized below: the comments made by the attendees: Pre-Close issues:

• Earn outs cover the differences in valuation between the buyer and the seller which indicate a lack of agreement on the expected outcome
• Conditions of the deal don’t work for one of the parties involved
• There are too many people involved in a transaction; all with high expectations
• Financial models don’t take into account unintended consequences of the deal [such as suppliers wanting to renegotiate with the new entity]
• Deal structure too broad
• Bankers have more influence on P.E. transactions
• Varying amounts of involvement by Senior Leaders from both sides in due diligence
• Lack of full understanding of cultural differences between two merging organizations
• Initial misunderstandings in the deal structure because of complexity and/or lack of knowledge
• Intermediaries don’t do a good enough job of playing “Lookout” for their clients
• Difficulty in choosing success over money
  • Valuation vs. success
• Insufficient time spent on pre-close discussions

Post Close Issues:

• Poor planning
• Poor execution
• Lack of understanding of the time required to implement structural changes
• Disputes over control and objective setting
• Acquired companies led by founders/entrepreneurs have a difficult time answering to someone else
• Lack of full understanding of cultural differences between two merging organizations
• Cultural issues in the middle markets are material and one of the biggest reasons deals don’t hit their targets
• Strategic buyers hold the cards forcing significant changes in the new organization in an attempt to meet the numbers
• Financial models don’t take into account unintended consequences of the deal [such as suppliers wanting to renegotiate with the new entity]
• Acquiring company puts in its own management team
• Reality sets in after the deal is closed
• Poor management
• Too much meddling by new owners
• Loss of tribal knowledge due to people leaving for various reasons

What impact does this have on intermediaries?

• Almost all earn outs fail to be realized in full and there are often disputes and legal actions taken. Legal actions often require additional resources and expenditures
• Not realizing full value affects an intermediary’s earnings
• Performance in a Merger/Acquisition has an impact on intermediaries because much of their business is through referrals

Can overcoming these results differentiate your business?

• An intermediary who has good results in deals they do, will have a marketing advantage over the competition
• Repeat business from previous clients
• Better referral flow
• Higher fees chargeable due to a better track record

In the end, the cultural and execution issues that face two companies when they are merged make a big difference on the value of a sale or acquisition and the effectiveness of mergers and acquisitions.

About the author: Jim Gitney is the CEO of Group50^® Consulting and specializes in the development and implementation of manufacturing and supply chain strategies. Jim and the Group50 team are all former executives with well-known manufacturing and distribution companies who understand what it takes to put together and manage the implementation of a successful Mergers and Acquisitions strategic plan. Group50 has led or been part of over 50 mergers and acquisitions over the last 25 years. Group50 has designed a series of strategic assessments, workshops and strategic execution tools that eliminate the existence of Anti-Strategy. You can reach us at (909) 949-9083 or send a note to info@group50.com.

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