The Hindu Business Line : Cultural integration audit for consummated deals

M&A or mergers and acquisitions always make big news. But what happens after the deal? "Eighty-three per cent of all M&A produces no benefit for the shareholders," is a line that stares from www.grovewell.com, citing `a 1999 study of mergers & acquisitions by KPMG'.

That was long time ago. Have things changed lately? Well, here is a recent report from KPMG titled `The Morning After'. The first of the `six key findings' in this `Transaction Services practice global M&A survey' is that more deals enhanced value than reduced value, despite increased competition in the M&A market.

Don't be thrilled, as yet, though, because a pie chart shows the stark reality: 31 per cent of the deals enhanced value, while 26 per cent reduced value. A five per cent advantage, that is, but what about the balance 43 per cent? `Neutral', says the report, meaning, `companies are using acquisitions to hold their competitive position'. Value neutrality may also indicate `a shift in power from the buyer to the seller through increased use of auctions and professionalisation of the sell side process,' postulates the report.

What can be most worrying is the wide `perception gap'. It seems "93 per cent of companies interviewed believed that their deal enhanced value, and over a third said that they would not do anything differently on their next deal."

How does one reconcile the 93 per cent as against the only 31 per cent that KPMG finds in `enhance' category? "Companies may not yet be prepared to make an honest assessment of the success or otherwise of their deals in order to avoid making the same mistakes on future deals." Wish the perception percentages next year would be more realistic.

Synergy, as you know, is two plus two equals five. Just the carrot that entices many deals, you'd appreciate. But `synergies do not always materialise where expected,' is what KPMG says, as expected. An insight of value is that companies focusing on delivering cost synergies may `fail to capture the full value of the deal, which would include revenue synergies'.

A key finding, again, in the report is that nearly two thirds of acquirers failed to realise their synergy target, though on average 43 per cent of the synergy target was included in the purchase price. This, despite `robust synergy analysis prior to completion'.

Be warned, acquirers, therefore: "The survey shows that buyers are having to pay for expected benefits in order to be competitive in the M&A market." Advisory of import is that given the trend for competitive auctions, "companies may need to take more seriously the `in-deal' synergy analysis in order to reduce the risk of paying for an unrealistic target in the price."

Watch out for `potential deal breakers'. For, those who plan can avoid these. A significant finding of the survey is that because of early planning and identification of the `breakers', 63 per cent of companies and 90 per cent of private equity houses interviewed `had walked away from deals in the past due to anticipated post deal difficulties.' The survey speaks of `top three post deal challenges' as follows: "Complex integration of two businesses; dealing with different organisational cultures; and difficulty in integrating IT and reporting systems." Culture is a fuzzy area, which explains why `80 per cent of companies were not well prepared to handle this.'

Not surprising, hence, that `the top three actions that people would do on their next deal' would be: "to plan earlier, perform additional cultural due diligence, and set up a dedicated team to handle the post deal work."

It should be apt if companies that went in for acquisitions lately did a quick cultural integration audit lest their deals fall in the `neutral' or `reduce' zones as regards value.

E&OE@TheHindu.co.in

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