As merger and acquisition (M&A) deals became faster, executives fail to spend time managing the risks to intangible capital.
The consequences can be severe, for if intangible capital is disregarded, integration languishes and the synergies fail to materialise.
A new survey has pointed out that companies tend to underestimate intangible capital. Too much M&A activity also fails to deliver the value expected. In a large part, this is due to neglect of the importance of intangible capital, which could be construed as the organisational, relational and human capital of the enterprise.
Though the collapse of debt-fuelled financing has put the brakes on M&A activity, the virtual disappearance of private equity investors, reduction of sovereign fund investment and a rush to divest non-core assets to shore up balance sheets has increased opportunities for strategic M&A investments.
However, Hay Group, a global management consultancy firm, found that where it was considered at all, intangible capital was often an after-thought. Though three-quarters of the deal value lies in intangible capital, very few organisations pay it that much attention.
Most of the executives polled typically valued intangible capital — including culture and customer relationships — at just 30 per cent of market capitalisation, and not the 75 per cent that analysts expect.
Since it was not the main topic, buyers could risk damaging deal value. “By underestimating intangible value, they allocate insufficient resources to protecting it during integration. Just 38 per cent of companies conduct cultural due diligence,” says the report.
Hay Group global M&A director David Derain adds, “Many recent financial deals have been decided rapidly, often in a matter of days. Due diligence around intangible capital, never very thorough in the best of times, takes even more of a back seat. However, now we are seeing the fallout of poorly planned integration of intangibles as ‘one organisation’ still operates as two, with subsequent brand confusion and loss of key talent.”
Senior leaders tend to pay more attention to business fundamentals like the balance sheet, and the revenues of each business unit. A large part of due diligence is often left to finance departments, whilst intangible capital, and particularly organisational culture, is seen as soft, and therefore relatively unimportant, issue.
For those that dare to pull the trigger, the survey has noted, the rewards of M&A remain as high as ever. But unless intangible capital gets the senior executive attention it deserves, value will remain untapped and could even be destroyed.
amritanair.ghaswalla@thehindu.co.in