Mergers and acquisitions are a prominent phenomenon in business. It provide additional growth and profit opportunities. Entrepreneurs also often use it as an exit strategy and it is crucial in determining their ultimate success and financial independence. Unfortunately things do not always go smooth in the execution of mergers and acquisitions and sometimes it is a complete failure.

Rationale Behind Mergers and Acquisitions

In general a company sees a merger and acquisition as an opportunity to improve their competitive edge and financial well-being. The rationale behind mergers and acquisitions includes the following:

• Realizing shareholders value. The management of companies is measured on the improvement of the shareholders value. Entrepreneurs on the other hand want to make a substantial material gain after they successfully built their companies.
• Broadening of markets. The growth potential of companies are enhanced through additional niche markets and a wider geographic spread.
• Increased efficiencies. Economies of scale can be gained from an increase in the size of the operations and through the better control of operations (e.g. controlling a larger portion of the supply chain).
• Access to resources. Competitive edge is enhanced through better access to finances, raw materials, skills and intellectual capital.
• Manage risks. Risks can be decreased through the diversification of the business and by having a choice of supply chains (e.g. manufacturing and procurement in different countries).
• Listing potential. The public offering of the shares of a business is enhanced through an increase in turnover and profitability.
• Political necessity. Countries have different legal requirements (e.g. in South Africa there are certain Black Economic Empowerment (BEE) regulations that companies need to adhere to).
• Speculative possibilities. Companies often buy another company just to sell it in the near future or to strip the company and sell portions of it.
• Additional products, services and facilities. Patented products and additional warehousing and distribution channels enhance the service levels and offering of a business.

Why Do Many Mergers and Acquisitions Fail?

Mergers and acquisitions fail for various reasons. The failure can be before the physical merger and acquisition take place, during the implementation process or during the running of the new merged entity. Potential failures are due to many factors, including:

• Negotiations failure. No agreement is reached between the parties due to factors such as different cultures, expectations and risk profiles.
• Legal issues. The competition laws of various countries often prohibit transactions that are considered to be anti-competitive.
• Implementation problems. Systems (especially IT) are often not very compatible and difficult to merge.
• Financial failure. The expected turnover and return on investment have not been achieved and/or the liquidity and solvency of the company are at risk.
• People failure. Cultural differences, hostility from personnel and resignations can cause serious problems.
• Planned strategic objectives are not achieved. This include the achievement of synergies such as increased efficiencies and market penetration.
• Risk management failure. The risks (e.g. legal, business, financial and operational) of the merged entity are unacceptably high.

Success Criteria for a Successful Merger and Acquisition

A successful merger and acquisition can be measured against two major factors:

• Shareholders value increase. A sustainable increase in shareholders value should be achieved over time.
• Synergies materialized. The achievement of expected synergies such as more efficient operations, increased profitability and an increase in market share.

Improving the Odds of a Successful Merger and Acquisition

Companies can increase their chances of successful mergers and acquisitions by proper planning, by working within a pre-defined methodology and by managing the whole merger and acquisition as a project. Specific detail that need to be managed properly include the following:

• Strategy. Mergers and acquisitions form part of the broader company strategy and it should be thoroughly thought-through and planned.
• Due diligence. Risks (e.g. legal, business, financial and operational) are analysed in a due diligence process. This process should be carefully planned and executed.
• Synergies. The planned synergies should be spelled-out and attention must be given to its achievement.
• Costs. Expenses can easily skyrocket during the merger and acquisition process. Expenses must be budgeted for and then be monitored.
• Expectations. False expectations by various groupings often lead to disillusionment. All expectations should be discussed and clarified with all relevant parties.
• Transparency. Proper communications and openness (where relevant) with employees, customers, suppliers and other business partners are advisable. Rumors (quite often unsubstantiated) that are not quickly nipped in the bud can cause a lot of damage to morale and role-players can look for alternative opportunities.
• Systems. The merging of systems (especially IT) should be planned and executed with utmost care or it can cause the downfall of the new merged entity.
• Keep interest. Top management commitment is essential. Their involvement (when required) can substantially enhance the chances of success.
• Keep eye on ball. A merger and acquisition is a means to an end. Companies often fail to see it in perspective and other critical aspects of the business are then neglected.
• Change management. The success of any merger and acquisition is quite often dependent on the successful merger of two different business cultures. In addition to this people often have resistance to chance and experience some form of trauma in the process. Professional change management can make the difference between a highly successful merger and acquisition or the failure thereof.
• Trusted advisers. Mergers and acquisitions are often a once-off experience for many companies. In this situation, as well as where companies do not have sufficient and qualified people to handle all aspects of a merger and acquisition, they should hire competent outside advisers. These advisers can include attorneys, auditors, business consultants and change management facilitators.

Summary A merger and acquisition is normally one of the most important strategies that a company will embark on. Unfortunately many mergers and acquisitions are failures (or at least in some aspect). One of the best ways to increase the chances of success is to plan properly for a merger and acquisition and to see it as a project and manage it in such a way. A merger and acquisition typically has all the important characteristics of a project – it is multidisciplinary, has specific objectives, is once-off and has time and budget constraints.

The Technology Due Diligence – Series Introduction is the first posting of an ongoing series on performing Information Technology (IT)  due diligence.  In this first section, we provide a brief commentary of the purposes and principles of conducting an IT due diligence, and layout the foundation and structure of the series.

Technology Due Diligence:

Information Technology due diligence efforts commonly fall into several traps.  The findings aren’t relative to the transaction strategy, or aren’t objective or thorough enough to be effective.  Worst of all, IT due diligence sometimes is not done at all, leaving dealmakers and corporate governance alike liable for unforeseen financial exposure, and stockholder retribution from any resulting negative impact to post-merger valuation.

Avoiding these traps requires following a basic due diligence success criteria. Fundamentally, any merger, acquisition, or divestiture due diligence is intended to reduce buyer exposure (or seller in the event of a divestiture), and contribute to the opportunity by providing a basis for business executives to make informed decisions.  For technology practitioners, meeting these criteria requires performing a rapid, fact-based analysis that is appropriately aligned to the business strategy behind the transaction.

Throughout this series, we demonstrate how to perform an analysis to support business transactions while avoiding common post-merger issues. The context is designed to straddle the line between technology analysis and business strategy, giving both business and technology professionals a holistic picture of technology’s impact on negotiations and post-merger valuation.

The series is initially structured around the 4 distinct Beacon Integration (BI) models of IT due diligence. There are 2 models for M&A, and 2 models for divestitures, all designed to produce transaction relevant results.  

BI Models:

• Current State Evaluation
• Forward Looking Due Diligence
• Buy-Side Divestiture Due Diligence
• Sell-Side Divestiture Due Diligence

In each section, we will outline how the principle of each BI model is based on producing objective/quantifiable results that can be provided quickly, without compromising valuable insight. The models leverage a combination of best practice tools ranging from ISO, through Six Sigma, to COBIT, adopting attributes from each that can fit within the tight working constraints of a due diligence. 

We continue the series by providing ongoing commentary on how to perform an IT due diligence under different circumstance, such as evaluating innovative technology and applying due diligence techniques in a turnaround situation. Both of which requires introducing different analysis and valuation methods.

Technology Due Diligence – Series Index:

Readers, be sure to bookmark this page, as it can be used as a menu to jump to major sections that they are interested in. We will activate the hyperlinks below of upcoming sections, as the posts become available, so stay tuned!

• Two Approaches to M&A IT Due Diligence
• Type I – the Current State Evaluation
• Type II – the Forward Looking Due Diligence
• Type III – Buy-Side Divestiture Due Diligence
• Type IV – Sell-Side Divestiture Due Diligence
• Innovative Technology Evaluation
• Distressed Analysis Techniques 
• Legal Requirements for Performing IT Due Diligence
• The Due Diligence Questioner (including a template download)
• Using the Due Diligence to Achieving Post-Merger Success

Please note: To gain the most value from each post, it is recommended to read the posts sequentially, as it is common for posts to reference earlier work. However, a reader will be able to grasp basic subject specific concepts if reading a post individually.

Continue to part 1 of our ongoing series on Technology Due Diligence, Two Approaches to M&A IT Due Diligence.