All too often, M&A deals fail to deliver the expected value. Whether you’re thinking about an M&A to grow your business, or defending your company from a hostile approach, how can you use risk management to achieve the desired outcome?
For any growing business, there is a significant chance a merger or acquisition (M&A) will be on the horizon. Acquiring or merging with a company is certainly a smart way to enter a new geography, access niche markets and of course, improve your competitive position. Alternatively, if you become the target of an acquisition, you will need to be ready to protect your interests.
The many pointers and pitfalls of mergers and acquisitions
Approaching M&A with the right mind-set is paramount. While a confident stance is key, taking a balanced view of possible risks will strengthen your position. Using risk management to challenge entrenched positions will allow you to see things for exactly what they are, good or bad.
Due diligence is essential, looking not only into the hard facts such as EBITDA, but also covering the softer aspects, company culture, for example. It makes sense to engage experts for the financial and legal areas. But investing your own time to understand as much as possible about the new business will help you understand how the merger will work in practice.
Don’t make assumptions
Are you making assumptions about the external status quo when assessing an M&A opportunity? A merger might make sense in current market conditions, but what happens if things change, for example, reduced access to finance, new competitors, or incoming legislation? Stress-test your assumptions by considering multiple future scenarios; have you future-proofed your deal by examining its resilience to external change? How will you manage the risks if they materialise?
Considering internal challenges is also important. What investment is needed to merge systems, bring together operations, combine business processes and establish joint teams? All of this can be a time consuming and costly process which will distract your leadership team from core business activities. Do you have the management capacity to deliver the changes? If you lose customers during the transition, have you factored the cost of winning them back (or replacing them) into the overall outcome?
Cultural fit is often the major pain point in achieving a successful M&A. A perfect fit on paper won’t always translate in the board room or the office. Mergers – whatever the size of business – typically involve uncertainty around job security, resentful or disengaged staff. Have you underestimated how long it will it take to bring the companies together?
There are lots of questions to be answered before you can be confident of a successful deal. So what techniques can you use to support a successful M&A activities?
Apply risk management thinking
M&As can be managed effectively as classic change programmes with several phased go/no-go decision gates. For many SMEs, it will be the first time they tackle a strategic programme in this way. Learning curves are steep! Risk management embedded from the outset acts as an enabler, to keep sight of the objectives and provides:
- A framework for asking probing questions to understand what could go wrong
- Rigorous methods to evaluate the consequences
- Structured identification of actions to manage the significant risks
- The discipline required to make decisions and communicate with stakeholders
Risk Management supports change, to ensure synergies are respected and integration is on-track and logical. Ultimately, there must be a cost benefit. At every stage, ask yourself whether the cost of the merger is in danger of being greater than the value it delivers.
Keys to successful M&As
Understanding the risks of your deal will sow the seeds of a good merger. A structured, planned approach to delivery will reap the benefits. Approaching M&A through measured risk-taking, within a properly planned change programme has the capacity to massively improve the chances of a successful outcome.
By Val Jonas, CEO and co-owner, Risk Decisions
First published in FreshBusinessThinking.com 25th January 2017