Would it surprise you to learn that research has shown that 50 to 70% of mergers and acquisitions fail to achieve the expected result (Lovallo and Kahneman 2003)? What about that 90% of mergers result in some type of lawsuit by shareholders (Secher and Horley 2018)?
You may be asking yourself, like I did, why mergers and acquisitions fail so often and why they continue to be undertaken when the failure rate is so high. As to the first question, there has been a plethora of research into why these acquisitions failed to achieve the expected result. Many researchers have investigated pre-merger activities, such as valuation, bidding wars, unreasonable expectations, and poor strategic planning. Other researchers have looked at post-merger acquisition activities to include the integration of both people and systems, poor leadership, and general market conditions. However, there is no consensus as to the main reasons they fail and what failure means to most individuals.
Since 90% of mergers end in some type of shareholder lawsuit, most of the research performed to date was to ascertain whether the value was achieved from the merger, which centers around public companies and share price (Secher and Horley 2018). The share price is indeed a good measurement, but there are so many components to the share price that it is hard to gauge that measurement as effective in determining the overall value of an acquisition. This measurement is almost entirely focused on the acquiring firm's shareholder value. There have been a few recent studies that have attempted to understand whether the acquired firm's shareholders received the value that they expected as well (Mundra 2016).
My understanding of the research to date is that both for the acquiring firm and the acquired firm, the misalignment of value tends to come from the timing involved in the process and the process itself. Consider that on the sell side of an acquisition, it is usually the entrepreneur or a few of the senior team that decides when it's time to sell. That decision is usually based on an emotional decision like retirement or an imperative decision such as liquidity needs. It may not be the best time to sell the company both in the market and with the evolution of the company itself. Remember that if the company is in a high growth period, that is usually a good time to sell, but usually, the company is sold when the product has matured. That's better for the buyer but not necessarily better for the seller.
Alternatively, buyers tend to develop a strategic merger and acquisition process because they must continually increase their portfolio of companies and their revenue to stay in the market and keep share prices high. Because of the target company identification process, it may not be the best time to buy a particular company and the process may be rushed if they feel a bidding war is coming along or if the market is changing adversely to their position.
What does this mean for both the buyers and sellers in the mergers and acquisitions process? This means that the timing of an acquisition or sale should be given more weight in the strategic process that both sides develop. Rarely does the strategic plan give weight to the business cycle of the acquiring or acquired firm and is done as usually once a target firm is identified from the acquisition side, it is put into a project management plan that leads to closing the deal. if during the process, the right time to purchase this company was put into consideration process, it might lead to better expectations of value.
This is also true for anyone trying to sell their company. If all sellers looked at the entire lifecycle of their companies, and then shows the best time to sell for them, that might increase their value expectations as well.
Through all this, the best approach is to have a good advisor that can look at the process objectively outside of the expectations of the shareholders and senior management and define a timing scenario that can help both the buyer and seller.
Donald H Noble is a Partner at the Florida CFO Group specializing in Mergers and Acquisitions, a Professor of Corporate Finance, and a Doctoral Candidate at Saint Leo University studying Mergers and Acquisitions. Don frequently guest lectures at The Institute for Mergers, Acquisitions, and Alliances (IMAA), The Funding Strategies Panel, and other teaching opportunities.
Lovallo, Dan, and Daniel Kahneman. 2003. “Delusions of Success.” Harvard Business Review 81 (7): 56–63.
Mundra, Ankesh R. 2016. “Impact of Mergers on Shareholder’s Value Creation.” Doctoral dissertation, India: Devi Ahilya Vishwavidyalaya. https://www.proquest.com/docview/2314083592/citation/B06D94B9454240F6PQ/9.
Secher, Peter Zink, and Ian Horley. 2018. The M&A Formula: Proven Tactics and Tools to Accelerate Your Business Growth. Chichester, UK: John Wiley & Sons Ltd.
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. Unless you’re a child prodigy, you probably weren’t a manager the last time inflation was this high—in 1982; it was 6.16%, last month it was 9.06%, today it is 8.52%.
Inflation consumes cash, eats margins, and lulls managers into a false sense of security as inflated revenues rise A company’s situation can erode very quickly, leading to takeover or bankruptcy. Business owners & CEOs who are fast to react and flexible in their approach can not only survive but prosper in this challenging environment as they seize opportunities afforded by less nimble and smart competitors. Those who react slowly or choose the wrong strategy and tactics will be weakened and may even go bankrupt.
Here are a few critical action items that Business owners & CEOs should focus on to review and manage their businesses through inflationary times:
Communication - The Business owner & CEO, CFO, and CHRO must be very public in the business and constantly share their insights and reasons for many of your decisions.
You are changing the way your business works, and you are asking your employees to follow you on this journey. To avoid confusion, be transparent by explaining the critical business objectives.
Cash Flow - During inflationary times cash is king. Finance should set up a dashboard that reports the KPIs that most affect cash flow and update it daily. The essential meetings in every organization should review the dashboard and take corrective action as soon as a deviation from the plan is spotted. Differentiate between strategic and nonstrategic spending.
Working Capital - Set goals for working capital and cash. Do not let inventory and receivables grow or even remain where they are today. Squeeze out every bit of money.
Continuity of the Business - Invest only in activities that ensure the company stays solvent and beats the competition.
Revenue - Grow real volume, real revenue, not inflationary revenue. Master and manage the balance sheet.
Fix your bottlenecks - They may be in production, the supply chain, the hiring process, or the ship to cash cycle. As inflation grows, any waste or friction will become more expensive.
Costs - Now is the time for cost reduction, consistent with the critical business goals. Reassess your spending habits. If inflation is making it difficult to stay within budget, take a moment to reassess your cash flow and where it is going.
Human Resources - if “cash is king,” the employees are “the queen.” They need and deserve the attention of the senior staff. And the CHRO will be under as much stress as the Business owner, CEO, and the CFO.
Compensation plans need to be changed to reflect what is happening in the company, competition, and its immediate business environment. Maximize loyalty and reward programs. HR must ensure fairness and explain the changes so that everyone can understand and accept them.
Automate - In addition to labor cost savings, automation can promote stability in an organization. Technologies like robotic process automation (RPA), workflow, and intelligent document processing can free up workers and make each person much more effective at creating value.
In conclusion, By playing both offense and defense, you have strengthened your company, making it more effective and efficient and have position your company to outpace lea-proactive competitors long after the volatility ends.
No one wants to hear this, but soaring prices on food, gas, and entertainment may be around for a while longer, likely another year or so. That is primarily due to the Federal Reserve's plans to raise rates a couple more times through the remainder of this year. If they see demand as still being high enough to call for a couple more rate hikes, then there is certainly potential that inflation could continue to creep up a bit more from here.
So, what can you do? Keep breathing and do your best to budget accordingly. Things will settle down eventually, though we may just have to get used to higher prices.