Mergers: The way to growth?

With inflation at a high, the cost of capital has now caused the deferral of many projects, or to make the cost of any investment more palatable, the restructuring of them. In addition, many senior leaders, having navigated COVID and the associated supply chain disruptions, have already invested in additional storage and now find interest rates sky rocketing.

In this environment many business owners (and baby boomers especially) are choosing to retire or find themselves needing to sell due to cash constraints, the interest rates, and difficult trading conditions. This, of course presents opportunities for growth-minded companies to acquire businesses and associated capital.

The challenge is how to do this well. It is one thing to write a cheque, it is another to acquire and integrate a high performing asset quickly to realise the merger benefits.

Unfortunately, I have seen many businesses do the former and struggle for years to achieve the benefit, if ever. In fact, only 6% of capital projects deliver target objectives in the first two months.

But the prospect of merging can be enticing; an established footprint, brand, proven capability, established supply lines, existing capital, complimentary capability and so on.

So, why do so few do this well? In my experience, it is a function of a number of things:

• The leaders of the purchasing business overestimate their understanding of the new business, and do not engage or retain adequate support.
• They do not create an integration team to manage all the aspects of the integration, and as they are inexperienced in mergers and integrations (it is not their core business) they do not know the pitfalls, heading blindly forward without a sherpa.
• If they do create a team, the brief is narrow, failing to consider all the elements of strategy, people, process and technology which would ensure a multi-dimensional integration. The result ensures the pain points keep coming up over time.
• Even when all the elements are considered, there is little thought given to the additional resource required, and so timelines become unachievable with existing burn-out of key people.
• There is no clear vision, measurable objectives, timeline, or ‘tone’ for the integration, viz. merging two companies (or more) is ultimately about people and culture and how it is done is often more important that what is done.
• There is no change management, and so the process of addressing issues as they arise is reactive and sub optimal. Ultimately good people are lost and the process is extended.
• Any initial due diligence is financially focused, and typically does not adequately cover the operational complexities of the existing businesses.

There are many more…

World class mergers are designed to achieve a vertical start-up. They identify, the true process potential of both organisations and consider a number of elements:

• What is the true capacity of both organisations without further capital spend to avoid overspending or unnecessary spending?
• What further capacity could be realised with what spend?
• What are the process bottlenecks?
• What are the network and supply chain opportunities? Can these be simplified to avoid future costs, optimise existing facilities, reduce logistics costs, in terms of last mile, inventory holding, and realising procurement opportunities?
• What is the critical internal knowledge and how is this captured?
• How to plan, manage and optimise the two entities?
• What is the structure and how can this be moved from the current to the future structures?
• Who are the steering team and guiding coalition to the new state?
• How will new people be trained into the merged entity when organisational knowledge is a critical intangible asset and typically missed as a vital element?
• How do we onboard, engage, motivate and inspire the acquired entity?

I have seen this done well in a range of businesses, especially in Japan and the USA utilising best practice models and a defined 100-day plan/vertical start-up approach. There are also some great examples, although fewer, in NZ.

The keys to success are:

• Engage a dedicated project manager who has been there before (you don’t want someone who didn’t make it to the top)
• Engage subject matter experts to provide;

-operational expertise

-supply chain capability

-change and transformation management

-knowledge management deploy

-and other specialist skills as needed

• Engage experts early to ensure there is enough time to implement the key opportunities. Yes, it will cost more up front, but all studies show it is significantly cheaper in the long run.
• Allocate your internal resources from both organisations to the project for a fixed timeframe and back-fill.
• Set challenging, but achievable and measurable goals, and create a war room with regular updates (a week is a long time during that first three months)

Over the last thirty years I have seen a number of acquisitions and subsequent ‘vertical start-ups.’ The worst are what I would call ‘horizontal start-ups’ failing withing the first couple of years, with business value destroyed. The best achieved the business objectives within a month or two and are now industry leaders.

Unfortunately, the best practice approach to mergers is also the most expensive up front, and in difficult business climates, hardest to justify versus traditional cost avoidance/reduction and corner cutting. The good news, however, is the cost of doing this well can be capitalised in many cases overcoming some of the hurdles.

It is time most business wanting growth and considering a merger takes the road less travelled…the road to world class.

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Ian Walsh

Partner, New Zealand