As the economic outlook continues to improve, acquiring another business to boost expansion is becoming an increasingly attractive option.However, research shows that a significant proportion of mergers and acquisitions (M&A) fail to deliver on anticipated benefits. For example, KPMG’s most recent analysis showed that nearly 70 per cent of deals did not produce a positive impact. These figures suggest there is something seriously wrong in the management of the M&A process and my own experience suggests the problem lies in a narrow financial view of business strategy. The value of a company’s intangible assets invariably far outweighs the value of its tangible assets. A brief look at a subset of the wide range of intangible assets demonstrates the point: Copyrights, customer lists, customer relationships, brand names, patents, trademarks, computer programmes, product formulae, research, new product development, reputation – these are all key elements of an organisation’s value. They derive from a single source: the organisation’s human capital. Due diligence is supposed to uncover the truth about the strengths and weaknesses of companies but it rarely does. Advisors and intermediaries are assigned to carry this out but they often don’t understand what they should be looking for. They aren’t – and usually never have been – operational managers, so the critical dependencies within a business operation can elude them completely. The target organisation’s human capital is rarely, if ever, given proper consideration. In a recent substantial acquisition in which I was involved, due diligence (undue diligence might be a better description) failed to ask the fundamental question: Are there any major incompatibilities between the two companies? There were, in fact, many red flags:
- The acquiring company was perceived by all staff (except the directors) of the ‘target’ as an unwanted predator;
- Staff at the target were blissfully unaware that, without a massive cash injection, their employer was about to hit the rocks;
- The acquiring company had always taken steps to ensure acquisitions were fully integrated with a common culture and universal values, whereas the target might best be described as a loose affiliation of disparate organisations – each with their own culture and values, with no real attempt at integration; and
- Staff in the target company were imbued with a Public Sector ‘Not For Profit’ ethos, which was totally at odds with the culture of the acquiring company.
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