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Three Measures that Give You the True Picture of the Success of a Merger

The region is going through unprecedented consolidation. The sluggish state of the economies, low oil prices, lower private spending, declining consumer spending are all attributing to the pressure that corporates and businesses are starting to feel after years of dealing with them. Add to this, the advent of technology-based innovations and the fear of being disrupted is high on the minds of the CEOs of some of the largest corporates.

In such a situation, consolidation seems inevitable and this is what we are starting to see across. Everyone who has seen a glimpse of the future is looking for synergy. While we can list down the M&A deals that are in the pipeline now to just show the sheer increase in such talks over the years, what is more important at this juncture is to understand that in the traditional sense, most mergers and acquisitions fail.

If you were to try and look up statistics, they will range from 70% to 90% of the mergers since time immemorial have failed to meet the expectations of those tracking them. But is this really true? Do most mergers actually fail? And if yes, for whom do they fail – for the shareholders; the customers; or the employees?

Let us look at how everyone measures the success of a merger or an acquisition – the most commonly used parameters to measure success are as follows:

  • Increased profits or revenue

  • Reduced costs

  • Increased share price

  • Current and future cash generation post-merger

And the list can go on with more financial metrics, P&L breakdown, Cash flow breakdown, etc. Who do these measures serve? I am assuming it is the shareholders with increased shareholder value as their basic objective. However, to look at a merger or an acquisition in such a narrow sense is not only a disservice to the shareholders but also to the management and the combined organization.

Mergers are done for a particular purpose, sometimes the purpose is need not be so much about expansion but a more basic instinct – survival. Let’s look at the reasons why corporates merge or acquire a target:

  1. To expand the geographical footprint – enter new markets and get access to new target markets

  2. For vertical integration – a firm wants to diversify within the industry it operates in

  3. To meet customer demand – as a response to demand from customers to offer products or services in sectors it does not operate in or in locations it is not present in

  4. For survival – to join forces with another firm to mitigate a worsening financial position

  5. To eliminate competition – consolidation can make the combined entity significantly larger and difficult to compete with

As you can see, these are all strategic priorities that a corporate can have and it is the strategic goals and objectives of a corporate that should define the success of a merger or an acquisition. It needs to be looked at from the perspective of how much closer the M&A activity has brought the combined entity to meeting its strategic objectives.

The merger or acquisition itself if not a strategy, it is the means to implement a strategy. This is a very important distinction. The main drivers of a firm’s strategy are its customers and the DNA of the firm itself. Thus, the most important measure for evaluating the success of a merger is how the merger is helping both entities reach closer to their goals.

The second measure of success of a merger is how much the combined entity has changed from its parts. This is necessary since without change the combined entity will not meet the very objectives it merged for to being with.

The third measure is to see if the combined entity meets the demands of its existing customers and adds new customers who were not looking to deal with the individual entities, pre-merger. Doing a C-sat after reasonable time post-merger would be a good indicator of the success of the merger.

We at Falak can help you meet all your M&A requirements, from creating an investment strategy, to helping you expand, search for suitable targets, conduct due diligences, evaluate options, negotiate, manage change and facilitate post-merger/takeover integration.

We know the importance of managing people and processes during a merger or an acquisition and we can be valuable partners in managing this with you.

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