Wednesday 28 September 2016

How to do a successful merger: the inside story

John Bowe

Published 21/06/2015 | 02:30

John Bowe of Mazars
John Bowe of Mazars

Mergers are difficult and history is littered with examples, across various sectors, of mergers that haven't worked. In fact, some research suggests that over 70pc of mergers have not delivered a positive return for shareholders.

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Some examples of high-profile mergers that have gone wrong include:

• AOL merger with Time Warner, creating a $350bn company signalling the peak of the dot.com bubble which burst only months later

• RBS acquisition of ABN Amro which signalled the end of Fred 'the Shred' Goodwin's leadership of RBS and contributed to the nationalisation of RBS, and

• Nokia and Siemens which created a telecom giant that spent most of its time post-merger trying to break up before the ink was dry on the original deal.

While these are high profile, they highlight that mergers are hard work and entrepreneurs and SMEs who have built their business from the bottom up and are now looking to merge, need to identify the right fit for their business.

Assess your financial position

First, is your balance sheet strong enough from a liquidity perspective to merge with a business or should you take on debt or equity growth capital to fund a successful merger strategy rather than use existing cashflow?

Your cash/liquidity position rather than your profit and loss performance should be your key determinant.

Understand reasons for a merger

Secondly, having a clear understanding of why you want to merge and who are the right targets for you and your business is very important. Scale and growth are often the driving factors, but other reasons may include getting access to a new customer base, new markets, new product offerings, diversification and getting access to key talent.

Due diligence

Once a target is identified and financial, legal, technical and commercial due diligence is required. Third-party expertise will ensure the reasons for the merger stand up and the expected benefits, synergies and savings from the transactions can be tested.

Post-completion merger integration

Once two companies agree to engage in a merger and have agreed commercial terms, the merger integration process is really only beginning. Its success will depend on whether the merger will deliver a return for shareholders and deliver on the goals and synergies identified in the original case for the merger.

The merger integration process is often a difficult process for both business owners and employees and it is, therefore, important to ensure adequate planning is undertaken from the outset to give the merger the best chance of being successful.

Other considerations to help ensure a successful merger integration process include:

• It is helpful to have a team or a person in charge of the process with responsibility for ensuring a smooth transition. Ideally, it should include people from both organisations

• Different companies have different ways of doing things and preparing employees for a changing culture is very beneficial throughout the process. Ensuring that there is good, ongoing communication with employees throughout the integration process will help

• Set common and achievable goals for the integration to keep everyone informed and up to date on progress. In many cases, the synergies outlined in the original business case for the merger are often high level for executive decision-making but may not be clearly defined at a practical level

• Define new roles, clearly articulating new roles and the new organisational structure of the merged company. A lack of communication around roles and responsibilities can cause anxiety and distrust among employees

• During an integration process, customer service levels can't slide. Competitors may try to use this opportunity as a chance to engage with your customers if you are too distracted

• Be ready to adjust and be flexible - after all, nothing ever goes exactly to plan

• Ongoing communication is very important at every stage in the process. Having an executive team and employees that are fully bought into the integration plan will give you a better chance of achieving a successful merger.

Companies back in growth may be considering a merger - but it's hard work. Ensuring you have access to financial resources is important. Once a target is identified, carry out due diligence to ensure the business case stands up under stress. Having a have a well thought out post-merger integration plan, clearly communicated to management, will go a long way in completing a successful merger.

John Bowe is managing director of Mazars Corporate Finance, Email: JBowe@mazars.ie

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