As one might remember last time I have introduced some definitions and players in M&A world. I have also talked about the motives of the acquisition. As I have promised I continue now with some aspects of why M&A can fail and I mainly stress what key points one should keep in mind in order to have better chances of a success!

The reason for M&A to fail

Despite the fact that M&A is widely practiced, it has been found that between 60% and 80% of business combinations ended up as failures.
M&A often fail because of the failure of filling the transaction and transition gaps. Transaction gap relates to the fact that most mistakes are made before the deal is closed. Transition gap on the other hand relates to the fact that most mistakes are committed after the deal is closed.

The problems with transaction gap

The transaction gap can be addressed by better negotiation and carefully considered valuation.

• Negotiate the right price, and do not overpay
• Apply realistic parameters in valuation
• Use multiples within comparable ranges, (I will elaborate on this in the upcoming third and fourth part of this blog-theme)
• Ensure reasonable synergy expectations
• Go for friendly and not hostile acquisitions

As the investment guru Warren Buffet puts it: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The problems with transition gap

Business risk to the newly merged entity is particular high at the beginning of its life. The failure of managing it often results in widening the transition gap. Therefore post-merger integration is key to making the new entity a success. There are many reasons for the poor management of business risk and hence the transition gap. M&A can also fail because of problems within the two merged firms (e.g. poor external communications, systems disconnect etc.) and changes in the environment and context (e.g. technological change).

Post-merger integration is about taking the newly merged company from transaction through the transition, which leads to the eventual transformation,  in other words managing the change.

To do so, actions must be taken by the top management and integration teams.

Top management:

• Establish clear leadership and vision about where the organization is headed
• Remove the obstacles to the new vision
• Establish a sense of urgency for change
• Create a new identity and a set of core messages
• Communicate clearly to all stakeholders of the firm
• Make tough decisions
• Deal with resistance

Integration team:

• Create project plan and assign ownerships of different workstreams
• Ensure regular contacts with workstream and project leaders
• Attain quick-wins to maintain momentum
• Ensure clarity and frequency of communication with all stakeholders of the firm
• Implement the post-merger integration plan within the first 60 to 100 days
• Respond and amend the post-merger integration plan as situation develops
• Anticipate problems and risks of integration continuously
• Maintain “business as usual”

Next time I cover the valuation of firms by discounted cash flows and multiples, stay tuned!

To be continued…

As a student of Financial Engineering and having followed the summer course “Finance in London”  at ESCP London, I am fascinated by the mysterious world of M&A.

When two companies decide to combine forces in a merger, the papers are shouting about it. Why are companies in industries ranging from telecommunications to financial services to retail looking to merge?  What is meant by the term M&A, Mergers and Acquisitions? And is a successful M&A more of a fairy tale than reality?

Definitions
M&A is generic term that can be broken down and defined more technically.
We talk about merger if an agreement between equals is made to combine their operations. However consolidation would mean that a new firm is created after a merger, and both acquiring firm and target firm shareholders receive shares in this firm. The merger of Royal Haskoning and DHV is one of the many examples of the far reaching consolidation in the engineering sector.
Acquisition takes place when one company uses its capital resources (cash and/or shares) to purchase another in order to develop resources and competences. Think of the recent buy of Bol.com by Ahold, this would be a typical example of acquisition. If one firm acquires the assets of another, through a formal vote by shareholders of the firm being acquired, one would speak of purchase of assets. And finally when a firm is acquired by its own management or by a group of investors, we speak of a buyout. After such transaction, the acquired firm can cease to exist as a publicly traded firm and becomes a private business.

The players
The buyers of companies can be put in two groups, strategic and financial. As the name already suggests strategic buyers are corporations who want to acquire another company for strategic business reasons. Financial buyers however are buyers who want to acquire another company purely as a financial investment. Financial buyers are typically Leveraged Buyout Funds or other private equity funds.

Already have an idea who will pay more for a company? Nine times out of ten, a strategic buyer will pay more than a financial buyer.  Strategic buyers take into consideration that they can grow company’s cash flows by expanding into complementary markets, reducing overlapping costs etc. As a result, the strategic buyer incorporates in his valuation of the company the post-acquisition cash flows, which he hopes will be higher than are currently expected to be, thus ending up valuing company higher. Such buyer will typically assume faster revenue growth and reduction of certain costs because the acquiring company will be able to derive the strategic efficiencies from the acquired company.  In contrast to this, financial buyer will not pay attention to the possible synergies while valuing the company.

Identification of the potential target
To determine whether a company can be a suitable acquisition target, the acquirer will consider the strategic aspects from 5 different motives. They include firm specific, industry specific, strategic, financial or personal motives.

• Firm specific:
  • Achieving economies of scale (Removal of central functions such as HR, finance and IT)
  • Reducing transaction costs (Heidelberg and Hanson)
  • Attaining economies of scope (Citibank and traveler)
• Industry specific:
  • Managing industry rivalry  (Heineken and Gruppo Petropolis)
  • Increasing bargain power (car makers)
  • Building barriers to enter (IBM and proprietary technology firms)
  • Capturing last opportunities (Morrison and Safeway)
• Strategic capabilities:
  • Adding new resources (Geely and Volvo)
  • Increasing value of products (Virgin and NTL)
  • Entering new markets (DHV and Royal Haskoning)
  • Protecting product quality (Ryanair and Aer Lingus)
• Financial advantages:
  • Exercising corporate finance (Vodafone and Mannesmann)
  • Diversifying risk (Bowater)
  • Increasing debt capacity (Carlyle and Virgin Media)

And finally the last motive, not to be forgotten,

• Personal gains
  • Building empire (ITT under CEO Harold Geneen)
  • Obtaining better benefits

I invite you to look up yourself all the mentioned companies between the brackets to get an idea of what companies they are!
Next time I will talk about the reasons for M&A to fail.  The valuation of firms by discounted cash flows and multiples will be covered also in this blog theme, but that will be done in third and fourth part. Stay tuned!

To be continued!

I am a master student in Innovation and Entrepreneurship at Aalborg University (Denmark). Currently I’m doing my graduation project for VentureLab Twente, which is related to entrepreneurial teams and growth of new tech-ventures.

Lots of red posters on VLT walls with catchy phrases kept raising my curiosity, but the decision to join the event came few days before it took place. To be honest, it was a challenge for me to participate. Since I am still a student, I was wondering about my potential contribution at the event. I set several goals regarding my participation.

First I wanted to know what I am capable of. I believe that competitive environments are best suited to reveal our strengths and weaknesses. Second and foremost goal was to learn how ideas evolve into a viable and promising business models. I’ve studied a lot about business development and multifunctional teams etc., but it was about time to experience it in practice.  Apart from that I knew I would meet lots of professional, spirited, entrepreneurial people and extend my personal network.  Rigid time frames set for the development of ideas (54 hours of work) added some spice to the vent. So I joined. Now I am way closer to starting my own company.

Startup Weekend Enschede is a 54-hour event.  Developers, designers, marketers, product managers and startup enthusiasts come together to share ideas, form teams, build products, and launch startups. I enjoyed the company of about 60 attendees from technical and business backgrounds. We listened to impressive key-note speakers like Arthur van Hoff (CTO of Flipboard) and the winner of Startup Weekend Amsterdam, Henk Willem Beks (Goddess Alert).

The format of a startup weekend is to begin with open mic (microphone) pitches where attendees are encouraged to bring their best ideas and inspire others to join them as a team. Over Saturday and Sunday, the teams design and develop business models and first prototypes, listen to experts’ feedbacks and prepare 180-seconds final pitches.

After the first pitches, 8 ideas out of 26 survived the viability test and had teams formed around them.  I happened to become part of the MoRally team (online social impact game on sustainability). Our team was formed with difficulty.  The idea itself did not get a significant number of votes, and therefore also people to work on it.  Despite that, the idea owner –the aspiring entrepreneur- succeeded to attract me and another person to form a team.

The pitch of MoRally contained too many unnecessary details at first. This diverted the attention of the audience thus leaving them dumbfounded. They did not find the idea attractive and rushed away to join other, more explicitly presented ideas. Basically the only content I was able to grasp from the pitch was the term “CSR (Corporate Social Responsibility) game”. Entrepreneurs are so into their ideas that they forget that others are not! Easy language, less details and better structure is what makes other people comprehend the message! I have been involved earlier into a project on corporate social responsibility so I found the topic quite interesting, especially since it was to relate to gaming.

Compared to other teams I thought ours did not inspire great hopes. Other teams consisted of experienced professionals, and ours mainly of students and solely business people. But the game inventor was surprisingly motivated by strong belief in success. After the pitches were done, the teams turned to work. First we spent 5 hours to comprehend the idea behind SCR game, by playing several game sessions. It appeared quite difficult to identify roles within the team, because members having very similar professional backgrounds. For years I’ve been studying that multifunctionality in teams is paramount to success. And  knowing that we were not “multifunctional ‘’ enough raised some discomfort at first. Monofunctionality, however, was still to some advantage. We had lots of meaty  discussions, which added new details and enriched our business concept.

Over Saturday and Sunday all teams subscribed for several experts sessions. First sessions with experts did not boost our confidence at all, especially because their body language said „I understand nothing of what you’re saying”! Despite ups and downs our lead- entrepreneur was still convinced of the greatness of CSR game. Commitment and belief is what led our team throughout the whole process. We kept working on the business model!

One of the important points is to realize one’s own capabilities and drawbacks. Despite being the owner of an idea, but being not such an expert presenter, one must delegate that task to someone who is more professional in this area. Entrepreneurs guard their ideas as chickens protecting their eggs. Interfering and further shaping the Ideas becomes really challenging then.  But I think it is also quite understandable.

After 24 hours of work, our team realized that without technical team members it was not going to succeed. We needed someone to create the graphic mockup of the game. And here all my entrepreneurial spirit came to the fore. Thanks to Facebook and quite a large number of engineer friends I was able to lure some of them to join the project. All together we kept moving forward. It’s not to say that we were ready by 19:00 Sunday, but what’s done..done!

We were really astonished to win the 3d award in the competition. It was an incredible experience.  I’ve learned from this event as much as I would learn in one year of my ordinary life.

Some lessons that I learned:

• Plan a pitch very carefully and present the underlying idea as simply as possible!
• Don’t give up your idea, no matter what they say!
• Understand your capabilities and drawbacks within a team!
• Leave space for others to work on and shape the idea, you may get surprised by the results!
• Show your commitment, it motivates your team!
• Negative feedback from people is a valuable source of information to get the next one positive, so love it!
• No matter who you are- experienced professional or a student- everyone can make a difference!

Entrepreneurs often have to deal with new and ill-defined product concepts, whose context of use is still poorly understood and whose commercial applications are not fully explored yet. Relevant, up to date and rapid information on a broad range of strategic topics such as competitors, potential customers, potential marketing activities, regulatory information, vendors and procurement, and collaboration with other actors in the market is crucial. Consumers more and more use social media to share their opinions and knowledge with others online. Whatever is being discussed online is searchable. Hence, this opens up new opportunities for acquiring relevant information that could support venture development. This blogpost provides some pointers on how entrepreneurs can use social media as information retrieval tools for supporting venture development.

How to start the quest for relevant information?

Although acquiring online information seems easy, finding the relevant information is quite challenging considering the overload of available information. Therefore, it is crucial that entrepreneurs narrow their search scope and be as specific as possible in formulating their information needs. Entrepreneurs need to ask themselves: What kind of information do I need and would be the most valuable? What keywords are associated to my strategic topics? The identified keywords will be the entrepreneur’s guide in their quest for finding relevant content. These keywords facilitate finding platforms on which actors are located that could assist entrepreneurs with fulfilling their information needs. Examples of tools that accommodate finding the right platforms are the following:

-       Google Alert: This tool helps to track keywords and enables entrepreneurs to identify platforms around their keywords.

-       Hashtags.org: Hastags (e.g #socialmedia) are used to mark keywords or topics in a tweet. They are useful for locating relevant communities on Twitter. The site www.hashtags.org enables entrepreneurs to check if there are  hashtags used that are associated with the keywords in which they are interested. These hashtags than can be used to locate the people that use them. These people could be part of the community entrepreneurs want to listen and talk to.

-       Listorious.com: This site enables entrepreneurs to find anyone by topic, region or profession on twitter. In addition, it provides information on the top 140 lists on twitter; the top 140 most listed people and the 40 most followed people.

-       Search for communities directly: Big social networking platforms like Linkedin and Facebook have a search option that also enables entrepreneurs to find people and groups associated with their keywords.

-       Google groups: Of course there are also a lot of stand-alone forums and groups that do not use Linkedin and Facebook as their preferred community host. Google Group helps to find these communities.

Using social media content for venture development

After relevant platforms have been identified, they can be strategically used for fulfilling entrepreneurs’ information needs. For this conducting four behaviors are useful.

1. Observing: This behavior entails observing what people are saying online. This behavior enables entrepreneurs to learn more about consumers needs, wants, experiences, complaints, motives for using certain products and services. In addition, it is also helpful to learn more about competitors and trends.
2. Questioning: This behavior entails asking questions. For this question and answering platforms like Quora and LinkedAnswers are especially useful. These sites enable people to ask questions and others can answer and respond.
3. (Idea) Networking: This behavior involves discovering relevant individuals with whom entrepreneurs can connect and engage.
4. Experimenting: this behavior aims to test ideas regarding the venture idea with the general online public.  Examples of such behavior are posting mock-ups online and elicit comments or posting two variances of the products or service and ask the public which one they prefer.

Key Take Away:

Social media are useful for information retrieval purposes that can aid venture development. For this three steps are needed:

• Determine relevant keywords
• Identify relevant social media platforms
• Use these platforms to conduct the four behaviors observing, questioning (idea) networking and experimenting.