Mergers and Acquisitions ‘R Us…Maybe!


As our regular readers know, my goal each month is to demystify that which may be confusing, provide additional knowledge in a given area, and at best provoke conversations within the digital signage community. I love to receive topic suggestions so please send them my way! Kudos to Ryan Cahoy, the head honcho at Rise Displays and the Vice Chairman of the DSF for this month’s topic.

Most will instantly recognize the term mergers and acquisitions (M&A) and their presence in our industry… but what do you really know (not just know of) beneath the surface? We will cover a basic definition of M&A, the upfront work required, potential benefits, and challenges to doing it “right”, as well as the potential downsides, and finally, how to avoid them. However, at the outset I want you to be aware of a startling fact. According to a Harvard Business report (and supported by several other studies) 60% to 90% of mergers and acquisitions fail to meet the majority of their objectives. With that noted, M&A can be a huge success… but it involves a lot of work (upfront, during, and after the fact) and an avoidance of drinking the Kool-Aid at any stage. With this stark reality on the downside and hopeful outcome on the upside let’s get started!

In short (non-MBA terms) mergers and acquisitions are business transactions in which one business consolidates with another, known as a merger, or one business takes over another, known as an acquisition. In business, people often refer to the entire process as M&A, even though the two words technically have different meanings. Mergers and/or acquisitions can generate significant profits for the companies involved, as well as the investment banking industry, which is often involved in the M&A legal process. This is the hopeful outcome… but there is a long and circuitous path to the finish line.

File the following under mandatory upfront work. Think about this as painting a house, where 80%+ of the effort is the prep work, and if done properly step by step it helps ensure a positive outcome. Words to the wise! This prep work is where most companies fall short when considering M&A.

Experts speak about “pre-deal” considerations. Under this banner is conducting thorough market research (again really know not just know of) to identify trends, potential opportunities, and strategic fits for M&A. Then identify potential targets that align with their strategic goals, such as expanding market reach or acquiring new technologies. Finally assessing financial feasibility and the financial viability of potential targets, considering factors like revenue, profitability, debt, and synergies that can be achieved through the merger or acquisition.

Now comes the due diligence phase. It begins by closely examining the legal, financial, and operational aspects of all parties involved to gain a comprehensive understanding of each company’s strengths, weaknesses, risks, and potential synergies. Once that is done, it is time to analyze risks and liabilities associated with the target company, such as legal disputes, environmental issues, or regulatory compliance concerns to name a few.

Now for the second weakest link in the chain, that many either overlook or have given short shrift. It is evaluating cultural compatibility of organizational cultures, management styles, and employee dynamics to ensure a smooth integration post-transaction.

As a company is going through either a merger or an acquisition, there are a few factors (top level and trickle down) to focus on that will determine the overall success of the endeavor.

  • Strong leadership and strategic vision: Strong leadership is essential for successful mergers and acquisitions, involving guidance, informed decision making, and alignment of integration with a strategic vision.
  • Effective communication and transparency is crucial throughout the M&A process. Keeping all stakeholders, including employees, shareholders, and customers, well-informed helps manage expectations, reduces uncertainty, and fosters trust.
  • Identifying and addressing cultural differences: Cultural differences between merging entities can impact the success of the integration. Companies should proactively address cultural challenges, foster collaboration, and create a shared organizational culture that promotes unity, shared values, and a cohesive working environment.
  • Implementing change management strategies: M&A often brings significant changes to organizations, including changes in processes, systems, and personnel. Effective change management strategies should be implemented to mitigate resistance, ensure smooth transitions, and support employees in adapting to new roles, structures, and ways of working.
  • Monitoring and evaluating the integration progress: Continuous monitoring and evaluation of the integration progress are essential for success. Regular assessment of milestones, key performance indicators (KPIs), and integration goals allows companies to identify potential issues, address challenges, and make necessary adjustments to stay on track and ensure the desired outcomes are achieved.
  • Flexibility and adaptability: Be prepared to adjust strategies and plans as necessary, considering unforeseen circumstances or market dynamics during the integration process.

By adopting these strategies, companies can navigate the challenges of M&A more effectively and increase the likelihood of successful integration and value creation.

Rationale and Benefits of Combining Forces

The following is a starting point checklist of the rationales for M&A. This is actually the thought process before moving forward… again, be realistic and don’t drink the Kool-Aid (yours OR theirs).

  • Overall Synergy:
    • By merging resources, expertise, and capabilities, companies can achieve synergies that lead to improved efficiency, cost savings, increased market share, and enhanced competitive advantage.
  • Market Expansion:
    • M&A allows companies to access new markets, customers, and distribution channels, expanding their reach and capitalizing on growth opportunities.
  • Talent Acquisition:
    • Mergers and acquisitions provide an opportunity to attract and retain more diverse top talent from both organizations and offer expanded career opportunities.
  • Enhanced Innovation:
    • M&A enables technological capabilities, and intellectual property, fostering collaboration and accelerating the pace of innovation.
  • Geographic Expansion:
    • This facilitates the acquiring company’s expansion into new regions establishing a presence in new markets and diversifying revenue streams.
  • Financial Synergy:
    • M&A can result in financial synergy by pooling resources, optimizing capital structure, and improving financial performance.
  • Brand Enhancement:
    • Allows you to capitalize on the reputation and brand equity of both organizations, enhancing market position, increasing customer loyalty, and gaining a competitive edge.
  • Streamlined Operations:
    • M&A enables companies to streamline operations by eliminating redundancies, consolidating functions, and improving efficiency, leading to cost savings, improved processes, and a more agile organization.
  • Competitive Edge in the Market
    • In most cases, bigger companies are harder to compete against.
  • Diversification of Risk through Portfolio Divergence
    • Mergers and acquisitions allow companies to spread risk across different revenue streams by the diversification of the products, services, and prospects for the business.

Why transactions fail… starting at the very top

The first caveat affects everything and may be uncomfortable to hear. Experts note that the cause of many business missteps and failures is hubris. Yes hubris! James Hollis, author of What Matters Most writes that, “hubris, or the fantasy that we know enough to know enough, seduces us toward choices that lead to unintended consequences.” Many corporate executives and fund managers, particularly those who have been successful, are under the mistaken impression that they are too smart to fail, that they are more insightful than what the team, data, and advisors are telling them; that because they feel it, it must be so. As a result, the overconfidence in themselves and their optimism around the investment ignores the need for (and often unheard pleas for) early integration planning and resourcing, leaves key team members out in the cold (which leads to poor morale, lack of support for the transaction, and unwanted departures), and leaves everyone, unprepared for post-close, without the necessary foundation for integration and success. Truth be told, at times we all suffer from some degree of hubris… but by recognizing it and avoiding the pitfalls we can negate the negative impact.

Common Reasons Why Mergers and Acquisitions Fail

  1. At the very top is insufficient due diligence. The importance of due diligence can never be emphasized enough, partly because so many firms are evidently eager to get it over with as soon as possible. Even due diligence doesn’t guarantee that you’ll fully understand the target company… and there are plenty of cases where even a lengthy period of due diligence doesn’t let you understand what really makes a company tick.
  2. Overpaying is probably the most common reason for the failure of transactions. It’s important for buyers to set a limit before negotiations start and stick to it to minimize the chances of overpaying.
  3. Lack of a strategic plan is next. As one expert notes, “A good ‘why’ is an essential component of all successful M&A transactions. That is, without a good motive for a transaction, it’s doomed to failure from the outset. A good rule of thumb here is that the less simply the motive for the transaction can be explained, the more likely it is to be a failure.”
  4. Overestimating synergies go hand-in-hand with overpaying in a transaction. Combining companies (business and culture) is far more difficult to achieve in practice than most managers are willing to admit. Practitioners of M&A would be well advised to look at potential synergies from a transaction through a highly conservative lens.
  5. Going hand in hand with synergies is the lack of cultural fit or inability to acknowledge cultural differences. It’s vital that any two companies engaging in a transaction use a change manager to oversee the process.
  6. Next in the list of caveats is understanding the resources (both financial and human) needed to remain healthy after the M&A. Target companies that are small in size relative to the acquiring company – are usually considered to be the best type of transactions. One of the main thoughts behind this is that they don’t require as many resources to be acquired or to be integrated. As Harvard Business points out that “Loading up on debt to acquire any firm creates pressure from day one to cut costs – never a good start for a deal, and often the beginning of the end.”
  7. Lack of management involvement is the most obvious reason for failure and left for last. Management involvement often incorporates many of the other reasons on this list. No stage of the M&A process will manage itself, be it the search for a suitable target firm to the integration of the two firms into the newly formed entity. When managers deem other tasks in their company to be more important than the successful implementation of M&A, they shouldn’t be surprised when their deal has eventually deemed a failure.

The number of transactions that fail every year, even among experienced practitioners, is a testament to the difficulty of getting everything absolutely right in M&A. There are no guarantees. The list we just outlined serves as a warning to managers that things can go wrong, even after they have seemingly taken all the right precautionary steps.

Don’t be one of the 60% to 90%

Let’s say you have your eye on an acquisition, you’ve checked yourself for hubris and desperation under pressure, and you believe the requirements for success are there. Since everyone starts out thinking they will succeed, how do you not become one of the 60-90% who, nonetheless, fail? Let’s listen to the right voices and make the right choices by going to experts in M&A to hear what they have to say:

  • “Fight against bias. We look at a deal. We have created a mental investment, a bias, that precludes us from seeing clearly. Our brains were designed to be biased. Judgments rely on our past experiences, which, in turn, shape our perspectives. They help us figure out what is safe versus where to be cautious and unknown. So, bias always plays a role in decisions. But science has shown that our brains don’t work well when conditions for bias exist. Nowhere is the condition for bias stronger than in risk-reward situations under stress. To fight against bias, be curious, be willing to re-evaluate as new data comes in; listen, listen, listen. Do not be so invested that you aren’t willing to pull the plug.”
  • “Broaden diligence and plan early. The best advice is to hire good advisors so that the people evaluating the deal aren’t you, don’t report to you, and don’t have a stake in the outcome. Don’t be pennywise and pound-foolish. Focus on not just the financials but the market, the customers, the products/services, the systems, the foundation of the entities, and, most of all, the people. If any of the information coming back about the combination, at any time, smells funny or feels off, do not ignore that feeling. And, if the diligence appears positive, begin planning immediately. To begin with, it will always take longer than expected. But, as importantly, the process of pre-planning is a form of diligence in and of itself. It is one thing to say, “Put these two things together.” It is another thing entirely to plan out the how of putting them together. In that process, it will either start to appear workable or it will start to feel like squeezing a square peg into a round hole. Synergies aren’t created without an early plan, a talented integration team, clear priorities and communication, and outstanding project management.”
  • “Formalize the integration strategy and priorities. It is critical that (a) an integration team be appointed, (b) a comprehensive integration map and checklist be developed and planned for during the deal process, and (c) once the transaction closes, outstanding project management to integrate the newly married entities. The integration team needs vision, leadership, and a clear hierarchy of what is most important.”
  • “Clarify leadership and resources. Of the many transactions that fail, the most frequent roadblocks involves people. The two sets of leaders have to decide early on who is going to be part of the integration team, who will lead what (remember, there are two sets of leaders at the start who both have a vested interest in the outcome), who will stay and who will go (if there is to be consolidation), who will be privy to the planning (are you in the club and motivated or out of the club and demoralized), and who will make the tough calls when they arise. This is particularly challenging since (a) most people are conflict averse and (b) early in the process no one wants to give anything away lest it doesn’t work out. Yet, the paradox is this: If control is not taken and ceded, if trust is not created and relied on, the transaction that everyone wants to work stands a far greater likelihood of failing.”
  • “Right behind leadership issues in terms of why transactions fail comes communication lapses. Key people internally need to be in the loop and once the hard work of selecting those people is done….and no secrets. The key leaders can then work out a communication strategy for the market, for customers, for vendors, for employees. The human brain abhors a vacuum. Absent information, people make things up to fill the vacuum and it is almost worse than the worst of the truth. There is a fear that communication will make it impossible to retain customers, staff, etc. In fact, the reverse is true. Of course, there is a time and place for all communication. But it is almost always earlier than your instincts advise you.”
  • Begin at the end and be ready to go. To borrow wisdom from Stephen Covey: “To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.” In any implementation, success depends on good people, correcting and prioritizing tasks, and speed. Implementing immediately post-close to prevent or solve any integration plan gaps as quickly as possible. The leadership team and integration team must be prepared to act quickly, and pivot as needed, which may include making difficult decisions regarding people and systems.

Suffice it to say, there is no guarantee that any transaction will ultimately be successful. What we do know are the majority of the variables that need to be understood and addressed. We know you need to put bias and hubris on the shelf and look at things aspirationally but also analytically and logically. Aspiration provides the emotion and energy, and analytics is the data or fuel that makes M&A work or not. As noted above, the process is step by step, and skipping any step means putting the project at risk. Strategic thinking and developing a strong plan with input from key members is essential. All the upfront work will provide a foundation for the successful integration of two companies and, if implemented properly, can provide a stronger likelihood of success limiting the possibility of becoming one of the large majority of M&A deals that aren’t successful. The call to action from this article is to consider the mergers and acquisitions in the digital signage and AV industries that you are familiar with. Suffice it to say some have worked well but, sad to say, many have not. Success or failure and meeting objectives can be traced back to how completely the topics we outlined were addressed and the advice that M&A experts have provided.