M&A Strategies in a Downturn

Timing is everything

Globally we are experiencing the worst economic down-turn since the 1940’s and it is now a real challenge for companies to identify growth opportunities in the current climate. Many companies are simply ‘battening down the hatches’ and seeking to cut costs where possible. That said, for those companies with healthy balance sheets and sound business models, the down-turn should in fact be an opportunity to strengthen market position and leadership. With company valuations currently at historic lows, any company with financial strength should now move forward to seek out so-called “sale price” acquisitions, to plug any strategic gap that might exist in their product lines, geographies or customer segments.

Lessons from the past for future success

An Accenture study of more than 800 US based companies during the 1990-91 US recession found that clear winners emerged in every industry following that recession and effective M&A was a key element of wining companies’ business strategy. But despite the “sale-price” of  target companies, any M&A strategy is still fraught with risk and can easily destroy shareholder value if done without detailed financial and operational due diligence or if execution capabilities are lacking. During a down-turn, the margin for error around M&A’s is even less than in growth times, however the potential prize is also significantly greater. There are five critical factors to the success of any merger or acquisition:

1. Do it for the right reason: While financial attractiveness is certainly a factor, successful M&A transactions are the ones that make clear long-term strategic sense for the business.
2. Identify discontinuities: Seek out situations whereby good companies are dragged down by overall market decline or where the decline in any company’s value drivers (such as revenue growth) should not be viewed as steeply as what market valuation suggests.
3. Focus on synergy potential: Historically most M&A’s fail to live up to the synergies promised to shareholders at their outset. During a downturn, a realistic view of potential synergy realisation and timing is critical as there is little margin for error in the timing of cash flow benefits.  Acquirers are now increasingly emphasising operational due diligence, independent from financial due diligence to better understand the synergy potential and timing of acquisitions.
4. Execute to realise synergy potential: Successful M&A transactions are as much about execution as they are about strategy. Below are four  steps to help companies integrate successfully:

• Mitigate merger integration risks: A formal and transparent risk analysis process should establish a clear 360 degree view of all risks, their interdependencies and how to mitigate them. This provides management, the board and regulators, greater insight and therefore greater confidence in the merger.
• Plan and implement a successful ‘Legal Day One’: Minimise the gap between regulatory approvals and the first day when the merging companies legally commence their integrated operations and carefully plan for a successful “Legal Day One” launch.. A “Day One” launch, with positive customer and employee experience creates on-going positive momentum for the tougher challenge of post merger integration.
• Manage through metrics: Put in place an agreed, standardised and transparent set of metrics and a common process to measure and evaluate how and when operational and financial targets are met, at all levels within the organisation.
• Manage change effectively: Clear, open and frequent communications, visible leadership and adequate prioritisation of change management are all critical to the success of any merger or acquisition.  Cultural integration is a key element in change management, not just for cross-border mergers but also for any companies with different organisational culture and ethos.

5. Keep customer focus:

Even at the best of times, customers do not view M&A’s as being in their interest. In a global Accenture study across five industry sectors, more than half of the consumers surveyed said they did not believe that they benefited in any way from mergers. During this current economic downturn, it is a real challenge to undertake a merger and remain focused on customer acquisition and retention, especially as competitors, often fighting for survival may take aggressive measures, including price cuts, to grow or defend market share. A pro-active strategy, to clearly communicate with customers during the integration process will be essential for success.

Conclusion

We know that well-executed acquisitions can create tremendous value for a company, and that the potential for value creation is even higher if targets can be acquired at rock-bottom prices. By capitalising on the buying opportunities in a downturn, high performance companies can out-perform competitions not just in the short term but also in the longer term when growth returns to the economy.

Anindya Roy leads Accenture’s Strategy Consulting practice in Ireland

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