Despite five deals announced in February worth $91 billion, Q1 2013 was not a booming quarter for M&A activity. Though deal value was around 10 percent higher than Q1 2012, it was still 26 percent lower than Q1 2011. Deal volume was also down, with a mere 8,115 deals announced worldwide – the lowest since 2003.
These results are somewhat surprising, given the predictions that were made by bankers and lawyers about a nascent revival in mergers in 2013.
In March, 97 percent of deal makers surveyed by the public relations firm Brunswick Group said they expected more deals to be announced in North America this year than last.
But if Q1’s results are anything to go by, it seems that there is still some trepidation on behalf of dealmakers to make big deals.
However, Q1’s lackluster performance is not necessarily a bad thing for the M&A market.
Dealmakers are being cautious; not rushing into deals that may result in careless due diligence oversights and costly post-closing issues. It’s hard to forget the infamous AOL/ Time Warner disaster of 2000, when a rushed due diligence process (reportedly done over a weekend), resulted in the largest annual loss ever reported by a company.
Perhaps a slower deal environment signifies a more cautious approach to the due diligence process, and a deeper consideration of intangible deal variables, like cultural integration. In a recent Firmex podcast, Andrew Sherman, a Partner at Jones Day, cited culture as one the greatest barriers to effective post-closing integration.
“Most studies have shown that for all the deals that do not integrate as effectively as they should, among the top three issues are culture, information systems, and compensations & reward systems not integrating,” he said.
In certain industries, culture will play a more integral role to the success of a deal than others. Consider the technology sector as an example. Employees are the biggest and most important assets in a technology company. If employee satisfaction cannot be maintained after the acquisition, then the combined company risks losing talented employees. The buyer should thoroughly assess the target acquisition’s existing culture and make key employee retention a core focus in the planning and execution of the deal.
Sherman also suggests buyers’ compare and contrast how people are motivated, incentivized and rewarded, because as two companies merge, this will play an important role. In some cases the challenge becomes upholding the norms and values that employees have grown accustomed to.
Last year Firmex CEO, Joel Lessem, attended a M&A Leadership Council workshop on post-merger integration. In a follow up article, he referenced some great anecdotes that were shared, including one about an acquired software company which had an ongoing tradition of “monthly movie night.” The tradition was hugely popular among the employees, but it was one of the first things cancelled by the acquirer to improve net income. Employees were outraged, and started leaving the company soon after, which far outweighed the cost savings from cancelling the event.
“The true assets of a business are not the cash it generates, but the people who make this happen. Greater attention needs to be given to who the key people are (not just the executives) and why they like working there. Ensure you foster what is important to them,” explained Mr. Lessem.
Cultural integration is a difficult, complex and sensitive process; there is no rigid one-size-fits-all recipe for success. Cultural due diligence is intangible; it can’t be examined through data or on paper. “It’s something you have to go and feel and touch and experience,” explains Sherman; something that often fails to occur.
Ultimately, the acquirer must evaluate the cultural differences between the two companies, and find ways to bridge the gaps. But as we’ve seen from past examples, like the failed $36 billion Sprint/Nexen deal, this can’t always be done. Chak Reddy, M&A Advisor for Elite Mergers and Acquisitions, suggests that if the cultural gaps are too substantial, then it may be in everyone’s best interests to terminate the deal and find a more suitable partner.
“Post-closing issues can develop quickly if the culture of the acquired company is substantially different from that of the acquiring company. Cultural clashes will reduce the productivity of the combined company, which may lead to delayed product/service executions, increased costs, loss of key employees and high turnover,” he said.
So, perhaps a slow Q1 is a good sign for M&A, especially if it means a more cautious approach to the due diligence process, and a deeper consideration of the intangibles, like post-closing cultural integration.