In the first of a three-part look at mergers & acquisitions, we’ll look into some of the reasons for M&As, the due diligence required, and human resources implications. The subsequent blogs will deal with: intellectual property, strategic partners and regulatory approvals (Part II); and, financial and timing considerations (Part III).
One of the defining characteristics of the IT industry — after Moore’s Law — has been the mantra of ‘buy or be bought’. For example, since 2000 IBM has bought more than 100 companies, spending billions of dollars to buy software and service assets, including Informix Corporation ($1 billion), PWC Consulting ($3.5 billion), Cognos ($15 billion) and SoftLayer Technologies ($2 billion). HP, prior to splitting itself in half, shelled out $25 billion for Compaq, $4.5 billion for Mercury Interactive, $13.9 billion for Electronic Data Systems and $11 billion for Autonomy Corporation. The biggest IT M&A, Dell buying EMC, is still in the works, but it is expected to be worth in excess of $60 billion when completed later this year.
There have been some major miscues during this buying frenzy, including IBM/Rolm, AT&T/NCR, Burroughs/Sperry and HP/Autonomy, and while most of the $11 billion has since been written off, the rest is still winding its way through the courts. This shouldn’t come as a surprise, because ‘typically 70%–90% of acquisitions are abysmal failures.’
Despite this terrible track record, M&As will continue to play a significant role in the business landscape. The reasons for buying another company can be broken down into a handful of strategic objectives:
- acquire new customers, markets and capabilities, i.e. products/intellectual property and geographies;
- economies of scale for improved supply chain logistics and lower costs;
- eliminate competition.
No internal combination of strategies and tactics offers the same growth opportunities as an acquisition.
With more M&As failing than succeeding, doing your homework about all the critical aspects of the potential deal — AKA due diligence — is essential. Due Diligence starts with confirming all the facts related to the sale, including assets and liabilities, as well as current and potential strengths, weaknesses, opportunities and threats.
Due diligence can be done internally, or with a partner. Key elements include deep dives into:
- -business: products, market segments, competition and outlooks
- -operations: people, processes and facilities, including technology and data
- -financial: assets and liabilities, accounting and taxes
- -legal/regulatory: governance and compliance
Due Diligence considerations should also include:
- -bias: sellers will present the most positive picture of their company and its prospects, and buyers will tend to be just as optimistic about the benefits to be achieved with the acquisition, and how quickly they will be realized
- -incomplete, inaccurate and/or misleading financial information: even with the best of intentions and efforts, financial information may not be accurate
- -risks: what are the current and potential risks and liabilities involving products, processes and people?
Getting the people part of an M&A right is critical. ‘People and HR related topics contribute to more than 50% of the reasons why acquisitions fail.’ [http://hqasia.org/insights/hrs-role-ma-how-move-needle-part-two]
There are many aspects to people in the M&A process, including communication, retention and culture. Confusion and uncertainty can lead to culture clash, low morale, poor performance, the departure of key personnel — or key customers — and disruptive behaviors. Are positions being reduced, reporting structures revised and compensation changed? What are the career development prospects? Benefits?
Essentially, it can be condensed to two questions: are you supporting the workforce, and are they supporting the business during and after the acquisition? If you answer these questions correctly, you’ve gone a long way towards making this a successful M&A.
Most M&As are based on retention of essential — and elimination of redundant and/or no-longer essential — personnel. That means making sure that people considerations are included in all aspects of the process — before, during and after the acquisition — is crucial.
For the before (pre-acquisition) phase, the talent and culture need to be determined. During the M&A, the people and processes need to be integrated. And after, considerations include revised personnel and compensation guidelines and retention activities.
Due diligence and HR are critical components of a successful M&A. In Part II, we’ll take a look at the roles intellectual property, strategic partners and regulatory approvals can play in the process.