After several years in the doldrums, mergers and acquisitions (M&A) activity has burst into life. Michael Dell’s possible $24B buyout of the personal computer maker he founded and a $23B bid by John Malone's Liberty Group for Virgin Media in the UK both indicate that liquidity has returned to the markets and fears around the state of the global economy are abating. But as activity and confidence return, now might be a good time to rethink how the acquisition process can be improved.
M&A activity of any scale often attracts a certain amount of controversy. At the heart of the debate is whether the deals add shareholder value in the long term and whether the merger objectives are ever fully met. For example, CIMA Global reported in 2010 that despite the popularity and strategic importance of mergers and acquisitions, several major consulting, advisory services firms and academics have reported that about 60 to 80 percent of all mergers are financial failures. Yet some mergers can be spectacularly successful, creating undeniable value. So what makes the difference between success and failure?
M&A activity requires clarity of vision and meticulous execution in equal measure. Successfully merging large businesses requires not only a great vision for the combined entities, but also a deep understanding of the financial impacts as well as integration issues around culture, talent management, business processes, and technology. The extent to which integration issues can be anticipated during the due diligence phase can have a profound impact on the degree and speed with which merger objectives are met.
Strategic financial planning at an early stage using advanced modeling capability and simulations allows management to review a range of options for combining acquired businesses and assessing their likely impact on, say, projected earnings, market share, cash flow, headcount, and organizational structure under each scenario. However, research shows that all too often there is an overwhelming tendency to focus pre-merger on financing the deal rather than some of the more prominent integration issues. Failure to plan (even at a high level) for the practicalities of bringing people, processes, and technology together along with the financial arrangements can lead to months or even years of strife. And with companies increasingly dependent on technology and process automation since the last M&A boom, planning for systems and process integration can be expected to play an even more pivotal role in the quality of outcomes.
With the current economy providing slender opportunities for growth, the ability to rapidly onboard a newly acquired business with a minimum of disruption and then quickly move on to the next acquisition can yield significant competitive advantage. But not all organizations are able to respond to market opportunities with such agility. So what gives a company the edge in a fiercely competitive M&A market?
According to Oracle Chairman Jeff Henley, business process excellence combined with Oracle’s strategic approach to M&A based on highly efficient IT, finance, and HR processes has allowed it to successfully acquire and integrate over 90 companies since 2005.
Oracle itself has gone through a massive business transformation, for example, from more than 65 instances of financial applications in 1998 to today’s position of one financial application instance, one data warehouse, and regional shared services centers to support global operations.
Oracle’s own experience showed compellingly that multiple ERP instances across business divisions together with fragmented and decentralized processes can make it difficult to integrate acquired companies. For example, inefficient financial close and reporting processes—coupled with inadequate accounting controls and fragmented planning and forecasting processes—all act as inhibitors to success.
Organizations that have focused on simplifying, centralizing, standardizing, and automating their key processes are well positioned to make strategic acquisitions. Take for example, shared services and centers of excellence, which are central to Oracle’s M&A success.
Shared services allow varied processes and practices (such as ‘quote to cash’ and ‘order to pay’ cycles) from across the organization to be standardized and excess staffing levels to be reduced. But they also provide the opportunity to re-engineer processes, eliminating tasks that do not add value. Often deployed on a regional basis and leveraging a common ERP system, process excellence in shared services allows businesses at the top of their game to pursue aggressive M&A activity, add market share, and quickly absorb new operations with a minimum of disruption.
Process excellence underpinned by knowhow and supported by centers of excellence can give a significant edge to the whole business. This can include areas such as human capital management, project management, quality assurance, regulatory compliance, business analysis, continuous process improvement, and enterprise performance management.
Finally, the cloud is becoming more widely appreciated by CFOs and others for its ability to more easily accommodate business change. The ability to bring cloud applications on board very quickly, to absorb a re-organization, an acquired business unit, or simply to test a new market venture, liberates businesses from the technical constraints of old and inflexible legacy systems.
With M&A activity gaining pace it will be the most agile companies that are able to execute most effectively on their merger strategy. Key to that success will be the simplification, automation, and standardization of processes, a commitment to deeper planning during the due-diligence phase, and leveraging leading-edge thinking in shared services and agile deployment methods such as the cloud.