Best practices of conducting M&A
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Companies around the world routinely struggle to realize value from transactions. However, by identifying and implementing leading practices, M&A executives can improve the likelihood of achieving deal success. KPMG LLP recently concluded a study of leading in-house M&A practices that captured feedback from 221 global organizations, including companies from the Fortune 500, FTSE 350 and the global private sector.
1) Impart Structure To The Deal Process
Leading M&A departments tend to implement distinct deal hurdles through two main methods: the use of sequential committees, where proposals are approved before additional resources are committed, and the implementation of a more thorough transaction documentation process. Nearly 75% of survey participants said that incorporating additional structure increases the effectiveness of an M&A team.
2) Leverage Resources
Respondents indicated that nearly twice as many non-M&A staff people work on deals as “core” M&A staff. An average of four M&A employees work on larger deals, with an additional eight from other business units. Companies said that leveraging resources and sharing responsibilities among internal channels increases the chance of success.
3) Rotate Staff Between Departments
The survey data revealed that M&A groups that rotate staff between business units are more likely to achieve deal success than those that don’t promote such rotations. Having deal advocates trained in M&A processes within business units appears to help filter out poor-quality deals.
4) Source Deals From Outside And Inside
According to the study, 75% of transaction opportunities originate from outside the corporate development group; business units account for 28% of sourcing activity, followed by the parent company, with 26%. Fewer than 20% of deals originate from law firms, investment banks and other external entities.
5) Synergies Matter
Companies that use their corporate development groups to help quantify synergies and integration costs stand a greater chance of achieving those objectives than those relying solely on the expectations of their business units. It is incumbent upon the corporate development team to perform their own check of the numbers to ensure validity. While conflicts of interest at business units may occasionally play a role, interviews with executives cite lack of training and perspective in the business unit as the key reason to leverage M&A staff in this task.
6) Train, Equip and Track
M&A executives need to know how deal activity is being monitored, whether expenditures are on target, whether synergies are being realized and whether operating metrics are being reached. Only 11% of survey respondents have a formal system to track deal flow, and few participants track expected synergies or costs on a majority of dealsmany that do track such metrics do so infrequently. Furthermore, most executives cited lack of training and tools as a primary impediment to improved efficiency.
7) Utilize Advisors
Respondents indicated several benefits to using external advisors during the deal process. Of the companies that hire due diligence consultants, 95% do so primarily to gain independent validation of key transaction assumptions, such as market drivers, competitive positioning or accounting analysis. Furthermore, while companies spend, on average, approximately $11 million per year on external advisors, roughly 80% of the expense comes from three types of advisors: investment bankers, consultants and lawyers.
8) Separate Due Diligence Activities
Many survey participants found significant value in creating separate investigations and workstreams for assessment of the target company, the market and the integration itself. Making these efforts distinct improves focus and makes the due diligence process replicable, which participants almost unanimously believed improves the likelihood of success.
9) Seek Independent Review Of Findings
Whether via internal committees or third-party advisers, companies should always validate key deal assumptions and diligence findings. Fully independent checks help ensure that deal staff have not overlooked key issues or made excessively aggressive assumptions, particularly since they may be unduly vested in the outcome. Executives say this vetting process is important no matter how experienced the deal leader is.
In brief, as companies and their M&A departments consider their M&A strategy for 2005 and beyond, they should assess whether they have the right organizational and process practices in place to help ensure deal success. Companies that support and execute leading practices, such as those described above, statistically fare better than companies that do not incorporate such practices.
Hello Aly:
This is really helpful information! I see the benefit of all nine points, especially point number nine. With such an expensive (and risky) business strategy, those that wish to pursue and M&A activity should definitely seek a so-called second opinion. I would liken this to a major surgery or similar situation that could impact an individual’s health and well being.
Thank you for sharing this information!
~Pamala
As far as the utilization of advisors I would say it depends. If you are conducting M&A activities within your industry and you have a legitimate M&A department advisors can be a waste of money. We did a large deal this year and the board felt that the size dictated the need for 3rd party help. All that did was slow down the process. 1st we had to get the advisors up to speed, and even then they could not keep up. Waste of $. Make sure you understand your needs and what the advisor can deliver.
7) Utilize Advisors
Respondents indicated several benefits to using external advisors during the deal process. Of the companies that hire due diligence consultants, 95% do so primarily to gain independent validation of key transaction assumptions, such as market drivers, competitive positioning or accounting analysis. Furthermore, while companies spend, on average, approximately $11 million per year on external advisors, roughly 80% of the expense comes from three types of advisors: investment bankers, consultants and lawyers.
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