Target companies are identified as generally being under-performers, although in some cases, they are simply undervalued and present good value for money to an acquirer.

The belief of management and board directors of the acquiring organisation is that by changing control of the target company, strategies to improve efficiency – from anticipated operating cost containment and better access to financial markets to higher returns on investment projects – could be implemented.

Since so many deals have failed to enhance corporate value, what does it take for a post-merger company to be successful? Looking first at the reasons for failure, of which there are many, the most common are target management attitudes, ineffective communication, inability to effectively address cultural differences and a lack of post-acquisition integration planning. In other words, insufficient attention is paid to the non-financial ways in which acquisitions are planned and implemented.

Additionally, there is evidence that fewer than half of acquiring companies perform a comprehensive post-deal review. This indicates that valuable lessons are not taken into account when developing new acquisition strategies.

For any acquisition to achieve sustainable long-term success, prioritising key activities such as synergy evaluation, due diligence and integration project planning in the pre-deal phase is essential. The due diligence process encompasses a range of investigative procedures but is based generally on operational, financial and legal issues. Crucially, it hardly ever involves one of the most important resources of value creation: people. The human dynamic is very rarely addressed, but it is usually where things go wrong.

It may be that there are significant technology or brand advantages in the merger or acquisition of a target company, or that the target has superior sales and distribution channels, but in any event, one company buying another is almost always about ‘buying’ people.

The real human resources

Research by Cartwright and Cooper shows that of 40 UK companies studied, all conducted a detailed financial and legal audit of the company they intended to acquire, but not one of them carried out an audit of the company’s human resources and culture to assess the challenges concerning integration of the organisation they were acquiring.

Evidence collected by accountants KMPG suggests that up to half of the managers in companies involved in M&A leave within three years post-merger. The firm also found that companies which gave top priority to the selection of the management team at the pre-deal planning stage, thereby reducing the organisational issues created by uncertainty, were 26 per cent more likely than average to have a successful deal.

Indeed, the very definition of success needs to be clear and unambiguous, especially when a deal depends on external financing. It is not good enough for a deal to realise value eventually. Rather, it is vital for that value quest to be hard-wired into every aspect of the deal, even before it has happened, in order to ensure the quickest, as well as the most lucrative, return.

Strong leadership from senior executives and the board is a key component of this. Because management appraisal and selection can be fraught with any number of issues, making key appointments in a way that does not have a detrimental effect on either of the businesses involved can be difficult. Working closely with HR, a robust assessment system needs to be implemented which should include an analysis of the functionality of managerial roles to gain clarity of the target organisation’s competencies.

Give and take

The complexity of the cultural challenge more often than not depends on the nature of the deal. If the acquirer and the target company are to be fully integrated, success will require changes within both organisations, with the best cultural aspects from both sides being incorporated into a ‘new’ company that is focused on achieving future business growth and improved shareholder value.

Where the objective is not to integrate the target company but keep the two as separate operating units, cultural integration is often not as necessary and may in fact be unwise.

However, it is important for the acquirer to ensure that mutual co-operation between the two organisations is maintained in order for the deal to realise shareholder value.

For any transaction to have a chance of success, priority must be given to so- called ‘soft’ activities such as the selection of the management team, resolving cultural issues, and sound communication. There is clear evidence that close attention to human factors is likely to improve the successful outcome of M&A, but based on past performances it seems inevitable that, for many, a gap between expectation and reality will continue to exist.