Globally and across the Asia Pacific region, merger and acquisition (M&A) deal activity has been on the rise. Data from MergerMarket reveals that M&A deals globally hit US$597bn in the first quarter of 2016, with a forecast upturn in Q2 rivaling the deal frenzy that characterised 2015.
In addition, the latest Southeast Asia edition of the EY Global Capital Confidence Barometer finds that the deal appetite of the region’s executives continues to be strong, with 40% of survey participants planning to enter into alliances with other companies and 74% considering cross border investments over the next 12 months.
The reasons for such robust deal making appetite are threefold: organic growth is difficult to achieve; massive structural shifts across several industries are making consolidation and alliances a viable growth option; and dominance by the top two or three major players of any industry’s profit pool is driving consolidation intentions. In addition, strong balance sheets, low cost of debt and availability of cash reserves are making it conducive for deal making in Asia.
While size matters and the benefits of gaining larger scale and depth from an acquisition are clear, extracting or creating value from the transaction may not always be a straightforward or easy task.
EY’s analysis of the total shareholder returns (TSR) of major transactions completed in the period 2012-13 globally shows that more than half of the deals had eroded – instead of enhanced – shareholder value in the subsequent two to three years following the acquisition.
Many factors can contribute to poor returns on value from an acquisition. First is a failure in strategy – be it a lack of clear strategy and goal, or a poor strategic fit between the acquirer and target.
A second reason could be inherent in the deal itself, whether as a result of a high acquisition price or disadvantageous structural conditions for the acquisition, such as regulatory changes. The third – and often most likely – cause of failure is poor integration following the merger.
To understand how acquirers create value through their deals, we examined the approach by serial acquirers, particularly those that generated positive TSR.
These acquirers more often than not undertake these leading practices: they link the M&A strategy to the overall corporate strategy and cultural fit; develop a practical view on value creation; establish clear synergy targets early on, and focus on de-risking their investment.
Mergers in Asia are usually complex transactions, so it is important to define the integration vision and strategy early in the deal process.
In defining the integration strategy, acquirers need to look at the type, level of integration and complexity of the deal; and establish clear guiding principles and governance for the integration, organisational structure and leadership, roles and reporting lines. A senior leader in the organisation should own the responsibility for integration – and this, while dependent on the deal type, is typically the chief financial officer (CFO), chief operating officer (COO) or even the chief executive officer (CEO).
Early onboarding of functional leads is important too. For example, the corporate treasury team should be involved in the early stages of drafting the integration vision, so as to be fully aligned and be ready for the proper execution of the deal subsequently to achieve a smooth transaction close.
Another leading practice is in achieving synergies. Deals are often justified by the magnitude of synergies. In the past, shareholders have rewarded successful acquirers for realising financial and operational synergies from the deal.
It is pertinent for acquiring companies to identify these synergies and value drivers well in advance and validate these during the due diligence process. Operational synergies identified at the time of signing should be measureable and achievable.
From experience, cost synergies are easier to achieve and are realised through treasury integration – such as the rationalisation of bank accounts, improved cash visibility and working capital, straight-through processing (STP), consolidation of treasury systems and functions among the tangible quick wins. Many companies come to realise that it is likely to be very difficult to achieve synergies if these aren’t already secured in the first couple of years following a transaction.
De-risking the merger is essential to achieve a smooth close and business continuity in the first six months of the deal closure. Detailed functional integration planning and proactive risk mitigation will enable the acquiring company to take into account the compliance and risk issues as they take control of the target company.
For the treasury and CFO, it is important that they identify and mitigate operational and liquidity risks by aligning hedging policies and banking standards, banking infrastructure and relationships, working capital needs, investment, funding structure, cash management and forecasting process, and forex risks that can potentially be disruptive to the business.
By deploying a systematic approach along the deal cycle – through careful target identification, detailed due diligence and focused integration – enhancing shareholder value from a transaction is achievable. Creating value from M&As does not happen by chance and there is a long history of failed mergers to prove this.
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