Mergers and acquisitions remain a popular avenue for growth-seeking enterprises. However, a diligently planned and executed deal can come undone with the lack of a clear post-M&A strategy.
“Some of the most common challenges we’ve seen for large-scale mergers include a missing integrated masterplan, cultural differences, lack of or under communication, a new organizational structure that tries to please everyone and ends up being compromised, and IT issues that are addressed too late into the M&A process,” says Karambir Anand, Partner and EY Asean Leader, Strategy and Transformation, at Ernst & Young Solutions.
An EY report released earlier this month revealed that companies in Singapore are underinvesting in post-deal merger integration. In a survey of over 40 executives in the city-state conducted in November 2017, about 57 per cent of the respondents said they invest less than 5 per cent of the total deal value on merger integration activities. About 21 per cent invest 5-10 per cent of the deal value in merger integration activities, while another 21 per cent invest more than 10 per cent.
“Our quantitative analysis of hundreds of deals in Singapore across many years shows overwhelmingly that a majority of firms are destroying shareholder value due to the lack of integration… Therefore, as M&A remains a crucial driver for growth, firms must focus on mastering the art and science of merger integration,” Anand added.
In an email interview, Anand discussed the M&A space in Singapore and the rest of Southeast Asia, acquisitive interest from companies in US, Japan and China, and how Southeast Asian firms are moving beyond the region to buy global peers.
Asia Pacific is set to see an uptrend in the M&A deal space in the first quarter of this year. Would you peg similar expectations for Singapore and also Southeast Asia as a region? What are your expectations for 2018 from Southeast Asia in terms of deal value and quality as compared to last year?
Even though global deal volume has been lower in the past couple of years, as compared to 2015, the numbers are still compelling and continue to tell the story of the following drivers that have propelled M&A: low interest rates, record stock market performance, plenty of available leverage and the rise of PE funds. We expect Singapore and the broader ASEAN region to continue to see a strong run of M&A and dealmaking in 2018. The IPO volumes going into this year will also remain strong.
Many M&A deals fail to generate – and some even destroy – value for shareholders. What is the most common mistake that companies in Singapore and Asia Pacific largely commit to lead to this? Is there a remedy for such failures?
The most common factor leading to an erosion of shareholder value post M&A is the lack of merger integration. This can manifest itself in many ways, including not having an overall strategy and masterplan in place for the integration; not focusing on synergies early enough; not paying enough attention to culture and communication – two very important factors to focus on in any integration; and not having a robust Integration Management Office (IMO) in place to coordinate all the activities.
Have such failures, in any way deterred these companies to undertake future M&As?
Anecdotally, we’ve seen firms struggle to win board and shareholder approval for large-scale M&A if their previous acquisitions were not integrated successfully. Most times, boards now insist on a check at the diligence stage on integration priorities, as well as synergy creation targets, before giving the go-ahead for an acquisition. We’ve also seen cases where management teams have been asked to include the outcomes of the integration into their personal key performance indicators.
Private Equity (PE) is considered a major driver of M&As. Is there a difference in the strategy adopted by the parties during a PE-backed M&A as compared to a non-PE-backed one. What is it, and is there something to learn from it or rather avoid?
For the PE industry, a large part of their returns are increasingly coming from value creation or operational improvement opportunities, rather than leverage, as was the case a few decades ago.
This necessitates clarity of the investment rationale and value creation opportunities for PE-backed M&A. Having the discipline to do this consistently is something that strategic buyers would also benefit from tremendously.
How important is post-merger integration for Singapore and other Southeast Asia-based companies? In case of larger firms coming together in a merger, what is the greatest challenge and also most crucial one when it comes to integration? How important is human capital or people integration during a post-merger integration?
Our quantitative analysis of hundreds of deals in Singapore across many years shows overwhelmingly that a majority of firms are destroying shareholder value due to the lack of integration. This holds true for large firms, as well as smaller firms with market capitalization of less than $150 million. Therefore, as M&A remains a crucial driver for growth, firms must focus on mastering the art and science of merger integration.
Some of the most common challenges we’ve seen for large scale mergers include a missing integrated masterplan, cultural differences, lack of or under communication, a new organizational structure that tries to please everyone and ends up being compromised, and IT issues that are addressed too late into the M&A process.
Human capital and people integration is a critical part of the overall merger integration. One of the biggest fears for employees in an M&A scenario relates to their personal situation: be in ranks, seniority, career path, compensation and benefits, etc. Addressing these elements in a smooth manner is often the difference between a successful integration and an unsuccessful one.
In terms of the transaction philosophy, is there a particular factor that is driving M&As by foreign players — US, Europe and Japan — for Asian firms. Has post-merger integration been different in such cases?
Given the demographics and the stage of the economies, economic growth for the next few decades will likely be driven overwhelmingly by Asia. Thus it’s easy to understand why firms from developed countries are looking at Asia for M&A.
What firms from outside the region need to consider while undertaking a transaction is the cultural nuances and norms that govern business in this part of the world. Making large financial bets without understanding the cultural aspects of how teams work and collaborate, what motivates people, how to drive growth would be a grave mistake. I often tell clients from outside the region that, in this part of the world, there are many ways of saying ‘No’.
What has been the trajectory this year for Chinese investments in the M&A space — strategics or PEs. Is there a peculiar trend that has emerged out of this very prominent investment theme in the recent years? Also, does it make it easier or more difficult for a pre-deal negotiations or post-merger integration when there is a Chinese investor with a Southeast Asian target?
Chinese investments in ASEAN have seen an uptrend in interest in the last 3-4 months. With capital controls being mildly loosened by the Chinese authorities, buyers have rekindled interest in this part of the world with a focus on the usual industries: real estate, manufacturing, commodities and tech. In general terms, we haven’t seen Chinese buyers doing a lot of merger integration – which has at times come back to haunt them at a later stage.
What according to you, are the best practices that succeed in generating synergy through post-merger integration? Can you also give specific examples in this regard?
Typically, a few best practices should be followed for synergies. At the diligence stage, firms should have a synergy hypothesis, with broad ranges of the size of the prize available. As the transaction proceeds, the ranges and numbers should get sharper. As well, having a prioritization in place for synergy realization is critical, and firms must push to achieve synergies within the first 2-3 years of the transaction, after which it becomes very difficult to galvanize forces to go after synergies.
M&A is the most common theme for businesses looking to grow. However, it has been continuously evolving keeping in view economic, social and political concerns. In Asia, and particularly in Singapore what is the most interesting trend that has laid the foundation for many deals?
The opportunity to rapidly grow and meet customer requirements, along with entrepreneurial zeal and a financial system that could meet emerging needs are the key drivers for M&A in Asia. Firms are realizing that in order to gain a large chunk of the profit pool, they need to be among the top two players in their industry. Thus firms have strived to gain scale and M&A becomes a logical path to follow, given organic growth will take time.
How have Asian firms fared when it comes to M&As with foreign companies as targets. In terms of post-merger integration do you see Asian acquirers pursuing a certain strategy? Do you see in future, companies from Southeast Asia emerging as prominent acquirers globally – if yes when? What will be the main contributor to this trend?
For the past few decades, Asian acquirers have been rather tepid and mild when it came to integrating their acquisitions abroad. We’ve seen this recently starting to change as Asian firms get more comfortable in the global business environment. There are also now several industries where Asian firms are global leaders and thus not shy to spread their wings.
There have already been cases where firms from ASEAN have made large global acquisitions. This trend is certain to increase in the years ahead as firms look for growth opportunities outside of the region. Given the mix of countries in this part of the world, we will also have emerging regional and global champions coming out of the shadows and M&A will remain a path they will continue to go down.