Local Corporate Leaders Debunk M&A Myths

Mergers and acquisitions are always a sign of a successful business, right? For the acquirer, it means instant growth. For the seller, it means divesting non-core assets, freeing up cash to focus on what the company does best

Not so fast. A report compiled by Deloitte’s B.C. M&A team suggests that, just like marriages, not every merger or acquisition is made in heaven. Based on interviews with B.C. corporate leaders, Deloitte set out to discover why pursuing mergers and acquisitions isn’t necessarily always a winning strategy.

The report begins by citing a 2012 Accenture report concluding that 42 per cent of global mergers and acquisitions between 2002 and 2009 destroyed value. Deloitte set out to find out why.

Mergers and acquisitions often develop a momentum of their own, pushing through to completion regardless of any contrary facts that may arise during due diligence. “An empire-building mentality can exist, especially in larger corporations where division heads want to grow and expand and are pushing for the deal,” Nathan Green, vice-president of corporate development with Belkorp Industries Inc. tells Deloitte. “This silo behaviour may get the deal done but end up hurting the company overall.”

The report’s authors note that “sometimes the best deal is the one that doesn’t get done.” Fabio Banducci, president and CEO of Peer 1 Network Enterprises Inc., notes, “We looked at over 100 acquisition opportunities in the past seven years, and we pulled the trigger on one. It takes real discipline to stick to your acquisition criteria and be prepared to walk away with no hesitation.”

One common myth is that companies lose out if they don’t jump on the acquisition bandwagon during an economic boom. “If you are truly being strategic in your approach to M&A, then you should already know who the logical targets are and have made contact,” Steve Lewis, vice-president of corporate development for Telus tells Deloitte. “Generally, one should try to avoid reactive participation in auctions where deal dynamics risk overtaking strategic rationale.”

Companies on the selling side can be equally hasty in their decision-making, with some CEOs wanting to sell as quickly as possible in order dump under-performing divisions or non-core assets. James Miller, former director of strategic business investments for Vancity Credit Union tells Deloitte that due diligence is equally as important for sellers as for buyers: “It really undermines your credibility and hurts your negotiating leverage if the buyer finds something that you don’t know about.”

Kenneth Johnston, a Deloitte partner specializing in valuations, notes that calculating a fair price for an acquisition target doesn’t necessarily rely strictly on parsing the balance sheet: “Keep in mind that sometimes what counts can’t be counted and what can be counted doesn’t count,” he advises. “Future success in an acquisition can depend significantly on how you manage risks related to non-financial factors such as the integration of people and culture.”

Here are some tips offered by Deloitte’s B.C. M&A team for companies considering mergers and acquisitions:

• Write down the three most compelling strategic criteria for your next deal. If they aren’t met, pull the plug.

• Identify and understand the critical deal assumptions in your model—assumptions that could blow things up if incorrect.

• Evaluate due diligence. If you haven’t found at least one significant problem you haven’t looked hard enough. Focus on the deal-breakers.

• Create a list of must-haves so you know where to hold the line in negotiations.

• The work doesn’t end when a deal closes. A disciplined approach to M&As includes monitoring progress toward targeted rates of return and key performance indicators.