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How to play the mergers and acquisitions game


If you want to make a deal that works, pay close attention to the data.

Around “70% to 90% of mergers and acquisitions fail to achieve value for the buying company”, says Adi Gaskell, writing for Forbes. In the majority of cases, it’s the company being acquired that achieves most of the value out of the deal.

Gaskell believes that CEOs have a tendency to ignore the data and go with their gut feeling, and this is the reason why such a high proportion of deals fail.

The problem with gut-instinct

Several problems can arise when CEOs put too much emphasis on instinct:

  • According to psychological and economical evidence, “intuitive reasoning in financial matters frequently leads to biased and therefore sub-optimal decisions”.
  • When a CEO pays too much attention to their gut reaction, they become prone to ignoring the data and “significantly overestimating any savings or synergies that might materialize when the two companies come together”.
  • Projects with a “high potential upside”, are likely to trigger a gut-instinct reaction. However, if that potential can’t be reached for a myriad of practical reasons, the project will be doomed.

A more successful approach

When considering a company for a merger or acquisition, gut-instinct is fine, so long as it is backed up by sound investigation and economic reasoning. The acquiring company should obtain as much information as possible before proceeding.

The investment firm IBID is a good example of a company with a strong record in acquisitions and mergers, and it emphasises the importance of gathering data. IBID believes that involving the target company in the process of information gathering will increase the amount of data the purchasing company is able to acquire. It will also have the dual effect of establishing cooperation between the two entities – something that might ultimately be crucial to the project’s success.

The type of information acquired about the business should include:

  • The way it operates
  • Its customers
  • Any operational inefficiencies
  • The talent available
  • Its channel partners

IBID’s CEO, David Barzilay, explains what they look for in a potential investment:

  • Acqui-hiring. The talent possessed by the company’s employees is a major factor of consideration for IBID.
  • Operational inefficiencies. Rather than focusing on revenue-based synergies, IBID focuses on “operational inefficiencies that could be tidied up with effective management”.
  • Low-hanging fruit: IBID looks to gain payback on the acquisition within the first year, and it achieves this by selecting companies where it can quickly derive added value by implementing relatively simple changes.
  • Marketability. With well-developed capabilities in marketing areas such as lead-generation, IBID is strongly positioned to exploit any potential revenue gains from the acquisition, enabling them to turn the company’s potential into actual profit.

As IBID shows, it is possible to avoid poor returns in the mergers and acquisition game, so long as you firmly temper your initial gut-instinct response with calmly applied logic and economic strategy.

Source Article: The Art And Science Of Making The Deal Work
Author(s): Adi Gaskell
Publisher: Forbes