M&A, Meet Strategy

Although the jury may still well and truly be out on whether the consolidation wave among AmLaw firms:

• (a) is just getting started;
• (b) has already crested;
• (c) is the smartest thing firms could possibly do in our increasingly globalized and client-centric world;
• (d) is a baneful surrender to imaginary "market forces" that those following the lemmings will come to rue, which will all come to tears; and/or
• (e) is a heck of a lot less than it's cracked up to be [choose one or more],

the practical reality remains that there are good and bad ways to execute mergers, and if you're in the game you want to play to win.

Summon McKinsey.  (The original piece, or try this.)

What do, in their words, the "Habits of the Busiest Acquirers" reveal?  The following "help, but do not guarantee, success:"

• assembling a worldclass M&A team,
• modifying the organizational design of the acquiring company, and
• adding systems to smooth integration

But these amount to the litany of the usual suspects.  If they're not the answer, what does matter, then?

First, a word (actually, quite a bit more than a word) about McKinsey's methodology.  It was typically rigorous.  This is what they did:

"Of the top 75 US companies by market capitalization and the top 75 by revenues as of June 2005, 33 had accumulated at least 30 percent of their market value through acquisitions. The executives most responsible for M&A activity at 20 of those companies agreed to sit down for a rigorous hour-long conversation covering more than 100 questions about the organizations, processes, tools, and metrics used in acquisitions and integration. We then compared the activities of acquirers that were rewarded by the markets—those whose total returns to shareholders exceeded the returns of their peer group from December 1994 to December 2004—with the activities of acquirers that were not rewarded during the same period."

So back to the show:  What exactly did they learn? 

This:  It all gets back to strategy.

Here are some bad reasons to merge:

• for sheer top-line growth without regard to how it can be capitalized on in future
• to acquire talented individuals
• to forestall a perceived competitor from grabbing the same opportunity
• for operational reasons, such as looking for economies of scale or synergies between offices in the same cities that could be integrated.

And good reasons to merge?:

• to pursue a well thought-out geographic expansion strategy
• to add one or more specific capabilities (practice areas, industry representation, e.g.) that would be more expensive, difficult, and/or time-consuming to grow at home, organically
• to pursue top-line growth through plugging  holes in capabilities that clients are hungry for.

And, did I forget to mention, "Strategy?"

Here's one way of looking at it:  "Rewarded" acquirers in blue, "unrewarded" acquirers in tan.  And in case the image is too small to read, the bars correspond to, in order:

• add capabilites
• expand geographically
• buy growth
• consolidate
• increase scale
• diversify portfolio [of business lin es]
• innovate
• defend business

What else do we learn? 

"The integration phase of an acquisition is often the time when deals go wrong; some studies blame poor integration for up to 70 percent of all failed transactions."

This strikes me as both true and of questionable value if one's looking for guidance.  "True" because we all know in our hearts and minds that post-merger integration can be the great graveyard in the sky of ambitious deals; but of dubious value for guidance because insurmountable "integration" problems can as easily be simply the telltale sign of a poorly conceived transaction to begin with—cultures that will never match, for example, or key financial metrics that are too far afield to ever be peacefully reconciled.

By contrast, here's something you can act on:

"According to one [successful] M&A director, "Our biggest challenge is to make sure that the corporate M&A team and business unit executives work in concert on an acquisition"—an important insight."

"Furthermore, rewarded acquirers were more than twice as likely to involve their business units in acquisitions from start to finish, including origination, due diligence, negotiation, and integration.

"Indeed, while the M&A team's involvement is essential for ensuring that all transactions are pursued rigorously, an M&A team that identifies synergy opportunities without significant participation by the relevant business unit can engender resentment and bring about charges that the team is setting unattainable targets. Many rewarded acquirers therefore say that having business units lead the entire process for a bolt-on acquisition can dramatically improve estimates of synergies—and the likelihood of capturing them."

Finally, here's another curve-ball that reinforces the precise point that the "M&A team" and the "business units [practice leaders]" must be joined at the hip:  It turns out that it matters a lot how well your M&A team leader (your Chief Strategy Officer, anyone??) knows your own firm:

"M&A executives at rewarded acquirers had significantly more experience at their companies, albeit in different roles (Exhibit 2). The fact that an M&A executive at a rewarded acquirer has a deeper knowledge of the culture, people, and capabilities of the company undoubtedly helps the executive to navigate corporate politics and identify targets that truly address a company's needs. It also ensures support from key people in the business units."

So here's my takeaway.  Merge:

• to follow your strategic goals, not to follow operational goals
• to build on your existing strengths, not to shore up your weaknesses
• because the transaction truly fits into your long-term vision for your firm, not because it would kneecap a perceived competitor or grab some talented individuals.

And post-merger, integrate, integrate, integrate:  Not from the top down, but from practice groups up.

Good luck.