NOTLaw: The Art & Science of Successful M&A
Event write up
Wednesday 5 June 2019, Mishcon de Reya
There is both an "art" and a "science" to M&A deals, and the application of such is often the difference between the deals that are successful and those that are not.
The true victors in M&A are those who apply both sound negotiating tactics and the latest digital technologies to their processes; whether for digital or traditional deals. They are able to get to better insights faster, run a smoother process and extract more value from their M&A.
On 5 June 2019 we hosted an event at Mishcon de Reya, which aimed to provide insight into the latest thinking surrounding M&A and provide real world examples of how to turn a competitive advantage from theory to practice. Below is a summary of the content.
Andrew Rimmington – Corporate and M&A Partner, Mishcon de Reya (Chair)
Deals that deliver value don't happen by accident.
For the highest chances of a successful deal, focus on value creation from the start. The traditional 100-day post-deal integration planning isn't enough.
Transactions should be an extension of your corporate strategy. Acquirers need to be ready with a comprehensive value creation plan well ahead of signing the deal. Key assumptions should be tested and validated through diligence so the plan can be implemented straight away.
The EY Global Capital Confidence Barometer report published earlier this year made clear that the old one-size integration 'playbook' doesn't fit anymore. Value creation plans no longer just focus on operational efficiencies and economies of scale. Deals are often used as a catalyst to acquire and expand customer relationships, to generate new channels for combined offerings and to acquire new technology, talent, products and services.
Be clear on all the elements of a comprehensive value creation plan. The challenges are significant but failure isn’t random. Mergermarket in its report "Creating Value Beyond the Deal" revealed that:
- 63% of Buyers whose deal lost value didn’t have a technology plan in place at signing;
- 70% of Buyers whose deal lost value didn’t have a synergy plan in place at signing;
- 79% of Buyers whose deal lost value didn’t have an integration plan in place at signing;
- 89% of Sellers say there is room for improvement on the tax and legal structuring and extracting working capital.
Consider how each of these support the business model, synergy delivery, operating model and technology plans.
Buyers need to stay true to their intent and approach deals as part of the strategic vision, aligning deal activity with the long-term objectives for the business. Opportunistic deal-making can create value – but not as often. Beware of shiny object syndrome.
Put people at the heart of the deal. The Mergermarket survey revealed that 89 per cent of sellers believed they could have derived more value from a sale by engaging the management team more closely. 82% of companies who say significant value was destroyed in their latest acquisition lost more than 10% of the key employees following the transaction and 65 per cent of acquirers say cultural issues hampered the creation of value. This is particularly relevant when a growing number of deals are “asset light” or made up of predominantly “people-centric” intangible assets.
The difference between success and failure is often connected to how you deal with the people.
Professor Paul Willman – Academic Director: Executive Programmes at London School of Economics
There are few more depressing literatures than that on mergers and acquisitions – it's mostly about how low the success rates are. In the last 50 years, 50 to 70 per cent of mergers and acquisitions have failed to meet their objectives – whether that's measured by the stock price, return on capital employed (ROCE) or competitive advantage.
Once it becomes clear goals won’t be met, it's human nature to change the goals. I even sat in a room on deal that was going to custard when the CEO said: "This is not proving to be the acquisition we want, but at least we stopped anyone else getting it."
As an adviser, it's sometimes hard to say what you want to say during a deal: this is going horribly wrong; are you sure you want to do this? Sometimes the deal you're in isn't the one you imagined.
There are some similar characteristics of difficult negotiations:
- There is no established process to work with
- You don't know the counterparties very well
- One party might be more committed than the other
- It's publicly accountable
- There are diverse shareholder pressures on both sides
- Value depends on contestable future benefits
- The cost of failure is high
- One or both sides has publicly set 'red lines'
This will be familiar to anyone with even a passing knowledge of how Brexit is going.
There is a hierarchy of things you acquire in any deal. Some things you get automatically – or at least you should – like the brand, the assets and the clients. But perhaps the most valuable bits are combined after the deal. However, these are much more tricky to integrate, such as transferring and developing know-how and developing synergies.
The people part can be particularly tricky. For example, it’s not uncommon when large consulting firms take over small boutique firms that buyers can end up paying a lot of money and end up with nothing more than a short-term lease on a West London property. If you don't anchor the consultants, you don't anchor the clients; you can suddenly find that you've created your own competition.
We all suffer from cognitive biases.
Escalation of commitment is common due to the sunk cost fallacy and lack of accountability. Like Napoleon, you might make it to Moscow, but at what cost? There’s a temptation to mine for gold that's not necessarily there, or at least can't be got now at any reasonable price – particularly with the incentives of bonuses based only on whether the deal goes through.
The paradox of success leads to overconfidence and an optimism bias. It's a particular trap for people who have a successful negotiating history. Not every deal is the same, so it pays to be humble. People also suffer from winner's curse and buyer's remorse. Not getting the right deal at the right place, or falsely believing that they left value on the table. Hindsight bias and the rationalisation of outcomes is also very common. Many rationalise a bad deal by later claiming that they would have accepted this at the start.
Information is unevenly distributed. You know you're going to find things out. It's important that you have the discipline in place to make sure you're not succumbing to these cognitive biases. Here are four things that can help:
Soft as well as hard due diligence: Use culture as an element in identification and evaluation.
Engagement of the senior management teams: Ensure there are multiple points of contact.
Agency problems: Ensure the interests of managers and investors are aligned
Contract, competence and relationship trust: Make sure you’re really all in this together.
Hard due diligence is just torturing the data until it confesses. Soft due diligence is analysing the prospects of actually running the business, considering how closely it should be integrated. In fact, organisational culture is becoming more and more relevant in the academic literature.
If the cultures are very different the chances of integration are reduced. If people don't feel involved you have to feel that they are digging trenches. At the very least, ask the two management teams to write a balanced scorecard – i.e. list the key performance indicators – for the merged organisation. If they can’t agree on this, the deal is destined to fail.
Nick West – Chief Strategy Officer, Mishcon de Reya
We spend a lot of time talking about what technology can and can’t do, but at least as important – or even more important – is how you get to the point of deciding to use a piece of technology, and how to choose from the plethora of options.
Three years ago, Mishcon set out a ten-year vision. It was an exercise for us to think about where the world will be in 2025. It’s intentionally broad and macro. Question like, what will London’s place as the centre of dispute resolution look like it 2025? Which will be the centres of wealth creation? How will global wealth move around?
Perhaps inevitably, one of the themes was technology: what will the world look like as we go through what is possibly the fastest ever tech revolution? One akin to previous technology revolutions but happening at a faster pace.
I think a lot about the business of law and the practice of law. The business of law is about how we engage with clients; how we on-board you; how we engage with you around the finance; the information you want to know about the matter we work on. The practice of law is how we get the legal work done.
We have an orientation towards cloud technology, web technology, and apps; the kind of things most people experience in their personal lives. This might mean anything from digital on-boarding or using Apple Pay to pay your bill. These tools are becoming pervasive: you only have to open the newspaper to read about some smart people at Stanford University who have developed a machine learning tool to outperform a dermatologist in skin cancer diagnosis.
This orientation towards tech allows law firms to do things better, faster and potentially cheaper. At Mishcon, we have an in-house team of machine learning engineers and data scientists; we have a technology team that’s capable of building tools, whether web or blockchain based; and we have MDR LAB which is a technology incubator.
As legal tech has exploded, we’re seeing a lot more tools. Some have been around for years, like deal rooms and data sites associated with deal preparation, but the new thing is their ability to plug into the diligence stage. At the diligence stage, a lot of new tools promise to be able to do away with lawyers by classifying and extracting data. It can make some things very simple, but there are still limits to their accuracy on more complex tasks. It is sometimes better to have a human solve a problem.
Technology is proving very useful at solving specific tasks. DealWIP built a product in our MDR LAB incubator that we're piloting. It helps manage the process of diligence. Signing, online editing and proofreading tools, for example, help with the negotiation and signing. We will inevitably see more and more tools in this space.
If you’re going to think about using a piece of technology to solve a problem, first you need to write down what it is that you do and go through a thorough process of judging the technology: define the problem and requirements; research and score solutions; have demos; trial; move one to pilot; and only then commit to the deal. Due to internal and external pressures, many companies buy too quickly.
The applications of technology to the practice of law will only increase. It allows us to do things better, but it isn’t just a matter of point and shoot – at least, not until the next technological revolution.
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