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Survey: Most M&A deals fail to exceed expectations, lack of cultural alignment to blame

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CHICAGO, IL — From strategy to implementation, there is significant opportunity to capture more value from M&A deals—according to a recent survey conducted by Grant Thornton LLP. The survey revealed that only 14 percent of all respondents feel that deals exceed their initial expectations for income or rate of return.

According to the 2018 Deal Value Curve Study, which surveyed more than 400 CEOs, managing directors, CFOs and other high-level executives, only 37 percent of respondents strongly agree that efficient M&A is a well-understood core competency of their company.

“With valuations near all-time highs and a high degree of competition for deals, it’s more important than ever to take a holistic approach to diligence—including financial, operational and cultural diligence,” said Jim Peko, national managing principal of Transaction Services at Grant Thornton. “At the end of the day, better diligence makes it easier to drive transaction value.”

Clarity from the start The pressure to grow, availability of capital and the constant exposure to “pitched” deals make it very easy for companies to fall into a frantic, reactive position rather than remaining focused and disciplined.

The survey found that thoroughly scrutinizing the details of transactions, well before the transaction begins and well beyond typical tax and earnings due diligence, helps highlight the precise drivers of value and leads to a much greater chance of success.

However, only 38 percent of respondents indicated they have very clearly communicated which acquisition targets they should pursue, and only 33 percent were very clear on what they should be paying.

“We’ve found that if you are proactive in your M&A approach, you can achieve higher conversion rates and deals turn out better across the board. But being proactive starts with being clear—that means translating your larger corporate strategy into a defined M&A strategy,” said Ed Kleinguetl, a Transaction Services partner at Grant Thornton.

“The best approach is multi-dimensional, encompassing strategic clarity, target focus, diligence rigor, process discipline and execution accountability,” added Kleinguetl.

Strategy within a strategy The initial articulation of objectives when it comes to deal making is imperative. Still, only 30 percent of respondents indicated they were operating with a clear, well understood M&A strategy. The absence of this can inevitably cause inefficiencies that appear throughout the process, leaking value at every stage.

“We find that when due diligence is broken down into specific areas of focus, it becomes abundantly clear that operational and cultural components of deals are receiving insufficient attention,” said Chris Nemeth, a Transaction Services principal at Grant Thornton.

While 55 percent of respondents rated their performance as strong on meetings with top management—and more than 40 percent described their financial, commercial and general operations due diligence as strong—those numbers dropped precipitously around suppliers (15 percent), safety and environmental concerns (18 percent), HR (22 percent), IT (19 percent) and culture (23 percent).

“It’s clear there’s a real opportunity to help companies improve the return on their M&A investments,” added Nemeth. “Given the magnitude of the M&A market—as well as the great importance of the typical transaction for a given company—the potential risks and rewards are significant.”

Interestingly, only 27 percent believed their tax due diligence, planning and structuring were strong, which suggests that the recent tax reforms have yet to be confidently interpreted.

Making surprises less surprising Since mergers combine two complex systems into one even more complex system, they inevitably present surprises. The sooner decision makers anticipate these surprises, the better they can manage them and preserve value for all involved.

When asked if they had “been good at avoiding/managing unexpected, post-close surprises,” a sheer 18 percent of respondents strongly agreed. Similarly, 17 percent described their efforts at executing a seamless people and culture transition as strong. These transitions are crucial because of the role cultural misalignment plays in deals underperforming expectations.

The survey findings ultimately confirmed that the tremendous volume of M&A deal-making has highlighted the value of taking an early and holistic approach to M&A execution. Quality execution delivers a wide range of benefits, including financial, operational, commercial and cultural success.

Peko concluded by saying that “the hard work of deal execution should be rigorously studied and improved to ensure the achievement of the underlying investment thesis and to drive shareholder value.”

Click here for additional findings from the 2018 Deal Value Curve Study.
 
About Grant Thornton LLP
Founded in Chicago in 1924, Grant Thornton LLP (Grant Thornton) is the U.S. member firm of Grant Thornton International Ltd, one of the world’s leading organizations of independent audit, tax and advisory firms. Grant Thornton, which has revenues in excess of $1.7 billion and operates 59 offices, works with a broad range of dynamic publicly and privately held companies, government agencies, financial institutions, and civic and religious organizations.
 
“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.


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Adam Bond
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