Mergers and acquisitions are two of the most valuable tools a corporate board can leverage. They’re important for building scale, improving performance and fueling long-term, profitable growth. However, approximately 80% of M&A deals fail. So, how can boards defy this statistic and successfully execute M&A, particularly during the current state of global unrest triggered by the rapid spread of COVID-19?
I’ve given this dilemma a lot of thought having participated in numerous M&A deals by virtue of my board positions at Raytheon, Bristol Myers Squibb and Nestle, in addition my former role as President of ABB Group and my current role as President and CEO of HARMAN, which was acquired by Samsung in 2017. In particular, as a board member, I’ve learned a lot from two of the biggest deals in recent U.S. history: the merger of Raytheon and United Technologies as well as Bristol-Myers Squibb’s acquisition of Celgene. I’d like to share six key learnings from my experiences that I call the “Paliwal Playbook,” which may be helpful to other board directors considering M&A—a process that is often overcomplicated and undervalued.
1. Hone Your Strategy and Strategic Intent
The first step in any deal starts with a clear understanding of the company’s strategic intent and how a merger or acquisition fits into that corporate direction. Once CEOs have articulated and socialized this intent with the board to establish a plan, it’s critical to stay true to your mission by collaborating with the executive leadership team to build an in-house team of experienced managers who can execute upon the M&A strategy and hold themselves accountable.
This isn’t as easy as one might think. M&A talent is rare, so you must keep your strategic intent front-of mind while selecting an internal team. Never lose sight of what you wish to achieve.
For example, HARMAN acquired Symphony Teleca Corporation (STC) in 2015 after the board took an honest and comprehensive look at the company’s strengths and weaknesses. At the time, HARMAN had strong base in systems, engineering and manufacturing but was weak in software and cloud services. STC’s offerings allowed us to better address our customer needs and grow through higher margins. That said, once STC was identified as an acquisition target, the benefits of the deal weren’t immediately clear to everyone, which brings me to my second point…
2. Drive the Deal from the Boardroom
Together with the CEO, board of directors should be a driving force behind any M&A deal as well as a source of strategic advice for the executives involved. So, they need to understand the ins and outs of deal making. M&A should be more than just a passing reference at the annual retreat—the board must have a solid understanding of the opportunities that exist so that they can help determine the right time to move forward. In fact, to avoid surprises, the best strategy is to introduce all “opinion makers”—like industry analysts and media—to the possibility of M&A long before a target is even in range. Boards can help spearhead that critical education.
It is the board’s responsibility to work with the CEO to ensure that all decision-makers can answer hard questions about the intent behind deal-related decisions and have a chance to contribute additional ideas and feedback. The board’s influence, if applied properly, will help sell the idea to other stakeholders so the deal can proceed quickly and decisively. Larger institutional shareholders used to be passive on this issue, but they’re now asking for early engagement and want more frequent dialog with the board members on strategic topics like capital allocation and portfolio.
3. Choose the Right Advisors
In addition to working closely with the management team, a board must also help select the right set of advisors to oversee the deal. Lawyers, bankers, communications firms, government relations specialists, HR consultants and others are critical to the process. Not all advisors have the same experience and depth to help companies navigate through the times when the announced deal gets less than favorable reception from the stakeholders. Look for the firms with solid experience in managing complex and global transactions.
Given the current global unrest, risks of the unknown due to the COVID-19 pandemic and other variables can spook stakeholders. But a strong team of external advisors can help model the deal based on different scenarios and sell the idea to corporate decision-makers and major stakeholders.
4. Identify Key Talent to Drive Culture
Once your stakeholders are informed, your advisers are lined up and the deal is underway, your next mission is to identify the key talent and leaders within the target organization that are going to champion the deal and drive the business forward. I’ve watched many companies parachute their own mostly ‘loyalist managers’ into the management structure of an acquired business only to see them fail quickly and publicly. That’s because, typically, these implanted managers lack experience in cross border deals, and they may not be trained to address unique challenges like varying business models and differences in company and country culture.
In my experience, the most valuable part of a deal is the technology and the people, but the latter often gets overlooked. Don’t underestimate the impact of culture on a business’ success. In the initial due diligence phase, boards must evaluate the leaders at an acquisition target, find the “star players” and try to retain them beyond economic gains. After the deal, establish respected local leaders from the acquired business that are embracing the new corporate culture to obtain the necessary buy-in from employees and other stakeholders on the ground.
For example, more than 10 transactions at Harman prior to Samsung’s acquisition of HARMAN and the HARMAN and Samsung merger worked because the companies were aligned in their goals to drive the strategy for developing a connected lifestyle forward. The deal also succeeded because of the effort that went into building a meaningful and seamless cultural exchange between the companies. Cultural exchange goes both ways: Samsung has taken a page out of HARMAN’s diversity and inclusion playbook by contributing to events hosted by HARMAN together – HARMAN’s resource group for gender equality and the empowerment of women, HARMAN employees participate in the annual Samsung Day of Service and members of both companies sit on the HARMAN board.
5. Understand and Prepare for Activist Interventions
I talked already about conditioning and aligning your audiences, but what should you do if you have an activist investor jumps in at the late stage? In the deal between Bristol Myers Squibb and Celgene, the biggest shareholder of the company publicly expressed its displeasure on the announced deal that strengthened the hand of an activist hedge fund that had been canvassing shareholders to oppose the deal. Bristol Myers CEO and the board of directors engaged the shareholders meaningfully and got them to understand the huge strategic importance and shareholder value creation that was one the line, resulting in strong support for the deal.
By understanding the motivations of the activist, we were able to talk to shareholders about strategic options, including M&A, to ensure they understood why this deal was beneficial for the company’s growth in the long-term.
6. Have a Robust Communications Plan
At the end of the day, no matter how much both parties want a deal to succeed, many elements have to fall into place for the relationship to work. With so many variables, it’s easy to get thrown off course. It’s important to develop a synchronized but targeted set of messages and a deliberate plan of attack to appeal to each key audience and plan for unforeseen scenarios.
In the end, to execute a successful merger or acquisition, boards must evaluate the deal from multiple perspectives. In addition to acting responsibly as a board member, they must think like a CEO and the owner of the company, be as shrewd as an investor and have the empathy of an employee—all while acknowledging that success requires a balance of strategic planning, stakeholder engagement, external guidance, cultural assimilation and preparation for the unexpected.
With exponential changes in technologies, many companies lack scale and cannot invest enough to embrace game-changing business shifts driven by technologies like 5G, Quantum Computing and Autonomous and shared mobility. Like several companies, some of the industries desperately need consolidation to create scale and global reach. Deeper partnerships and M&A may be a way for companies around the world that have been severely impacted well before the we were hit by the Coronavirus to survive amidst economic uncertainty, but it is important to be steady and thoughtful throughout the process. M&A is not a “rush-to-the-finish-line” kind of activity. It’s more like running a marathon. Boards need to be lot more diligent in educating on company strategy and work closely with the CEOs to plan meticulously and prepare extensively before approaching the starting line, and, even then, striking the deal is just the beginning.