Buyers splashed out $3.8 trillion on mergers and acquisitions in 2015, reaching an all-time high, and even surpassing the previous record set in 2007, before the financial crisis happened. Brexit excepted, many indicators suggest 2016 could also be a strong year for M&A. Wealth creation is the main objective of M&A and it can massively pay off – for example Google managed to achieve the biggest presence in smartphone operating systems thanks to the purchase of Android in 2005.
The problem is 70% to 80% of acquisitions fail dramatically. They miss the opportunity to create wealth for the acquiring company’s shareholders and, most often, even lead to financial loss. News Corporation, for instance, had to sell MySpace for as little as $35 million after acquiring it for $580 million six years earlier.
The question is, why do so many deals end up failing?
One answer is a lack of attention to the definition of the new corporate entity’s identity and subsequent communications around this.
Several studies suggest that reputational incentives play a major role in the decision to merge, and the willingness to associate with firms with high reputations is seen as a way to signal high quality. Overlooking reputation in an acquisition increases the likelihood of either overpaying, or of missing a great opportunity through underbidding.
Nevertheless, and quite surprisingly, numerous firms involved in M&A don’t use the services of communication consultants. Interesting research by Cass Business School’s M&A Research Centre revealed that deals where both companies were represented by communication agencies had a much higher completion rate than the ones where no external public relations specialists were involved. The study also found an unequivocal link between good quality announcements and deals being completed, highlighting the value of taking a strategic approach to communications throughout the entire transaction cycle.
A major issue is that most companies tend to focus on what they are going to get from the other company, and overlook the commonalities and the common purpose of the two merged organisations. A name change can send a strong message and reinforce the new corporate brand’s purpose statement.
For instance, the British headquartered alcoholic beverage company Diageo, born from the merger of Guinness and Grand Metropolitan, chose its new name because the combination of “Day” in Latin, and the Greek for world (“geo”) best expressed its willingness to serve every day, around the world, millions of customers. The company’s tagline, “Celebrating Life, Every Day, Everywhere”, still expresses today the purpose of this very successful merger.
Striking the balance between interests of divergent stakeholders can be challenging. Rather than burying one’s head in the sand, it is nevertheless prudent to take into consideration the diverse expectations your stakeholders sometimes have, and to objectively assess the reputational risks if these are overlooked.
Amongst key stakeholders, a particular emphasis should be paid to employees in the context of an M&A. For instance, the decision to exclude the America West brand following the merger of US Airways and America West Airlines created distrust and animosity amongst some employees who felt they were unimportant in the bigger organisation.
This underlines that measuring and tracking stakeholder expectations both in the run up to a merger, and afterwards, is crucial.
In the word of the late Muhammed Ali, "he who is not courageous enough to take risks will accomplish nothing in life." Risk-taking is inherent in any financial transaction, but risks can be assessed, and intangible assets such as reputation, ought to be taken into consideration, throughout the entire M&A process.
The definition of a vision, mission and purpose aligned with customers, employees and shareholders expectations, as well as coherent with the identity of the two organisations, is the best way to ensure a smooth integration process. The M&A transaction is often a tumultuous period, but it can also be a unique opportunity to demonstrate positive change, and to foster a new and compelling brand identity, from the inside out.