Using an Understanding of Climate to Drive Value from Mergers and Acquisitions


Climate, as measured by the Performance Climate System (PCS), should be a key metric in valuing a company, assessing its potential fit with or within another company, and in determining how separate organisations can be fused to create a bigger and better entity.

We know that:

  • The decision to merge or acquire is driven by one underlying motive; to protect or improve the strength and/or profitability of the dominant company — and ultimately to maximize shareholder wealth.

  • Although dipping slightly in 2016, the global value of M&A was £3.6tn 2016[1] with a UK domestic value of £23.9bn[2], not including inward or outward investment.

  • The M&A advisory industry is vast with estimated revenue of $20.7bn in the US alone[3].

  • While a company is typically measured by its output, it delivers / operates via a range of inputs. Even though automation has transformed many industries over the last thirty years, people and teams remain at the centre of most businesses. Academic research suggests that the effectiveness of a team is largely down to climate (how an organisation feels) and that climate is principally influenced by the quality / ability of leadership and management[4].

However:

  • A sizeable proportion of mergers and acquisitions fail to provide the anticipated value; a “rule of thumb” 40% failure was identified in a survey of Fortune 500 companies in 2005[5].

  • The amount of time allocated for Due Diligence and Integration Planning is often the difference between success or failure. Nevertheless, everyone involved in a merger or acquisition will tell you that they are often rushed, and therefore assumptions are made which focus on hard and easily quantifiable metrics.

  • Due to the imperative to generate short-term efficiencies and immediate increases in shareholder value, it is no surprise that the average team involved in processing a M&A comprises of people with financial, legal and commercial knowledge, skills and experience (KSE). Usually, those with operational and sectoral KSE are brought in after the completion of a deal to implement plans. Last to be engaged are typically HR professionals who are either reducing headcount or reallocating staff.

  • A report from Deloitte on how companies can improve value through M&A from 2013 suggested 4 “conditions that can make for better bets in the high-stakes M&A game”[6]:

1. Acquiring at the correct time (M&A Activity Cycle);

2. Applying accumulated experience (Nature of the Acquirer);

3. Pursuing deals of an appropriate size relative to the acquirer (Size of the Target);

4. Funding transactions with equity or a mix of equity and cash (Financing).

While these conditions appear logical and based on sound analysis, they miss two fundamental issues 1) the nature of the target and 2) the complementarity of parties from a hard perspective (finances, strategy, processes, geography) and a soft perspective (people, culture / climate, behaviours).

Understanding the climate of an organisation will improve shareholder value as a result of merger or acquisition by:

1. Measuring the climates of organisations pre-merger to understand potential conflicts and opportunities;

2. Using climate results to inform Integration Planning and investment;

3. Measuring progress and understanding return on investment of post M&A activity;

4. Identifying the most effective leaders during Integration Planning to ensure they are not only retained during any headcount reduction but more importantly, are placed in ‘M&A critical’ roles during the execution phase;

5. For a willing target organisation, using climate status to increase an ‘asking price’: “you’re not just buying an organisation with a healthy set of accounts, you’re buying a productive organisation with an effective and well led workforce”.

PCS is a unique and powerful system which typically helps leaders, teams and organisations to focus their attention on the critical factors impacting performance. It focuses on the link between the climate in which people work, their level of attainment or performance, and the factors impacting this performance.

PCS has evolved as a result of 17-years of client experience. To date, it has been used over 20,000 times, across more than 3,000 teams in 14 countries. It has been deployed globally by large and small organisations, across all functional areas. It can be used pan-organisation as a framework for performance improvement, using the bespoke Organisation Performance Dashboard.

For more information on PCS and how it can support M&A activity contact us on: info@performanceclimatesystem.com

Footnotes:

[1] https://www.ft.com/content/0e9afdce-cdb6-11e6-b8ce-b9c03770f8b1

[2] 2016 https://www.ons.gov.uk/businessindustryandtrade/changestobusiness/mergersandacquisitions/articles/ukmergersandacquisitionsactivityincontext/2016

[3] http://share.thomsonreuters.com/general/PR/MA_4Q_2016_E.pdf

[4] Burke WW, Litwin GH (1992). A causal model of organisational performance and change

[5] Bruner, Robert F. Deals from Hell, John Wiley and Sons, 2005

[6] Beating the Odds: How companies can improve value through M&A. Deloitte 2013


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