(17min 52) The last year has set a new record for the number of mergers and acquisitions (M&As) in Australia. Putting two companies together can be a long and complex process, with the potential for lots to go wrong.
Today on BTalk Australia Phil Dobbie talks to Max Coulthard, a senior lecturer at Monash University, about the issues around M&As. How many mergers, for example, turn out as planned?
Click on “Play” to hear the podcast or click “Get It” to download.
Add your thoughts in the Talkback section at the bottom of today’s post.
- Today’s Transcript
Dobbie: Good day I’m Phil Dobbie. Today on BTalk Australia, mergers and acquisitions. What drives them and what can go wrong. Max Coulthard is a Senior Lecturer in the Department of Management at the Monash University. He’s worked in the Finance Industry for 15 years as well. He’s been a Board member on a number of companies and worked on the internalisation of many Aussie businesses so a man with heaps of experience. A few years ago he worked on a study of integration issues resulting after a merger and he joins me now. Max first of all, I guess in these economic times we’re starting to see more mergers and acquisitions in Australia.
Coulthard: That is absolutely true. If you look at in fact the year 2007-2008, we had a 141 billion Aussie dollars worth of acquisitions and so that’s up 23 per cent on the previous year.
Dobbie: So is that a record year?
Coulthard: It’s another record year. We seem to go from record to record.
Dobbie: It’s like the weather. Either the warmest summer or the coldest winter, and the most mergers and acquisitions.
Coulthard: Worldwide you know we keep hitting records too so we’re part of a trend. Interestingly though of course with the downturn just at the moment in the number of the markets. I noticed that we’re about double the previous years’ first six months and then about half in the second six months, so we certainly have hit a brick wall in some ways.
Dobbie: So why is this happening? Is it because the opportunity is there because share prices are so subdued?
Coulthard: I think that in fact it was the opposite. The first six months everyone could see things were just continuing to get bigger and better, and therefore, let’s take advantage of that and we can keep growing our business. One of the key drivers it appears for M&As, in particularly acquisitions, are great opportunities. So you had a huge number of big movers in the first half of the financial year before December of 2007, and you know it really has shown what I think moved to 1,148 acquisitions in the last 12 months. But interestingly, only about a quarter of those or less where 358 of them were Aussie buyers. It’s interesting to see that a lot of those overseas companies soared towards the end of last year, they just continued to boom over the Australian industry, and said we want to be part of it. Mind you it’s interesting that they’re still buying now in particular in things like mining. You know they’re still quite optimistic about those things…
Dobbie: Yeah. Can’t hold back that resources sector can we? So in other sectors I guess it’s that whole thing isn’t it — that it’s quicker to acquire than to go for organic growth and often cheaper as well.
Coulthard: I sort of look at it this way. I think you’re really talking about the key thing which is the reasons for mergers and acquisitions. And let’s face it, about 95 percent of M&As are actually acquisitions say, mergers are purely thin on the ground. But if we look at them, we probably find that there’s a whole range of reasons built into our system of the way we run businesses, that sort of drive the whole acquisition approach. For example, at the end of the day usually the bonuses that we pay our senior executives are built around growth and profit, in particularly growth and in some ways it’s a lot simpler and faster for companies just to go out and buy someone else and say, “Look at that. We’ve just increased our bottom line, well we’ve increased our top line in terms of sales significantly, and it’s leading to overall long-term bottom-line growth.
Dobbie: It’s quite a simplistic view though isn’t it and does it all work out like that? I mean there’s a million and one factors that can…you take two companies and it’s not necessarily adding one on one and getting two or even three. Sometimes it can be adding one on one and getting one and a half.
Coulthard: Or getting three quarters.
Dobbie: And that becomes a question of due diligence, not asking the right questions and getting caught up in basically a sales process?
Coulthard: It is actually. I was just looking before at some interesting data coming out of some research done on 1,700 M&As where they interviewed in 2004 about 250 CEOs and sort of said to them “Why did you take over these other organisations?” And then they found that well over half of them actually didn’t have a clear rationale at all. And opposed to the M&A, the rationale proved to be wrong. That’s sad.
Dobbie: So the expectation wasn’t met?
Coulthard: The expectation wasn’t met. They usually had great words. In fact I often suggest to people that if they see some good news in the papers saying, “You know this company is about to take over this other organisation because they’re getting excellent synergy such as economies of scale, cost savings, increased products, rationalisation of distribution channels, you should immediately sell” because it’s more than likely to be the opposite. But if they say things like “we have a clear vision” and the strategic rationale for the acquisition was that we were identified some key new products, some key capabilities and skills that we needed to extend our geographical reach or to consolidate within our industry because it’s very mature, or because we were moving in transition towards either a new industry direction, or into a new industry ourselves as an organisation, then I’d be buying those shares.
Dobbie: So what you’re saying is that you’re buying shares on businesses that are saying, “We’re merging or taking over to expand and you’re running away from those saying you’re merging to try and cut our costs overall.”
Coulthard: Well, the one can actually appear to have a clear vision and a good reason for it, I think there are positive reasons but sadly too often we look at the cost accounting efficiency and the simplicity of trying to knock out a competitor. Instead of going up or down say in the supply chain where we’re trying to gain some efficiencies in a whole supply chain, we tend to often find that it looks a lot simpler to just buy out our competitors so we don’t have to worry about them anymore. But history has shown that your chances of actual success when you buy competitors, who you hated yesterday by the way, and now you have to love them because they’re now a part of your organisation. It doesn’t work too often and in fact you have about a 66 to 68 percent chance of failure in those organisations. You’re much better off when you go up or down in the supply chain and you lock in say the supply of raw materials, or you lock in some of the distribution or the people involved in the distribution for example.
Dobbie: So you’re buying more control in effect by going down that road?
Coulthard: That’s right, well you know people talk about the importance of strategic alliances and all that, but they’re usually talking about linking people in the supply chain, same with M&As. But you did mention about the issue of due diligence and certainly diligence there appears to be two key things. Are you going in there for strategic reasons which I mentioned before, or is it just finance? And if it’s just for financial reasons, then you’re probably going to miss a whole lot of things such as mismatch of the cultures between the organisations, the whole integration planning required, and you know just getting the communication right or more fundamentally which is really a problem. And this is often driven by egos of CEOs who should know better when they just pay too much, and then later on turning on the light to find that people have got no clothes on, and you realise that you’ve just bought something that you probably should never have touched.
Dobbie: A lot of that of course is difficult to tell before you buy. I mean there tends to be the due diligence tends to be a completely darted driven process doesn’t it? Largely driven by the finance team.
Coulthard: I think in the past that was true and although I do believe that today you’re finding that teams of people are going in, and they’re usually teams of not just people from the consulting area, because let’s face it consultants make their money by trying to put people together or when acquiring another, but also I think you’re finding teams of people from the functional areas within organisations are now getting in there and really assessing who are the key people, what systems are working, what intellectual property and that is available in the new organisation that’s being acquired. And so therefore you’re finding they’re starting to learn from their mistakes of the past and we’re getting better decision-making.
Dobbie: Now, it is a period of immense change for both organisations when it happens throughout the organisation, I mean you’ve touched on it a couple of times already. You’re putting together two companies that may have very different cultures. How do you manage that and you know could you just find after the deal’s done that the cultures are so different, the only way you’re going to resolve it is to get rid of everyone in one of the companies and start from scratch which makes you begin to wonder why you bought the company in the first place.
Coulthard: You’re absolutely right. It’s funny because at the end of the day we talk about this in Organisational Behaviour or in Strategy that your corporate culture is the reason for your competitive advantage. Now once you start taking over other organisations and integrating corporate cultures, well your chances are that you’re going to muck-up that competitive advantage; that you’ve been driving for so long to build, so one of the first things you’re going to think about is what the heck is going to happen if we integrate? Is there a disparity between cultures? How do we handle those cultural differences and do we even in fact need to integrate the two cultures of two organisations or in fact should we be keeping them separate? Because each of them in their own right gives each of them a competitive advantage, and once we bring them together as one entity, we’re going to stuff that whole competitive advantage up.
Dobbie: And you believe that’s something that’s not really factored in at that due diligence stage often?
Coulthard: In the past I don’t believe it has. I still believe there’s a lot of people who are naive to the importance of corporate culture, and they’re more looking at it from a simplistic manner in terms of some key financial indicators.
Dobbie: When you spoke about keeping staff, what about keeping customers? If I’m a St George customer for example, I’m probably not going to be very happy about becoming a Westpac customer; I mean deals like that you’d have to expect a high mind of customer churn, surely.
Coulthard: It’s interesting having been in this finance industry and banking for 15 years. I went through a few waves of those mergers so I can relate to this very well. And that was one of the biggest challenges. You know you have a whole lot of key people that’s so focused internally on just getting some integration happening — who’s gonna do what, who’s in charge of what department and all the incredible effort being put towards just making the systems and processes come together. Sometimes the poor old customer is somewhat forgotten, and yet you would think that that would be the key fundamental thing to get a focus on right from day one; which of course means that too often we don’t have a plan of how to tackle post-merger, the whole thing about the people, the customers, property, assets, purchasing, IT and we sometimes find that we’ve got a whole lot of energy being spent by people on things that are to do with the acquisition or the merger, and not to do with keeping our customers. Now guess what our competitors are doing?
Dobbie: They’re having a field day.
Coulthard: I had to look in the figures and it suggests that within the first five days of an acquisition being announced, that all of your key people will have been contacted.
Dobbie: That’s why I love getting your staff and your customers. Well that’s the interesting thing — retaining your staff is one thing; trying to retain your customers is difficult, particularly when the people who should be focusing on that are probably too busy focusing on what’s happening internally, and a large chunk of that is going to be for a lot of them is am I going to keep my job because obviously at the top you’re gonna have two CFOs, two CEOs, two marketing directors, two sales directors. You basically want to halve your management team.
Coulthard: Those are some very good points you’ve made there and let me just try to cover a few of those. Number one, in terms of that effort where the key people are focusing on the acquisition and not on the customers, one of the key things is you have to have a clear plan on dealing with keeping your customers informed, what’s in it for them, what’s good for them as you do obviously for your key people in your organisation. The key people have to be locked in almost from the due diligence stage as soon as they’re identified, and right throughout the organisation, I don’t mean just at the senior level, they could be anywhere in the organisation. They’ve got to be identified and locked in to long-term career path opportunities or you’ll lose them. Your competitors will be circling. The next part is that it’s very important to have some clear strategic direction. So then clear mission engulfs the new entity have to be in place, or people will not see where it’s going to take them. They will not be excited and therefore they’re more likely to take those offers from those competitors. You need to have a clear strategy say an integration manager and team right from virtually the day that due diligence is started, rather than waiting until it’s even announced, but right from the day you have to start forming the team and having some clear instruction of how they’re going to deal with the whole integration. And those key people you know they have to have that sort of leadership style that’s going to reduce the conflict, encourage the change; they have to be sort of what I call closers. They have to be people who promise and deliver on those promises. You have to have people who really almost crusaders who have to be able to build a new entity, and then cheer people on who are building and being successful so that you build and mould the whole new team, because morale you can expect to drop. You’ll find that about 25 percent of the acquired executives leave in the first year, and 50 percent by the end of the first three years. It’s pretty depressing …
Dobbie: And that could be the stronger of the two.
Coulthard: Could be your best people and in fact what it shows is that quality of the people has absolutely nothing to do with departure rates. But for the first nine years after an acquisition, it’s about doubled. The top management departure rate has about doubled normal. If you don’t find those good people fairly quickly and lock them in, then you’re certainly going find you’re going to lose quite a few.
Dobbie: So this team that you talked about seems important. The team that’s going to drive both companies through the process, and you really do need to involve people from both organisations don’t you for that to work? Otherwise it is seen as being a takeover.
Coulthard: It’s funny you should say that because every CEO or senior teams I’ve spoken to, feel comfortable working with their own people and they seem more mindset in comfort, and when they buy out another company you know they’re suspicious, there’s a lack of trust, and often the first thing they want to do, the temptation is just move our people in there. Let’s get in there and make it happen. Let’s sort of impose ourselves on the other organisation. And just from what some of what we’ve been talking about, the culture and all the rest of it, that maybe that’s the wrong way to go. We’re often just failed to sort of say, “Hey, what are we trying to achieve here?” Can we actually do this better by perhaps sitting down and getting the planning team to talk about, you know, some of those senior executives and getting them for at least for the first 12 months into some challenging roles, we can measure their performance. If they sort of fit in and look like their going to be part of the long-term team, giving them some more incentives to do more.
Dobbie: It looks like you know we can do lots of figures on paper prior to a merger. Human beings are the complicating factor I think. Over your 15 years in the finance industry and beyond and out of all the mergers and acquisitions you’ve seen, what’s the success rate in terms of a few years down the track the company meeting the expectations in terms of cost-savings and incremental value to the business?
Coulthard: It’s almost a guarantee if it’s of similar size organisations coming together that you have less chance of success because of just the power of the two paths coming together it leads to a lot of trauma. You’ve got a couple of years at least where you can expect below average performance. So two years is usually about the indicator when you start to kick out of that downtime, as I would call it. So if you were going to be a shareholder for example in a company today, in the Australian stock exchange, and you saw there was a large acquisition you could probably sell your shares immediately afterwards because you know they always bounce up in value at a very nice premium, wait about 18 months, buy it at a low level and see your shares grow again. Disappointing really.
Dobbie: It sounds like Max you’ve given us some useful insights and a good stock tip at the same time. Thanks for your time today.
Coulthard: Not a problem.
Dobbie: Next time on BTalk, Incentive Travel. With the economy taking a bit of a downward slide, is now a really good time for you to be spending money on jollies?
Froggatt: And you’ve got to remember that the increase sales that result from salesmen achieving predetermined targets is that the incentive itself is funded by part of those profits.
Dobbie: That’s Richard Froggat, the Director of NGT Travel Conference Incentives in Melbourne. We talk to him next time on BTalk Australia.
Add your thoughts and comments by clicking “Participate” at the bottom of this post.
See also:
How To Executive A Merger
When to Ally and When to Acquire
How to Avoid M&A Culture Clash
Listen to other editions of BTalk Australia here.
