M&A activity in Asia Pacific is projected to hit a new high of US$750 billion in 2019. Despite confidence being high, the likelihood for any given merger or acquisition to succeed is low. Singapore ranks 3rd among countries with the most failed M&A deals. So what are the top M&A risk factors that companies and deal makers in Asia need to look out for?
Speaking to clients here in Singapore and across Asia, I have observed a few common hazards, such as overpaying for deals, insufficient operational diligence, culture-related issues, insufficient financial due diligence rigor, and target company management operating capability, just to name a few.
Some risk factors stand out more than others and culture risk remains at the top of the list. According to Mercer’s M&A Readiness Research series 3.0 report, “Mitigating Culture Risk to Drive Deal Value”, culture issues are derailing M&A transactions globally at an alarming rate of 43%. Deal makers are experiencing delayed close, no close or an impact on purchase price. In fact, 30% of transactions worldwide fail to ever meet financial targets due to culture-related issues.
The Asian buyers I come across are often first-time acquirers into overseas markets. They typically do not have management teams to take on the operations of overseas subsidiaries, so they often retain the target’s management. They then face the new challenge of clearly assigning and distinguishing governance and decision-making rights between owner and management, which in practice is never clear-cut and straightforward. In the case of Japanese whiskey-maker Suntory’s acquisition of Jim Beam in the US, the mere suggestion of using Japanese kaizen processes to improve the quality of the Jim Beam whiskey caused a firestorm and resulted in significant tension between the management teams on both sides.
My colleague Lewis Garrad also shared a case study in a recent webinar of how some Asian companies link pay with employee tenure rather than pay-for-performance, which is the common practice in Western organizations. Documenting and quantifying red flags and gaps like these can help you build them into the pricing.
Interestingly, Mercer | Sirota research suggests that company management style has a significantly bigger impact on organizational culture as compared to national cultures. In a study presented at the Annual Conference for the Society of Industrial and Organizational Psychology, our researchers demonstrated that company culture influences employee engagement survey results dramatically more (up to 12 times!) than the national culture the employee belonged to. This reinforces what we all intuitively know: Leadership and management have tremendous influence on not just people, but the bottom-line.
All of these issues relate to culture and need to be addressed sensitively during an M&A deal.
· Driver – The client wanted to acquire new skills in the area of digital transformation, increase its geographic footprint and access new markets to meet aggressive growth targets.
· Challenge – However, the client did not have any experience conducting cross-border transactions but knew that national and organisational cultural differences could potentially derail the transaction. They partnered with Mercer to leverage our cultural diligence framework to identify the key differences in the organisational cultures and leadership styles and formulate a well thought-out organisational integration strategy.
· Solution – Mercer administered our Executive Culture Assessment online survey to map out the current state organizational cultures of both the client and the target and map out the future desired state for the combined organisation. We supplemented the survey results with interviews with the target company’s top executives and conducted a detailed due diligence on the target companies organisational, workforce and rewards data in order to compare the results of the survey with the factual evidence.
· Result – The Client achieved its post-acquisition revenue growth target of 20%.
So what practical steps can companies take to reduce culture risk in M&A transactions in Asia?
A common failing in M&A transactions is having separate diligence teams operating in silos with no common understanding of the deal thesis or rationale. The reality is that different stakeholders value different cultural components. Independent M&A advisors believe performance measurement plays a pivotal role in defining culture (45%), but only 18% of HR professionals agree, according to the Mercer report. According to Jeff Cox , Mercer's Global M&A Transaction Services Leader, “Deal makers can mitigate M&A risk and drive deal value by putting culture at the center of business transformation. Culture is a firm’s operating environment. It defines an organization, allows effective change of business strategy, and can provide a platform to attract and engage the right talent."
Step 2 : Insist on cultural diligence
People often assume culture risk is a non-financial risk. I have a number of clients in the hi-tech industry that are very focused on this area and that employ very defined processes, tools and methodology that link cultural issues to their pricing and financial plans.
Step 3 : Prioritise culture, especially post-signing through first 100 days
Different stakeholders value different cultural attributes, buyers and sellers must have a common and shared understanding. I often see big pharmaceutical companies, acquiring biotech companies with vastly different cultures and then see them faced with a lot of clashes post-signing.
On a final note, I would suggest that rather than using one specific approach, having an approach that works for your organisation is paramount. Ideally, this should be an approach that you can use in a repeatable and useful way, taking you from your current state to an improved future state.
For more guidance, download the one-pager on “Top 10 critical success factors in M&A transactions”.
Dhurv Mehra is the M&A Leader and Senior Principal for Mercer’s Multinational Consulting Group for South East Asia at Mercer. He has more than 16 years of professional experience in human capital consulting across the US and Asia and is passionate about helping clients manage the health, wealth and performance of their most important asset - their people. Dhruv helps clients find solutions to the complex people challenges that occur in M&A transactions, and he continues to leverage his experience to help a growing list of Asian multinational companies become world-class organisations.