Tech giant IBM has reported it plans to use a new algorithm to assist its corporate development team in improving the success rate of its M&A programme. It is recognised that only 30% of M&A deals are successful, and with a $20bn budget at stake, IBM is clearly looking to increase this rate.
An algorithm – IBM believes – removes the risk of human error from the M&A deal and helps speed the process. This means that targets can be identified, due diligence undertaken and the businesses integrated in as little as three weeks. However leading consultants OE Cam question the advisability of such a system when so much business success – past and future – rests on the nature and skills of the people employed, something that isn’t identified easily through data analysis.
OE Cam’s approach is borne out by the success of the UK’s Connect Group PLC, whose trading statement for the 19 weeks to 9th January 2016, published on 13th January, showed a 6.4% rise in group revenues. This report follows very strong annual results for the financial year ending 31 August 2015, where the successful acquisition and integration of the Tuffnells business contributed to an increase of 13% in profit before tax for Connect.
Connect developed a holistic approach to M&As through working with OE Cam and, since its demerger from the WH Smith Group in 2006, has used it to drive rapid change through thoughtful acquisitions. As part of its M&A approach, Connect Group has developed a systematic, rigorous process to human due diligence, recognising its importance to the overall assessment of opportunity and business fit.
Glenn Leech, Managing Director of Connect Education & Care, one of the company’s four operating divisions, explains that the people aspect of successful acquisitions is an area which differentiates the company’s approach from many others that are investing in mergers and acquisitions. “We’ve spent considerable time with OE Cam, considering how we develop the most effective assessment as part of due diligence. Working together we identify the most important people factors that will be necessary for success, also considering how our due diligence findings might translate into actions once the acquisition has been finalised.”
Leech continues: “We try to understand the capability of people we are acquiring, focusing also on cultural dynamics such as the effectiveness of the relationship in the senior leadership team. This informs our approach and quickly highlights if there are things that we will need to do differently.
“In one example, we swiftly identified that we would need to put strong ‘people processes’ in place to affect the kind of change we needed.”
Leech concludes: “Obviously the scope for analysis is dependent on the extent we can get in to the business pre-acquisition, but there have absolutely been instances where HR-led due diligence has informed how we invest in a business, what the likely costs and benefits will be and indeed whether or not we want to buy at all.”
Based on the Connect Group experience, and the team’s work with other FTSE top 100 companies, OE Cam is urging British firms not to follow the example of IBM and take people out of the M&A equation, but rather to make them central to it. The firm recommends that companies make the HR Director an equal partner with the Finance Director when undergoing the due diligence process that pre-empts a deal.
Chartered psychologist and OE Cam’s Managing Partner Martyn Sakol MBA acknowledges that some 70 per cent of mergers fail to achieve their goals, but he attributes a proportion of theses failures to ‘people issues’ and not ‘human error’.
“At OE Cam we work with organisations to assess the capability and culture of the target acquisition’s key team members. The value of the exercise is so significant that is has become a key factor in fixing a realistic value and minimising the risk in any deal.”
Martyn Sakol explains: “The human element can act as an indicator as to the true nature of a target organisation and can highlight potential issues early enough in the process so that appropriate measures can be put in place. Our process reduces the risk of losing value during and immediately post the merger due to people. One area of key importance is to provide the insight into leadership capability, behaviour and attitude that enables the acquiring company to act swiftly post acquisition, delivering changes that ensure that value is maximised from day one. These are issues that would be difficult to identify and understand through statistical analysis and modelling”
With a number of top mergers and acquisitions expected in 2016, such as Marriott hotels with Starwoods, Ladbrokes with Coral, and Anheuser-Busch InBev with SABMiller, companies clearly need to consider the impact that the ‘people’ in the business will have on the deal and factor it into the due diligence process in the same way that financial disclosure and review is undertaken.
“Sadly it is an area which is all too easily ignored until it is too late”, says OE Cam’s Martyn Sakol. “Companies need to be decisive about the management in the acquired business, as a simple mistake to make is to keep the wrong leader in place and become over-reliant on the existing senior team. It is crucial for businesses to understand the management team, understand their allegiances towards the acquired MD, and examine their motivations and drivers. The lower the management level you can assess the better – pre-deal or immediately afterwards.”
The holistic approach to maximising the effectiveness of acquisitions can be broken down into four separate strands: planning ahead, rigorous due diligence, a focus on capability and culture, and the need to execute thoughtfully but quickly.
OE Cam’s Managing Partner Martyn Sakol comments on Connect Group’s approach: “The way in which Connect Group has made this strategy a systematic part of its acquisition process is outstanding. It is a very good example of the holistic approach to M&A.
“A business needs to have strong, confident and visible leaders throughout the M&A process and this should clearly include the HR Director, who is an extremely important asset pre- and post-acquisition. Managerial changes need to be made thoughtfully but quickly after a deal is concluded, and OE Cam can help with this. Our experience shows that people often expect change immediately post-merger and – if you leave it too long – employees will be unprepared which leads to unnecessary hostility. HR focused due diligence provides the insight that makes this achievable.”
OE Cam works with major businesses on all aspects of their operation. Other programmes run by OE Cam have delivered significant new revenue streams to a food business, transformed an underperforming international finance firm and enabled a FTSE 100 retailer to overcome creative difficulties in its team to great effect.