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Tales from the M&A Crypt: Why so many transactions go off script

by | Sep 15, 2020

It was a match made in heaven. Research showed a healthy company. Financials checked out. Meetings went great. The courtship was a success. But after the transaction, seemingly out of nowhere, things didn’t go as expected.

From Amazon and Whole Foods to HP and Compaq and Marriott and Starwood — there is no shortage of bumpy integrations. Too often we hear, “We couldn’t have predicted this. We couldn’t have prevented this.” But is that true?

The pivotal mistake.

Watching organizations make investment decisions using traditional due-diligence is like watching the protagonist in a horror movie run upstairs from the murderer. WHY do they keep doing that when there are so many other options? Don’t they know the statistics are not in their favor?

Unfortunately, the odds are just as dismal on Wall Street as they are on Elm Street. Over 70% of mergers and acquisitions fail to meet their objectives. Why?

To be fair, It’s not that traditional due diligence is missing the mark completely, it’s that it brushes over a critical component—the people. At the end of the day, it’s not just dollars, cents, and strategic plans that make a company successful, it’s the people. People control how dollars are spent. People are in charge of carrying out plans. Peoples’ behavior and decisions define workplace dynamics. People will make or break your investment.

Human beings are behind the numbers that we crunch and the strategies that we analyze when we target investments.

It’s critical to success that investors start looking beyond the numbers to leadership readiness and culture compatibility. That they are clear about strategic goals and weigh them against questions such as:

  • Are executives ready to lead through change?
  • Are your cultures compatible?
  • Is the team ready to scale?
  • Which norms and behaviors might prevent synergy?
  • Will existing dynamics obstruct success and growth?

These predictive insights are quantifiably proven to impact ROI after a transaction, so why is it not a mandatory component of the due diligence process? Perhaps because it’s normal to want to run in the opposite direction of things that seem counterproductive to our immediate objective. Analyzing people seems too subjective, too immeasurable to be an accurate and valuable indicator of ROI. But it’s the missing component that experts predict will be a game-changer in post-COVID mergers & acquisitions.

Flipping the script

The good news? After years of working with leaders to scale teams and build resilient companies, we have found that people are predictable (and coachable), patterns do emerge, and gathering quantitative data on leadership and culture is not only possible, but advantageous to transaction outcomes and ROI. A non-financial evaluation adds depth to due diligence by evaluating factors that are proven to impact an organization’s ability to thrive after a transaction. And incorporating these evaluations into a financial due diligence process is quite seamless.

As the M&A plotline continues to thicken in the wake of a tumultuous year, non-financial due diligence could mean the difference between a blockbuster transaction and another mediocre sequel.

Take your due diligence to the next level. 

Contact us to learn more.

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