successful merger case study

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Lessons from Eight Successful M&A Turnarounds

November 12, 2018  By  Ib Löfgrén ,  Lars Fæste ,  Tuukka Seppä ,  Jonas Cunningham ,  Niamh Dawson ,  Daniel Friedman , and  Rüdiger Wolf

M&A is tough, especially when it involves an underperforming asset that needs a turnaround. About 40% of all deals, on average, require some kind of turnaround, whether because of minor problems or a full-blown crisis. With M&A valuations now at record levels, companies must pay higher prices simply to get a deal done. In this environment, leaders need a highly structured approach to put the odds in their favor.

The greatest M&A turnarounds

Automotive: groupe psa + opel, biopharmaceuticals: sanofi + genzyme, media: charter communications + time warner cable + bright house networks, industrial equipment: konecranes + mhps, retail grocery: coop norge + ica norway, shipbuilding: meyer werft + turku shipyard, retail: office depot + officemax, energy: vistra + dynegy.

We recently analyzed large turnaround deals—those in which the target was at least half the size of the buyer in terms of revenue, with the target’s profitability lagging its industry median by at least 30%. Our key finding was that these deals can be just as successful as smaller deals that don’t require a turnaround in terms of value creation. However, they have a much greater variation in outcomes. In other words, the risks are greater and the potential returns are also greater. Critically, our analysis identified four key factors that lead to success in turnaround deals.

1. These buyers use a “full potential” approach to identify all possible areas of improvement. Rather than merely integrating the target company to capture the most obvious synergies, a full-potential approach generates improvements to the target company, captures all synergies, and capitalizes on the opportunity to make needed upgrades to the acquirer as well. (See the exhibit.)

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2. These buyers have a clear rationale for how the deal will create value, and they take a structured, holistic approach:

• They initially fund the journey by generating quick wins that deliver cash to the bottom line quickly, typically restructuring back-end operations to reduce costs and increase efficiency.
• Then they pivot from cost-cutting to growth measures in order to win in the medium term. They revamp the portfolio, selling off some business units and assets and buying others that align with their strategic direction.
• Finally, they invest in the future, often focusing on building digital businesses, upgrading processes with AI, and investing in R&D to secure long-term growth and expanding margins.

Winning buyers have a clear rationale, execute with rigor and speed, and address culture upfront.

3. Successful acquirers execute their plan with rigor and speed. They begin developing plans long before the deal closes, so that they can begin implementation on day one, seamlessly combining the core elements of post-merger integration and a turnaround program. These acquirers are extremely diligent in building clear milestones and objectives into the plan to ensure that key integration and improvement steps are achieved on time. Throughout the process, they move as quickly as possible, regarding speed as their friend. Moreover, they are confident enough to make their targets public and to systematically report on progress.

4. Winning acquirers address culture upfront by reorienting the organization around collaboration, accountability, and bottom-line value. Culture can often be hard to quantify or pin down, but it’s critical in shaping a company’s performance following an acquisition. (See Breaking the Culture Barrier in Postmerger Integrations , BCG Focus, January 2016.)

The case studies on the following pages illustrate these four principles. They offer clear evidence that M&A-based turnarounds may be hard but carry significant opportunity when done right.

Groupe PSA, the parent company of Peugeot, Citroën, Vauxhall Motors, and DS Automobiles, was languishing after the 2008 financial crisis. Demand was particularly slow to recover in Europe, which accounted for more than two-thirds of the company’s sales. After losing $5.4 billion in 2012 and $2.5 billion in 2013, Groupe PSA struck a deal to sell 14% of the company to Chinese competitor Dongfeng and another 14% to the French government, for $870 million each. With the capital raised, it launched a turnaround program in 2014. As part of the program, Groupe PSA bought the Opel brand, which had lost about $19 billion since 1999, from General Motors. The deal was finalized in August 2017.

The turnaround has a strong growth element with a focus on strengthening brands. A sales offensive was built on reducing the variety of models available, offering more attractive leases (possible thanks to the company’s stronger financial services capability), and maintaining discount discipline. Cost efficiency is another important element. Limiting the number of models reduces complexity across the combined group, which reduces costs in both manufacturing and R&D. The increased scale across fewer models leads to simpler procurement and more negotiating clout with suppliers.

The turnaround continued at a relentless pace through the first half of 2018, with profitability restored at Opel and margins continuing to rise for Groupe PSA as a whole.

Overall, gross margins have increased by 35% since 2013. During the same period, Groupe PSA has rebounded from losing money to an EBIT margin of 6%, in line with competitors such as General Motors and ahead of Hyundai and Kia. Perhaps most impressive, the company’s market cap has increased more than 700%. In all, the transformation has allowed Groupe PSA to resume its position as one of the top-performing automakers in the world.

Key success factors in this turnaround: Groupe PSA started the turnaround by raising capital to fund the journey. That enabled it to buy GM’s Opel unit, halt steep financial losses quickly, and generate a profit within one year of the acquisition.

Raising capital allowed Groupe PSA to buy GM’s Opel unit and generate a profit within one year.

In 2009, French pharmaceutical company Sanofi was in acquisition mode. Many of its products were losing patent protection, and the company wanted to shift from traditional drugs into biologics. One potential target was Genzyme.

From 2000 through 2010, Genzyme had grown rapidly, but manufacturing issues at two of its facilities halted production and led to a shortage of key drugs in its portfolio. Sales plunged, the US Food and Drug Administration issued fines, and investors called for management changes. But many features of the company still met Sanofi’s needs, including a lucrative orphan drug business with no patent cliff and a strong history of innovation. Sanofi made an offer: $20 billion, or $74 per share, which was roughly Genzyme’s value before the manufacturing problems hit.

Management laid out a bold ambition and moved fast. The company streamlined manufacturing, opening a new plant to reduce the drug shortage and simplifying operations to remove bottlenecks at existing plants. Next, it moved sales and marketing for some of Genzyme’s businesses, including oncology, biosurgery, and renal products, under the Sanofi brand. It also reduced the overall sales force by about 2,000 people.

Genzyme’s R&D pipeline was integrated into Sanofi, and a new portfolio review process led to the cessation of some studies and the reprioritizing of others. And about 30% of Genzyme’s cost base was reduced through the integration with Sanofi. Genzyme’s diagnostics unit was sold off, and about 8,000 full-time employees were eliminated in the EU and North America.

The moves generated positive results fast. Overall, the integration led to about $700 million in cost reductions through synergies. By 2011, the company was back in expansion mode with 5% revenue growth, increasing to 17% in 2012. Only about 13% of Sanofi’s revenue came from Genzyme products, but these were poised for strong growth, positioning Sanofi as a global leader in rare-disease therapeutics and spurring its evolution into a dominant player in biologics.

Key success factors in this turnaround: Sanofi laid out a bold ambition in its acquisition of Genzyme, and it executed a strategic repositioning with extreme speed, cutting costs and increasing top-line growth.

Genzyme executed a strategic repositioning with speed, cutting costs and increasing top-line growth.

With 8% of the US market in 2014, cable TV provider Charter Communications found itself facing fierce competition for multichannel video subscribers, who usually had bundled services with increasingly important broadband subscriptions. The threat came not only from other multichannel video providers in its markets—including direct-broadcast satellite services and large telcos—but from internet streaming services, as many cable subscribers were “cutting the cord” and streaming video over mobile and other devices.

To protect its market share and profits, Charter significantly expanded its subscriber base in 2015 by acquiring Time Warner Cable and Bright House Networks, which had a 20.8% and 3.6% share of the US cable market, respectively, paying $67 billion for the two businesses. The acquisitions made Charter the second-largest broadband provider and the third-largest multichannel video provider in the US.

With the deal closed, Charter launched a bold transformation that captured extensive synergies among the three businesses in areas such as overhead, product development, engineering, and IT, and it introduced uniform operating practices, pricing, and packaging. Most important, the company’s increased scale improved its bargaining power with content providers. Charter went beyond synergies in a full-potential plan to accelerate revenue growth, product development, and innovation through the increased scale, improved sales and marketing capabilities, and enhanced cable TV footprint brought about by the combination of the three companies. It improved products and services, centralized pricing decisions, and streamlined operations to achieve additional operating and capital efficiency.

As a result, Charter kept up its premerger growth trend and profitability, growing at an annual rate of 5.5% post-merger to reach $42 billion in revenues in 2017. In addition, Charter’s value creation significantly outperformed that of its peers, increasing annualized TSR to 289% from the closing of the transaction to the end of 2017.

Key success factors in this turnaround: Charter made a bold move in acquiring both Time Warner Cable and Bright House Networks. Management developed an extensive plan to generate operational synergies and rationalize the commercial offering of the new entity.

Charter developed an extensive plan to generate operational synergies and rationalize the new entity’s offering.

Konecranes is a global provider of industrial and port cranes equipment and services. Several years ago, in the face of increased competition, Konecranes was struggling to cut costs or grow organically. In 2016, it bought a business unit from Terex Corporation called Material Handling & Port Solutions (MHPS), its principal competitor. The MHPS business included several brands that complemented Konecranes’ products and services, along with some sizeable overlaps in technology and manufacturing networks.

Before the deal closed, Konecranes drafted an ambitious full-potential plan to generate about $160 million in synergies within three years through cost reductions and new business. That represented a 70% improvement over the joint company’s pro forma financials. The turnaround plan encompassed all main businesses and functions across both legacy Konecranes and MHPS operations.

As part of the preclose planning, Konecranes’ leaders designed an overall transformation to start after the merger was finalized. The program covered all business units and functions and was extremely comprehensive, including the following:

• Reducing procurement spending through increased volumes
• Consolidating service locations
• Aligning technological standards and platforms
• Closing some manufacturing sites
• Streamlining corporate functions
• Adopting more efficient processes
• Optimizing the go-to-market approach
• Identifying new avenues of growth

The full program consisted of 350 individual initiatives, organized into nine major work streams and aligned with the overall organization structure to create clear accountabilities and tie the program’s impact directly to financial results. Still, many of the initiatives were complex by nature, so solid planning and rigorous program management and reporting have been critical.

Konecranes also carried out a holistic baseline survey to assess the cultures of the two organizations and define a joint target culture. An extensive cultural development and communications plan featured strongly in the early days of the integration.

The company has reported on its progress to investors as part of its quarterly earnings calls, and two years into the three-year plan, it has hit or exceeded its targets. That performance has earned praise from investors, leading to a share price increase of more than 50% since the acquisition was announced.

Key success factors in this turnaround: The combination of competitors presented a clear opportunity to create value from synergies, but management took the more ambitious approach of using the deal as a catalyst for the combined entity to perform at its full potential. Hitting —and often exceeding—performance targets has led to a dramatic rise in the company’s stock price.

Konecranes used the deal as a catalyst for the combined entity to perform at its full potential.

Coop Norge ranked third in Norway’s competitive and consolidated retail-grocery landscape in 2014, with a 22.7% share. But the company faced a major strategic challenge from its two larger competitors, which were able to use their scale advantages to negotiate favorable prices from suppliers while opening new stores. A smaller player, ICA Norway, was in a more precarious position, with a 2014 operating loss of more than $57 million on revenue of $2.1 billion. An acquisition made sense. In buying ICA, Coop aimed to become the number-two player and so increase economies of scale in procurement and logistics. ICA stores in Norway were a strong strategic fit as well, complementing Coop’s existing locations.

After the acquisition closed, Coop rebranded all ICA supermarkets and discount stores to concentrate on fewer, winning formats and to fully leverage improvements and synergies in areas such as procurement, logistics, and store operations. Coop’s discount brand, Extra, was already showing good momentum in the market, and this was accelerated through the ICA Norway transaction.

The integration and rebranding created pride and momentum internally at ICA, which led to improved growth and financial performance at the acquiring company as well. Coop moved up to second place in the market, generated new economies of scale, and realized 87% of its expected results from synergies within just eight months of the close and 96% after two years. And because the company stayed true to its existing store strategy, it was able to lean on previous experience and maintain its long-term vision. Operating profits rose by approximately $270 million, from a loss of $160 million in 2015 to a profit of $106 million in 2016. Revenue during that period increased by 10.7%, to nearly $6 billion, of which ICA stores and Coop’s existing locations accounted for 7.8 and 2.9 percentage points, respectively.

Coop Norge’s early successes in the integration created strong momentum and a culture of success.

Key success factors in this turnaround: The early successes achieved in the integration created strong momentum and a culture of success, enabling the combined entity to increase both revenue and profits in a highly competitive market.

In the early 2010s, the global shipbuilding industry declined significantly, in part because of a contraction in the demand for ships. That left many shipyards—including the Turku yard, which operated in the sophisticated niche of cruise ships and ferries—in need of cash. When Turku’s owner, STX Finland, verged on insolvency in 2014, the Finnish government (which had a stake in STX) began looking for a new owner. Meyer Werft, a leading European shipbuilder, believed that the Turku shipyard could be operated profitably and bought 70% of the yard in September 2014. As part of the deal, Turku secured two new cruise ship projects. With the orders confirmed, Meyer Werft bought the remaining shares, becoming sole owner.

Renamed Meyer Turku Oy, the company began to integrate the shipyard’s operations and find synergies in development, procurement, and other support functions. Having negotiated up-front for new business, it was able to fill Turku’s production capacity, benefit from increased scale, and begin to boost profitability almost immediately. Critically, the deal helped restore trust among employees, which extended to other important stakeholders such as customers and lenders. Such trust is essential in an industry that hinges on building a small number of very large projects, and it was fostered by Meyer Werft’s delivery on promises right from the start.

Meyer Werft then looked to planning growth in the longer term: increasing capex to boost capacity—and profitability—still further and investing in a new crane, cabin production, and a new steel storage and pretreatment plant while modernizing existing equipment. It also entered into a joint R&D project with the University of Turku to develop more sustainable practices across a ship’s life cycle—from raw materials to manufacturing processes and beyond. And it hired 500 new workers, partially replacing retiring employees, in 2018.

As a result, the company increased revenues from $590 million in 2014 to $970 million in 2017, an annual growth rate of more than 18%. It also increased profit margins to 4% in 2017, up from a loss of 5% in the acquisition year. The company now has a stable order book out to 2024, and productivity continues to climb.

Key success factors in this turnaround: In addition to making operational improvements, Meyer Werft was able to foster trust among employees and customers by delivering on its promises and showing its commitment through long-term investment.

Meyer Werft fostered trust among employees and customers by delivering on its promises.

In early 2013, Office Depot and OfficeMax were in a similar situation: online retailers were threatening their business. They agreed on a merger, with the goal of generating synergies by reducing the cost of goods sold, consolidating support functions to cut overhead, and eliminating redundancies in the distribution and sales units.

Because the two companies were merging as equals—rather than one buying the other— some decisions were difficult to make before the close (for example, which IT system the combined entity would use and where headquarters would be located). But management was able to define synergy targets and begin planning the integration during the six months before the close. The companies also created an integration management office (IMO) that addressed areas that were critical for business continuity, specifying which units would be integrated and which would be left as is.

The IMO created playbooks for 15 integration teams, addressing finance, marketing, the supply chain, and e-commerce operations, and developed a plan for communication, talent management, and change management for the overall effort. It categorized all major decisions into two groups: those that could be made prior to the close (because the steering committee was aligned) and those that couldn’t be made during that period. For decisions in the second category, the IMO laid out the two or three best options to consider. Critically, the IMO’s rigorous plans included timelines for how the businesses would evolve over the first, second, and third years of the merger, helping to align functions and manage interdependencies.

Once the deal closed, all this preparation allowed the two organizations to start the integration process immediately on day one. Within weeks, they had agreed on a leadership team for the combined entity, a headquarters site, and an IT platform. The organization was largely redesigned in just two months—a remarkably rapid effort given that it ultimately affected about 9,000 employees.

Most important, the smooth integration process allowed the companies to be extremely rigorous in capturing more synergies—and doing it faster—than anticipated. For example, they integrated the e-commerce businesses in a way that allowed them to retain most key customers. In the first year after the deal closed, the company captured cost savings close to three times management’s original targets; cost savings of the end-state organization were 50% more. In all, the merger unlocked about $700 million, putting the new company in a much better competitive position.

An extremely rigorous integration plan allowed Office Depot and OfficeMax to exceed cost savings targets.

Key success factors in this turnaround: Office Depot and OfficeMax merged in response to the threat of online competition. An extremely rigorous integration plan allowed the combined business to dramatically exceed its cost savings targets.

Texas-based Vistra Energy operates in 12 US states and delivers energy to nearly 3 million customers, with a mix of natural gas, coal, nuclear, and solar facilities enabling about 41,000 megawatts of generation capacity. It was formed in October 2016 when its predecessor emerged from a protracted bankruptcy process.

At the conclusion of bankruptcy proceedings, Vistra underwent a corporate restructuring, moving from a siloed operating model to a unified organization with a centralized leadership team and common objectives. New governance structures facilitated more consistent and rigorous corporate decision making, with an emphasis on capital allocation and risk management. In addition, management immediately launched a turnaround effort to reduce costs and improve performance across the entire organization.

In all, the company managed to reduce costs and enhance EBITDA by approximately $400 million per year, exceeding its original target by $40 million without any drop in service levels or safety standards. At the same time, investments in new service offerings—many enabled by digital technology—boosted customer satisfaction.

In 2017, Vistra announced the acquisition of Dynegy, one of its largest peers, resulting in the largest competitive integrated power company in the US. The combined entity offers significant synergies, with Vistra now on track to deliver $500 million of additional EBITDA per year, along with annual after-tax free cash flow benefits of nearly $300 million and $1.7 billion in tax savings. The deal also allows Vistra to expand into new US markets, diversifying its operations and earnings, reducing its overall business risk, and creating a platform for future growth.

The addition of Dynegy also supports Vistra’s shift toward a more modern power generation fleet based on natural gas. The company preceded that deal with the acquisition of a large, gas-fueled power plant in west Texas, and it also retired several uneconomical coal-burning facilities. In all, Vistra’s generation profile has evolved from approximately two-thirds coal-fueled sources to more than 50% natural gas and renewables.

With these measures—a successful turnaround followed by two strategic acquisitions—Vistra has positioned itself to sustainably create value for its shareholders in a very competitive industry.

Key success factors in this turnaround: Vistra’s acquisition of Dynegy represented both a pivot to growth and an opportunity to extend cost savings to an acquired operating platform.

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Case Studies of Successful Mergers

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Welcome to our exploration of successful mergers through the lens of compelling case studies. We'll delve into the strategies, execution, and outcomes that have defined some of the most successful corporate mergers in recent history. These case studies will not only provide insights into the complexities of mergers but also shed light on the factors that contribute to their success.

The Power of Mergers: An Overview

Mergers represent a significant shift in the business landscape. They can transform industries, redefine market leaders, and create new opportunities for growth. However, the path to a successful merger is often fraught with challenges. It requires strategic planning, careful execution, and a clear vision of the desired outcome.

In this section, we will explore the concept of mergers, their potential benefits, and the factors that contribute to their success. We will also touch upon the importance of studying case studies to understand the dynamics of successful mergers.

Case Study 1: The Disney-Pixar Merger

The merger between Disney and Pixar in 2006 is a classic example of a successful merger. The two companies had a long-standing relationship, with Pixar creating some of the most successful films for Disney. However, the merger took this relationship to a new level, creating a powerhouse in the animation industry.

The success of this merger can be attributed to several factors. Firstly, the merger was based on mutual respect and a shared vision for the future. Secondly, the merger allowed Pixar to retain its unique culture and creative process, which was crucial to its success. Lastly, the merger resulted in a series of successful films, which further cemented the partnership between the two companies.

Case Study 2: The Exxon-Mobil Merger

The merger between Exxon and Mobil in 1999 is another example of a successful merger. This merger created the largest company in the world at the time, with a combined market value of over $80 billion.

The success of this merger can be attributed to the complementary strengths of the two companies. Exxon had a strong presence in the Middle East and Asia, while Mobil had a strong presence in Europe and Africa. The merger allowed the combined company to leverage these strengths and expand its global reach.

Case Study 3: The Vodafone-Mannesmann Merger

The merger between Vodafone and Mannesmann in 2000 is considered one of the most successful mergers in the telecommunications industry. The merger created the largest mobile telecommunications company in the world, with over 42 million customers.

The success of this merger can be attributed to the strategic fit between the two companies. Vodafone was a leader in the mobile telecommunications market, while Mannesmann had a strong presence in the fixed-line telecommunications market. The merger allowed the combined company to offer a comprehensive range of telecommunications services.

Case Study 4: The Procter & Gamble-Gillette Merger

The merger between Procter & Gamble and Gillette in 2005 is a prime example of a successful merger in the consumer goods industry. The merger created a company with a combined revenue of over $60 billion.

The success of this merger can be attributed to the complementary product portfolios of the two companies. Procter & Gamble was a leader in the household goods market, while Gillette was a leader in the personal care market. The merger allowed the combined company to offer a wider range of products to consumers.

Lessons from Successful Mergers

Studying these case studies provides valuable insights into the factors that contribute to the success of mergers. These factors include a shared vision, complementary strengths, strategic fit, and respect for the unique culture of each company.

However, it's important to note that each merger is unique and what works for one may not work for another. Therefore, it's crucial to carefully analyze each situation and develop a tailored strategy for success.

Wrapping Up: Gleaning Insights from Successful Mergers

As we wrap up our exploration of successful mergers, it's clear that these case studies offer valuable insights for businesses considering a merger. They highlight the importance of strategic planning, mutual respect, and a shared vision for success. While each merger is unique, these case studies provide a roadmap for navigating the complexities of mergers and achieving success.

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What You Can Learn from Successful Mergers & Acquisitions

Business mergers and acquisitions (M&A) can be an effective strategy for growing the bottom line. Companies consolidate to remove excess capacity, increase market access, acquire technology more quickly than it could be built, develop new businesses, and improve the target company’s performance.

Most often, companies merge or acquire because they want to grow, with the goal of providing new top line revenue or bottom line profitability. When the market perceives an M&A strategy sound, a company’s stock price can be rewarded. Companies today exist in a global marketplace and are no longer bound by region or country. Today’s most successful companies merge and acquire businesses across country borders.

The key to sustaining the positive benefits of any merger or acquisition pursuit is ensuring the post-merger integration is successful. If so, then profitable growth can follow, and the deal valuation is achieved. Some mergers or acquisitions are focused simply on obtaining a technology. However, there are many others for which retaining the acquired talent is crucial because employees themselves have critical knowledge, skills, and customer relationships that determine the value of the acquisition. When this is the case, companies need to motivate and engage employees through the process, which is easier said than done. The new combined entity, and the people and teams within, can be more innovative and collaborative if integration efforts go well.

In this article, we’ll review a few of the most successful mergers, as well as one that didn’t reach its potential. By studying failed and successful M&A examples, you can get a better understanding of how to achieve success — tips you can apply to your company’s future growth strategies.

The Most Successful Mergers

The following three case studies show how companies achieved long-term success with M&As that had global reach. Each case study highlights the challenges the companies were facing, as well as the M&A processes they designed to meet those challenges.

Procter & Gamble Purchased Gillette

In 2005, Procter & Gamble (P&G) wanted to spark internal growth and innovation by incorporating Gillette’s processes into its own. A key to this integration was retaining top talent from the Gillette pool, which was no easy task as headhunters went after Gillette employees.

In addition to retaining top Gillette talent, P&G was also facing a range of business disruptions, including government inquiries in Massachusetts, Gillette’s home state, and issues in India that erupted as a reaction to distributor changes.

P&G tackled these challenges head on with a solid strategy. They took the time to research how these two companies could merge their best processes and talent into one profit-boosting entity. They did this by forming about 100 global integration teams .

Typically, each team would have two executives, one from each company, who were responsible for similar functions. In line with this spirit of collaboration, Gillette employees were allowed and, in some cases, such as in China, were encouraged to continue using their own processes until they could receive training on P&G’s methods.

Another important key to this merging of talent was taking it slow. Instead of rating Gillette employees on performance as normal, during the corporate integration, P&G gave the Gillette employees a year before they would review performance and tie bonuses to the outcome.

To successfully create an atmosphere of collaboration took significant communication. They had to clearly communicate a message of inclusion. The communication component of their merger and acquisition process included carefully crafting all internal and external communication around the term “merger,” rather than “acquisition,” and holding town-hall-style meetings that drove home their principles.

Throughout it all, P&G emphasized the goal of joining the best of both companies. The idea of replacing under-performing P&G employees with better-performing Gillette talent was a bold strategy for this promote-within company. It paid off: P&G leaders were supportive of this initiative, and most all employees found motivation in becoming even better by learning from the best talent at Gillette.

P&G’s commitment to merging and learning from Gillette was carried out carefully across their global holdings. P&G created a mergers and acquisitions process that:

• Smoothed the transition period — In Brazil, for example, the general manager of the company for P&G shut down the office and reworked employee placement. On Monday morning, employees from both companies arrived to new offices on different floors instead of just placing Gillette employees into the already established layout. This signaled that P&G was willing to change as well, and both teams would work together in creating success for the new company.
• Involved internal stakeholders in their decision-making process — The decision-making was not limited to the highest-level executives. Instead, P&G welcomed Gillette with a role in the process.
• Made the merger easier for Gillette employees — Employees who joined P&G from previous business mergers reached out with advice to the Gillette employees through intranet postings. P&G also worked hard to establish cross-company connections, matching seasoned employees with the new Gillette employees. Through training programs that emphasized soft skills, such as network- and relationship-building, Gillette employees learned more about the purpose, values and principles driving P&G.
• Considered the practices and procedures in each country — Not only did P&G take the important step of establishing appropriate practices and procedures in each country, they also sought to actively incorporate any of Gillette’s processes that were working better than established P&G ones. Each country’s staff worked together to merge the best processes of both companies, investing both teams in the process. This motivated all staff and drove home P&G’s commitment to merging the best of both companies.

With this calculated approach to merging two companies into a single, stronger one, P&G experienced significant success. They managed to retain more talent from the acquired team than most buyers have been able to — 90 percent of Gillette’s top managers accepted their new job offers . P&G met their revenue and cost goals within a year and enjoyed ongoing growth.

Mexico-Based CEMEX Purchased RMC in Europe

The two companies involved in this merger were CEMEX, a building materials company with headquarters in Mexico, and RMC, a multinational company headquartered in Egham, United Kingdom that produced ready mixed concrete, quarrying and other concrete products.

In 2005, CEMEX’s goal was to double its size and market share by purchasing RMC. This goal was in line with the M&A trend of emerging-market companies acquiring established ones. Examples of this trend include the acquisition of popular U.K. tea brand Tetley by the lesser-established Indian company Tata Tea and the 2003 acquisition of Korean-based Daewoo vehicle company by Indian Tata Motors. The trend continued in 2005, with Lenovo acquiring IBM’s personal computer business. The merger accelerated Lenovo’s technology and brand recognition.

CEMEX faced some significant challenges with this merger, specifically with RMC’s assessment of CEMEX; many RMC employees saw CEMEX as an emerging market firm who came in to absorb a major business with plenty of share in the developed markets.

With this negative view, the objective of getting the acquisition’s employees to assimilate into CEMEX’s established processes and global standards was no small feat. CEMEX had to find a way to share its knowledge with a team who didn’t view them as industry leaders.

The pressure for early indications of a successful merger and acquisition added to the challenge. CEMEX knew they needed to prove the validity of this merger to both RMC employees and the London capital markets. The London capital markets had the power to back additional growth with low rates. If CEMEX wanted to continue growing their global presence, they would need to be able to access future capital. CEMEX met the challenge head on by tackling one of the weakest components of RMC: its under-performing cement plant in Rugby, England.

Not only did this cement plant cause a nuisance, interfering with local TV reception, but it also was the cause of health problems due its dust and carbon emissions. Even employees who worked there were ashamed to admit their connection to this highly unpopular cement plant.

CEMEX worked to turn the plant around, making a significant investment in the process, especially the air filtration system. While it wasn’t a necessary step, CEMEX leaders saw the opportunity to improve their environmental reputation.

Revitalizing this cement plant was not an easy task. It required CEMEX leaders to establish a post-merger integration process that:

• Formed the best team for the task — Changing processes is difficult enough for an internal team, but it gets even more complicated in a merger involving teams from two different cultures. CEMEX smoothed the process by sending experienced post-merger integration (PMI) teams to Rugby, as well as experts in quality control and maintenance.
• Fixed problems and trained staff without alienating Rugby colleagues — CEMEX emphasized the role of the PMI team as being temporary. This allayed fears that the Rugby team had. Instead of viewing the PMI team as coming to take their jobs, they saw them as fellow — and temporary — team members who would work alongside them. The PMI members took the time to listen to their Rugby counterparts, actively seeking their advice. The CEMEX experts also recommended keeping all local managers who were interested in retaining their positions.
• Trained Rugby employees on the new corporate culture — CEMEX made the right training investment in Rugby employees. They sent them to CEMEX plants in the United States, Mexico and Germany to obtain first-hand experience with CEMEX ethics, technology and management practices. Once Rugby employees better understood the principals and processes behind CEMEX, they were motivated to join the team, igniting change among other Rugby employees when they returned.
• Provided effective cross-cultural training for CEMEX employees — The CEMEX PMI team was comprised of employees from around the globe, including Mexico, Spain, Hungary, Brazil, and Uruguay. Insightfully, CEMEX saw the challenges of working with different cultures and viewed it as an opportunity to bridge cultural gaps. The PMI team underwent cross-cultural training in British culture, learning what was accepted and how they needed to adjust their current processes to align with expectations.

CEMEX’s commitment to respecting Rugby and educating their team on cultural differences was key to their success. By the end of the first quarter, they saw an increase in safety and productivity, while achieving a decrease in carbon emissions.

Perhaps even more importantly, the resistance to the merger that many RMC employees felt was replaced by a spirit of teamwork and motivation. RMC employees were invested in CEMEX’s vision and plan for the future.

CEMEX modeled their mergers and acquisitions integration process after the Rugby plant as they acquired new operations throughout Europe. They deployed almost 800 experts on PMI assignments and experienced similar integration success. Through these successful integrations, they developed an internal, streamlined processes to identify cost-saving and best-practices in transfer opportunities.

France-Based Publicis Groupe Acquired Saatchi & Saatchi

Now the fourth-largest communications and advertising company in the world, Publicis Groupe can point to their acquisition of cash-strapped Saatchi & Saatchi in 2000 as a key to their success. They wanted to secure future growth for their company by acquiring Saatchi.

One of the biggest challenges Publicis faced was retaining the top talent at Saatchi. Following the control change, top Saatchi employees could cash out their stock on favorable terms. This is typical with M&A transactions — shareholders of the target company have the option to cash out at significant premiums, especially when transactions are all-cash deals. When the acquiring company pays with a mix of cash and stocks, the shareholders of the target company hold a stake in the new merged company, giving them a vested interest in its success.

Another factor complicating matters was the established culture at Saatchi. Saatchi’s company identity revolved around creative excellence and independence. Moreover, the culture of French Publicis clashed with the culture of the British company. Employees of Saatchi had difficulty accepting a French company buying them out.

Making Saatchi employees feel like becoming a part of Publicis and investing in the creation of a new company together became primary goals for the merger. They achieved a successful merger thanks to a plan that:

• Enlisted the participation of Saatchi employees — At the Publicis welcoming retreat, Saatchi played a leading role in the meeting. Instead of expecting Saatchi to assimilate into their corporate culture, Publicis made it clear that Saatchi would be integral to forming this new company.
• Adopted Saatchi’s best practices — Publicis drove home their view of Saatchi employees as team members by announcing they would adopt the Saatchi operating system, and distributed the Saatchi-written management book to all employees. They also announced Publicis managers would have the opportunity to learn from Saatchi’s top talent through training sessions.
• Established Saatchi’s ongoing role in the future of the company — Publicis established Saatchi as running parallel, along with other agency networks. To further strengthen this new role, Saatchi’s CEO joined the operating committee at Publicis.

These committed efforts to respecting the culture of Saatchi paid off. Saatchi employees were motivated to join the Publicis mission, despite their pride and desire for autonomy. Publicis continued this method of integration when they added digital-marketing agency Digitas to their company. They emphasized the central role the acquired company would play in the future of the new company, instilling a sense of investment and excitement.

Learning From Mergers That Didn’t Work

While we can learn what to do when we study successful company mergers, reviewing mergers that didn’t work can also reveal important insights. One of the most famous international mergers to end in failure was the Daimler-Benz merger with Chrysler in 1998. Originally marketed as a “merger of equals,” it didn’t take long for employees to realize this was not the case.

When Daimler-Benz sought a merger with U.S. automaker Chrysler, they wanted to create a car-making leader that spanned across the Atlantic. Less than 10 years later, however, they sold the venture for $30 billion less than they paid for it. [1]

What went wrong? Looking back, experts point to differences in culture — both national and corporate — that led to the failed partnership. Unlike other successful mergers, this one lacked a strategy that:

• Addressed the two different cultures of each company — While Chrysler’s company identity revolved around being diverse, daring and creative, German Daimler-Benz was safe, efficient and conservative. Instead of working to bring these two visions and identities together — or defining how they could exist in unison — Daimler-Benz neglected to address the issue.
• Established mutual trust and respect — A key of successful mergers and acquisitions is creating mutual trust and respect among the two different companies. Through communications and actions, other companies made it a point to highlight the importance of the acquired company talent, seeking advice and establishing teams that worked together for the greater good. In this case, however, both sides were reluctant to work together and share their resources. Daimler-Benz exacerbated this issue by trying to dictate the terms of how the new company should work. Seeing key Chrysler executives resigning or being replaced by Daimler-Benz counterparts attributed to the breakdown of a “merger of equals” philosophy, resulting in even more lost trust.
• Incorporated best practices from the acquired company — Successful mergers don’t seek to replace a company. Instead, the goal is to make a company better by adopting new talent, processes and philosophies. Daimler-Benz had a hierarchy that was based on respect for authority and a clear chain of command. Chrysler’s was much different. They took a team-oriented approach. Daimler-Benz didn’t try to incorporate any of the best practices of Chrysler, which led to a complete clash in operating philosophies.

Post-Merger Integration: Keys to Successful M&As

Without a strong cultural-integration plan, mergers and acquisitions fail to deliver long-term value. An effective cultural-integration plan must overcome the most common obstacle to a successful merger: how employees respond. If the employees are in shock, full of anxiety, and protest the merger, the company will experience a host of problems, from supplier unrest to losing customers and being disapproved by governments. Additionally, when the human integration efforts fail, many key employees will leave, often with skills and knowledge that are not easily replaced. When that human capital walks out the door — most likely to a competitor — the asset value of the deal itself is compromised.

While you can define value in different ways, from profits to employee happiness, the point remains unchanged: If you are merging your company with another, you want it to be more valuable than before.

A Dedicated Integration Team

To ensure your company’s merger brings value to all invested parties, care must be taken to identify and train leaders with emotional intelligence and agility around culture — both corporate culture and national culture. The goal of your integration team is to successfully identify and integrate the new talent. Your team needs to:

• Help the often highly emotional and culturally diverse employees navigate through the process
• Communicate the change effectively and establish processes that are transparent
• Act as hosts welcoming the new employees
• Show they are eager to learn from the acquired company
• Build relationships that cross-cultural differences
• Work closely with HR to build positive connections across functions and informal networks

A Complete Integration of the Two Companies

Without integrating the two companies fully, you have two separate entities that are losing out on valuable connections. You have to work hard to discover, stimulate and institutionalize innovation. The new enterprise is most likely to succeed when it optimizes the resources from both companies. To fully integrate, you need to:

• Identify the processes that offer the best value and adopt them
• Consider those systems that need to be consolidated and centrally-run (financial systems) vs. those that can have some autonomy.
• Provide training to employees on new processes and technologies that result from the integration
• View the integration in three steps: running the two companies side by side, then combining into one company in which you work to unify cultures, and finally creating the new company that works together for a new future

A Definition of the New Entity’s Corporate Culture

While the success of a merger is defined in profit numbers, the people are the driving force behind the performance. To effectively define your new corporate culture, you should:

• Recognize differences in the two companies’ corporate cultures and take steps to bridge the gap
• Identify the new combined company’s values, attitude, and voice
• Set goals and objectives for the merger and communicate them clearly for managers to carry out

A Communication Plan

Once you’ve identified how the integration will proceed, you need to clearly communicate it to all invested parties. When there is a void of knowledge about what is happening, employees are left to fill in the gaps with speculation is are often fueled by anxiety. To alleviate fears, build trust and motivate your new combined team, you need to:

• Provide a human face behind the new company that employees can relate to
• Offer a consistent message
• Provide opportunities for employees to engage in the discussion, such as town-hall-style meetings
• Communicate regularly with updates on the process and notices of upcoming changes

Cross-Cultural Training

Companies involved in any global merger or acquisition activity face the added challenge of integrating national cultural differences in addition to corporate or organizational differences. When other national cultures are involved, one can expect additional complexity around the following activities, among others:

• Communication style (indirect vs. direct)
• Decision-making (risk vs. certainty)
• Group and team structure (egalitarian vs. hierarchical status)

One of the first steps to ensure that national cultural differences do not become an impediment to a merger is to recognize the differences early on.

This is a step that should take place before the merger is announced, and mere recognition is not enough. Having members of the integration team be fully prepared to recognize and leverage the diversity among the combined employees is critical.  This may require some cultural awareness training during the integration phase for both sides.

Through effective cross-cultural training, employees:

• Become aware of their own work style vs. that of colleagues from outside their home country
• Will form more highly productive teams and functional groups
• Have actionable advice on how to communicate with peers from other countries

Early commitment by management to learn as much as possible about the various culture(s) of a target company is key. Many mergers and acquisitions are planned with a financial and operational strategy in mind, and HR is often the last to get involved. And yet, the human integration piece is the most difficult. Those involved will benefit from having a strategy mapped to the cultural differences, both before and after the deal is signed. As part of this, a plan to educate managers on how to address and leverage these cultural gaps (corporate and national) will make the transition much smoother and faster. With clear communication based upon a commitment to integrate the best of both organizations, the new company will be stronger and more innovative in the long term.

With more than 170 consultants and nearly 4,300 country specialists, Aperian has the power to ensure a smoother merger. Get in touch with us today to speak to one of our experts to discuss your M&A needs.

References:.

[1] Gundling, E., & Caldwell, C. (2015). Leading Across New Borders: How to Succeed as the Center Shifts. Wiley.

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Mastering M&A: Your Ultimate Guide for Understanding Mergers and Acquisitions

• May 6, 2024

Table of Contents

The process of two companies or their major business assets consolidating together is known as M&A ( mergers and acquisitions ). It is a business strategy involving two or more companies merging to form a single entity or one company acquiring another. The reasons for mergers and acquisitions transactions are entirely on the basis of strategic objectives like market growth, expanding the company’s market share, cost optimisation, and the like.

What are Mergers & Acquisitions

M&As are also an essential component of investment banking capital markets. It helps in revenue generation, shaping market dynamics, and more. This article will provide a profound understanding of mergers and acquisitions including the roles and responsibilities in the M&A process , types, processes, and various other nitty-gritty involved in the investment banking fundamentals relevant to this business strategy. 

Types of Mergers and Acquisitions  

There are many types associated with the mergers and acquisitions strategy. These are:

Horizontal Mergers 

The merger or consolidation of businesses between firms from one industry is known as a horizontal merger. This occurs when competition is high among companies operating in the same domain. Horizontal mergers help companies gain a higher ground due to potential gains in market share and synergies. Investment banking firms have a major role to play in identifying potential partners for this type of merger. 

Vertical Mergers 

A vertical merger occurs between two or more companies offering different supply chain functions for a particular type of goods or service. This form of merger takes place to enhance the production and cost efficiency of companies specialising in different domains of the supply chain industry. Investment banking firms help in the evaluation of said synergies to optimise overall operational efficiency.

Conglomerate Mergers 

A conglomerate merger occurs when one corporation merges with another corporation operating in an entirely different industry and market space. The very term ‘conglomerate’ is used to describe a company related to several different businesses. 

Friendly vs. Hostile Takeovers 

Hostile takeover.

A hostile takeover is a nonconsensual merger that occurs when one corporation attempts to acquire another without the agreement of the board of directors from the target corporation.

Friendly Takeover

A friendly takeover is a consensual merger that occurs because of the agreement between the board of directors of two corporations. 

Leveraged Buyouts (LBOs) 

A leveraged buyout occurs when a company is purchased via two transactional forms, namely, equity and debt. The funds of this purchase are usually supported by the existing or in-hand capital of a company, the buyer’s purchase of the new equity and funds borrowed. 

Investment banking services are majorly relied upon throughout the entire process encompassing a leveraged buyout. Investment banking skills are necessary for supporting both sides during a bid in order to raise capital and or decide the appropriate valuation. 

Mergers and Acquisitions Process 

To succeed in investment banking careers, your foundational knowledge in handling mergers and acquisitions (M&A) should be strong. Guiding clients throughout the processes involved in M&A transactions, including roles and responsibilities in the M&A process, is one of the core investment banking skills.

Preparing for Mergers and Acquisitions

To build a strong acquisition strategy, you need to understand the specific benefits the acquirer aims to gain from the acquisition. It can include expanding product lines or entering new markets.

Target Identification and Screening

The acquirer defines the requirements involved in identifying target companies. They may include criteria like profit margins, location, or target customer base. They use these criteria to search for and evaluate potential targets.

Due Diligence

The due diligence process begins after accepting an offer. A comprehensive examination is conducted wherein all aspects of the target company's operations are analysed. They may include financial metrics, assets and liabilities, customers, and the like. Confirming or adjusting the acquirer's assessment of the target company's valuation is the main goal.

Valuation Methods

Assuming positive initial discussions, the acquirer requests detailed information from the target company, such as current financials, to further evaluate its suitability as an acquisition target and as a standalone business.

Negotiating Deal Terms

After creating several valuation models, the acquirer should have enough information to make a reasonable offer. Once the initial offer is presented, both companies can negotiate the terms of the deal in more detail.

Financing M&A Transactions

Upon completing due diligence without significant issues, the next step is to finalise the sale contract. The parties decide on the type of purchase agreement, whether it involves buying assets or shares. While financing options are usually explored earlier, the specific details of financing are typically sorted out after signing the purchase and sale agreement.

Post-Merger Integration

Once the acquisition deal is closed, the management teams of the acquiring and target companies cooperate together to merge the two firms and further implement their operations.

Taking up professional investment banking courses can help you get easy access to investment banking internships that will give you the required industry-level skills you need to flourish in this field. 

Financial Analysis   

Financial statements analysis  .

Financial statement analysis of mergers and acquisitions involves evaluating the financial statements of both the acquiring and target companies to assess the financial impact and potential benefits of the transaction. It may include statements like the income statement, balance sheet, and cash flow statement. It is conducted to assess the overall financial health and performance of the company.

In investment banking, financial modelling is a crucial tool used in the financial statement analysis of mergers and acquisitions (M&A). Investment bankers develop a merger model, which is a comprehensive financial model that projects the combined financial statements of the acquiring and target companies post-merger. 

Cash Flow Analysis  

Examining a company's cash inflows and outflows to assess its ability to generate and manage cash effectively. In investment banking jobs, one of the primary roles is to assess the transaction structure, including the consideration paid and the timing of cash flows. 

Ratio Analysis  

Utilising various financial ratios to interpret and analyse a company's financial performance, efficiency, and risk levels. Investment banking training equips professionals with a deep understanding of various financial ratios and their significance. They learn how to calculate and interpret ratios related to profitability, liquidity, solvency, efficiency, and valuation.

Comparable Company Analysis  

Comparable Company Analysis (CCA) plays a crucial role in mergers and acquisitions (M&As) due to its importance in determining the valuation of the target company. In investment banking training, you will learn how to conduct a CCA and identify a group of comparable companies in the same industry as the target company. 

By comparing the target company's financial metrics to its peers, you can identify the company's strengths, weaknesses, and positioning within the industry and provide appropriate guidance.

Discounted Cash Flow (DCF) Analysis

Discounted Cash Flow (DCF) analysis is a crucial valuation technique used in Mergers And Acquisitions . It helps determine the intrinsic value of a company. It helps project the potential cash flows of a company in the future. DCF analysis involves factors like revenue growth, operation costs, working capital requirements and the like.  

Investment banking training provides the skills in building complex financial models that are required for DCF analysis. They develop comprehensive models that incorporate projected cash flows, discount rates, and terminal values to estimate the present value of a company.

Merger Consequences Analysis

Merger Consequences Analysis helps assess the potential outcomes and impact on financial performance, operations, and value of the entities partaking in the M&A. Investment bankers conduct an extensive evaluation to identify and quantify potential synergies that may result from the merger or acquisition, encompassing cost savings, revenue growth opportunities, operational efficiencies, and strategic advantages. 

This analysis aids in estimating the financial implications of these synergies on the combined entity.

Legal and Regulatory Considerations

If you are pursuing an investment banking career, knowledge of the various legalities involved in M&As will help you nail any investment banking interview. The regulatory legalities involved in the process of Mergers And Acquisitions that partaking entities and investment banking services need to consider:-

Antitrust Laws and Regulations

Antitrust laws and regulations aim to foster fair competition and prevent anti-competitive practices. In the context of Mergers And Acquisitions , it is vital to assess whether the combination of the acquiring and target companies could potentially harm competition significantly. 

Complying with antitrust laws may involve seeking clearance from regulatory bodies or implementing remedies to address any potential anti-competitive concerns.

Securities Laws and Regulations

Securities laws and regulations are of utmost importance in M&A transactions, considering the issuance of securities or transfer of ownership interests. Compliance with these laws governs the disclosure of material information, fair treatment of shareholders, and the filing of requisite documents with regulatory entities.

Regulatory Approvals and Filings

M&A transactions often necessitate obtaining approvals from various regulatory bodies, including government agencies, industry regulators, or competition authorities. These approvals ensure adherence to specific industry regulations and are typically indispensable for proceeding with the transaction. 

Additionally, filings and disclosures like Form S-4 or 8-K, may be mandatory for furnishing relevant information about the transaction to legal authorities.

Confidentiality and Non-Disclosure Agreements

Confidentiality is crucial throughout M&A transactions. To safeguard sensitive information and trade secrets, parties involved usually enter into non-disclosure agreements (NDAs). These NDAs outline the terms and conditions governing the sharing and handling of confidential information throughout the entire transaction process.

M&A Documentation

The following M&A documents are instrumental in organising and formalising the holistic M&A process. They give clarity, safeguard the interests of all parties included, and guarantee compliance with pertinent legal and regulatory prerequisites all through the transferring process.

Letter of Intent (LOI)  

The Letter of Intent (LOI) is the first and most urgent document that frames the agreements proposed in Mergers And Acquisitions . It fills in as the commencement for exchanges and conversations among the gatherings participating in the business procedure.

Merger Agreement  

The Merger Agreement is a legally approved contract that covers every detail of the merger. It may include crucial information like the price of purchase, terms of payment, warranties, post-closure commitments and representations. This arrangement formalises the responsibilities between the partaking parties.

Share Purchase Agreement  

The Share Purchase Agreement is a legally binding contract that oversees the assets of the target organisation being acquired. It frames the terms, conditions, and legitimate liabilities connected with the exchange of ownership interests.

Asset Purchase Agreement  

An Asset Purchase Agreement is utilised when particular assets of the target organisation are being gained. It is a legal contract that sets out the regulatory commitments attached to the procurement and division of those assets.

Confidentiality Agreements  

Confidentiality Agreements, also known as Non-Disclosure Agreements (NDAs), play a major role in protecting sensitive data collected during the Mergers And Acquisitions cycle. They lay out rules and commitments to guarantee the safe handling and non-exposure of restrictive proprietary information and secrets.

Due Diligence Checklist  

The Due Diligence Checklist is a broad list that helps direct the assessment process by framing the important documents, data, and areas to be evaluated. It works with an exhaustive and deliberate evaluation of the objective organisation's monetary, legal, functional, and business viewpoints.

M&A Case Studies   

M&A case studies serve as a hub of knowledge, enabling companies to make informed decisions and avoid common pitfalls. By delving into these real-world examples, organisations can shape their Mergers And Acquisitions strategies, anticipate challenges, and increase the likelihood of successful outcomes. 

Some of these case studies may include:- 

Successful M&A Transactions  

Real-life examples and case studies of M&A transactions that have achieved remarkable success provide meaningful insights into the factors that contributed to their positive outcomes. By analysing these successful deals, companies can uncover valuable lessons and understand the strategic alignment, effective integration processes, synergies realised, and the resulting post-merger performance. 

These case studies serve as an inspiration and offer practical knowledge for companies embarking on their own Mergers And Acquisitions journeys.

Failed M&A Transactions  

It's equally important to learn from M&A transactions that did not meet expectations or faced challenges. These case studies shed light on the reasons behind their failure. We can examine the cultural clashes, integration issues, financial setbacks, or insufficient due diligence that led to unfavorable outcomes. 

By evaluating failed M&A deals, companies can gain valuable insights so they can further avoid the pitfalls and consider the critical factors to build a successful M&A strategy.

Lessons Learned from M&A Deals  

By analysing a wide range of M&A transactions, including both successful and unsuccessful ones, we can distill valuable lessons. These case studies help us identify recurring themes, best practices, and key takeaways. 

They provide an in-depth and comprehensive understanding of what are mergers & acquisitions , the various pitfalls and potential opportunities involved in an M&A that can enhance their decision-making processes to develop effective strategies.

Taking up reliable investment banking courses can be instrumental in taking your career to unimaginable heights in this field. 

M&A Strategies and Best Practices   

By implementing the following M&A strategies, companies can enhance the likelihood of a successful merger or acquisition:

Strategic Fit and Synergies  

One of the key aspects of Mergers And Acquisitions is ensuring strategic fit between the acquiring and target companies. This involves evaluating alignment in terms of business goals, market positioning, product portfolios, and customer base.

Integration Planning and Execution  

A well-balanced integration plan is crucial for a successful Mergers And Acquisitions . It encompasses creating a roadmap for integrating the acquired company's operations, systems, processes, and people. 

Effective execution of the integration plan requires careful coordination, clear communication, and strong project management to ensure a seamless transition and minimise disruption.

Cultural Integration  

Merging organisations often have different cultures, values, and ways of doing business. Cultural integration is essential to aligning employees, fostering collaboration, and maintaining morale. Proactively managing cultural differences, promoting open communication, and creating a shared vision can help mitigate integration challenges and create a cohesive post-merger organisation.

Managing Stakeholders  

Mergers And Acquisitions transactions involve multiple stakeholders, including employees, customers, suppliers, investors, and regulatory bodies. Managing their expectations, addressing concerns, and communicating the strategic rationale and benefits of the deal are all crucial. 

Engaging with stakeholders throughout the process helps build trust and support, ensuring a smoother transition and post-merger success.

Risk Management in Mergers and Acquisitions   

M&A transactions involve inherent risks that need to be effectively managed. Conducting comprehensive due diligence, identifying and assessing potential risks, and developing risk mitigation strategies are essential steps. 

It's important to consider legal and regulatory compliance, financial risks, operational challenges, cultural integration issues, and potential resistance from stakeholders.

Post-Merger Performance Evaluation  

Evaluating the performance of the merged entity post-transaction is critical to assessing the success of the deal and identifying areas for improvement. This involves tracking financial performance, measuring synergies realised, monitoring customer and employee satisfaction, and conducting periodic assessments. 

Continuous evaluation helps refine strategies and ensure the realisation of intended benefits.

Conclusion 

Mergers and acquisitions (M&A) are intricate processes that require in-depth knowledge and expertise in investment banking operations. The components discussed, such as reasons for mergers and acquisitions , M&A documentation, case studies, and strategies, emphasise the importance of comprehensive analysis, due diligence, and risk management. 

Many students tend to pursue investment banking careers because of the comparatively high investment banking salary involved. If you are one of these enthusiasts, pursuing a Certified Investment Banking Operations Professional course from Imarticus can provide you with the investment banking certification you need to get started. 

This course helps you develop the specialised skills and knowledge required for a successful career in investment banking. It covers essential topics related to M&A, financial analysis, valuation methods, and regulatory considerations, equipping learners with the necessary tools to navigate the complexities of M&A transactions.

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Successful and Failed Mergers and Acquisitions to Learn From

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

Mergers and acquisitions are nothing if not learning experiences. It’s rare that a transaction doesn’t provide the participants with at least some takeaways.

DealRoom has worked with hundreds of companies over the years on their M&A transactions, and when asked about what they’ve learned, the breadth of their answers is astounding.

However, most answers tend to fall into one of a few broad categories.

Below, we look at some of these lessons, three positive and three negative, as well as the well-known examples that you can learn from.

Learning from Successes

Here are examples of successful acquisitions:

1. The right price is the right price for you: Morgan Stanley and E*Trade acquisition

Overpaying for a target is always a mistake.

But it’s also important to distinguish between what most people think is the right price and what constitutes the right price for the buyer.

There is a fine line here, where hubris can quickly make things go awry, but if there’s sound logic underpinning the deal for the two companies to come together, it may make sense to pay a premium to ensure you land the asset.

This was the case in 2020 when Morgan Stanley acquired E*Trade for $13 billion - a 30% premium on a stock that was already trading at 13 times earnings.

Coupled with news of a Covid-19 shutdown, it’s fair to say the market didn’t react well to the acquisition: Morgan Stanley’s share price dropped from $55 to less than $30 within a month.

But move forward to July 2021 and the stock is worth $75 . It was right for them. Just not for everybody else.

2. Understand where the market is going: Facebook and Instagram acquisition

It’s easy to believe that everyone that makes a successful acquisition simply understands at what stage their market is at.

In theory, that should be easier for people already operating in that market, but shifts in technology take even the most experienced companies by surprise (see the number of retailers that have gone bankrupt, failing to anticipate the rise of ecommerce by way of example).

Facebook’s acquisition of Instagram for $1 billion in 2012 makes it look like a company that knew exactly where social media was headed. It seemed like a lot to pay for 25 million users - particularly when Facebook had hundreds of millions.

But Instagram allowed advertisers to advertise in ways that Facebook couldn’t. And Mark Zuckerberg knew that advertising was key to the survival of social media. Fast forward to 2021 and Instagram has 1 billion users.

3. When the right company appears, acquire: Walt Disney Co. and Pixar acquisition

Some of the best acquisitions are opportunistic. Just because a company isn’t actively looking to make acquisitions doesn’t mean that undertaking M&A is a bad idea.

A number of factors can conspire to make buying another company a good idea when least expected. On the rare occasions when these deals present themselves, you’ll be able to identify them because both sides of the transaction will know that a deal makes perfect sense.

This was what happened when Disney acquired Pixar in 2006. The two had a distribution agreement which was coming to an end and had to be renegotiated. But as soon as both sides considered it, a merger made far more sense.

The synergies were huge. Best of all, Disney was able to acquire Pixar with a share deal that valued it at a premium of less than 5% of its going market price.

A match made in heaven.

7 Steps to a Successful M&A Deal (Useful Guide)

Learning from Failures

Here are examples of acquisition failures:

1. Underestimating culture: Amazon and Whole Foods acquisition

Underestimate culture at your peril. Perhaps culture in M&A isn’t given the importance it deserves because  it’s considered the ‘soft’ side of a deal.

A litany of failed deals owing to culture clashes between two companies shows what a colossal error this is. When Amazon acquired Whole Foods in 2017, from the outside, it looked like a match made in heaven.

Amazon had a way into the grocery market, and Whole Foods instantly overtook its rivals in technology.

Only everybody forgot culture. Amazon, whose culture is largely based on efficiency and making incremental gains using technology, runs contrary to the more traditional and homespun values of Whole Foods.

In a way, the whole point of organic food is that it’s not efficient. It’s quality at the cost of efficiency.

Although the two companies remain an entity, it’s now generally accepted that their cultures were far too misaligned from the outset for the deal to be a success.

2. Rushing due diligence: Caterpillar and ERA acquisition

As soon as a company makes the decision to undertake a transaction, there’s an inherent desire to get the deal done.

This desire shouldn’t overtake the necessity to make sure that everything is in order beforehand.

The example of western companies trying to get on the China bandwagon through acquisitions at the turn of the century is littered with examples of companies failing to take ample due diligence in order to just get the deals done.

One such example is provided by Caterpillar and ERA in 2002. On the surface, Caterpillar was acquiring an industry leader in China, giving it the ideal launchpad into the world’s largest coal market.

Underneath the surface?

ERA’s coordinated accounting misconduct which had gone on for years. Caterpillar was cavalier in its attitude to due diligence . The result was a $580 million write down in the value of the target.

3. Overestimating synergies: News Corporation and MySpace acquisition

M&A synergies may be the most commonly cited reason for executives for undertaking mergers and acquisitions. As a rule, the bigger the deal, the bigger the estimated synergies from the deal will be.

And while synergies usually do exist, so does the temptation to overstate them. A sort of built-in bias in dealmakers’ thinking.

A Bain survey of executives showed that around 60% of them state that they’re guilty of overestimating synergies from deals.

Mixing new with traditional media provides ample cases of companies overpaying for new media with the idea that it will generate huge synergies.

The case of News Corporation acquiring MySpace for $580 million in 2005 is a case in point. News Corporation, with its speciality in delivering media adverts, thought Myspace would generate $1 billion in synergies per year.

A huge overestimation. Some years later, it was divested for a figure of $35 million .

The 8 Biggest Mergers and Acquisitions Failures of All Time

Top 10 reasons why mergers & acquisitions fail.

There’s no need to reinvent the wheel every time you decide to participate in mergers and acquisitions.

There are enough deals that have been concluded - good and bad - that can be learned from. Even if the examples aren’t associated with your industry, or the companies are several sizes the size of your own, take some lessons from each.

Applying them gives anybody a good roadmap on their M&A journey.

Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

Organizational culture in mergers: Addressing the unseen forces

Cultural factors and organizational alignment are critical to success (and avoiding failure) in mergers. Yet leaders often don’t give culture the attention it warrants—an oversight that can lead to poor results. Some 95 percent of executives describe cultural fit as critical to the success of integration. Yet 25 percent cite a lack of cultural cohesion and alignment as the primary reason integration efforts fail.

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How can companies address culture more effectively during a merger? How can the transformational opportunity a merger offers lay the groundwork for a healthy, high-performing organization?

This article describes our approach to understanding and addressing culture in mergers and focuses on the actions needed to combine operations and deliver value. This approach has been refined over more than 2,800 mergers in the past five years.

What is culture?

Culture is usually defined as one (or a combination) of the following: national cultures (German versus American, for example), artifacts (such as a suit and tie versus jeans), and employee engagement (including satisfaction levels). We believe that these definitions of culture are red herrings and instead take a very practical view, which can transcend national boundaries. We define culture as the outcome of the vision or mission that drives a company, the values that guide the behavior of its people, and the management practices, working norms, and mind-sets that characterize how work actually gets done.

Case study one

“I can think of two examples where we did extremely cursory assessments of the existing organizational cultures. Based on these assessments, we thought the cultures were very similar. Only later did we learn just how different the cultures were, particularly in terms of decision-making style. In one company, the boss made the decision, and the employee’s job was to execute. In the other, the style was more democratic. Debate was encouraged on all topics, even outside your area of functional expertise.

“So, you get the situation where the head of finance—who is used to having decisions simply followed—is suddenly challenged by someone from HR who wants to debate the issue first. The head of finance feels criticized and can’t understand why. Half the people watching this incident feel the challenge from HR is normal and appropriate, while the other half can’t understand why HR wants to have a debate over something that has already been decided and is none of their business anyway.

“People feel uncomfortable, and they don’t understand why. Leaders from the acquiring company, whose ways of working are typically adopted by default, don’t realize how uncomfortable the people from the target business are feeling. No one is recognizing their concerns, their worries, and their fears over this new style of decision making, because executives from the acquiring business don’t understand that this is a new style for people from the target company.

“This discomfort can unfortunately develop into unhappiness and to people choosing to leave. This unhappiness can also permeate throughout the organization, particularly if key leaders start to leave. It can have serious implications and affects your ability to both maintain your base business and deliver the value expected from the deal.”

—Aileen Stockburger, former vice president for worldwide business development at Johnson & Johnson

A company’s vision and values are almost always clearly defined during a merger, usually by the CEO, with input from the leadership team. The real challenges come in managing and aligning how work actually gets done. At this level, misunderstandings, friction, and tension can make it difficult or impossible for teams to work together effectively and can jeopardize the success of the deal (see sidebar, “Case study one”).

Our approach to culture

There are three key steps to understanding and managing culture during a merger:

• Diagnose how the work gets done.
• Set priorities.
• Hard-wire and support change.

Five key success factors

Leaders in merging companies can establish a clear, structured culture by following these action items:

1. Create a fact base and a common language:

• Work to gain insight into existing cultures and to recognize differences, but don’t exaggerate them.
• Understand the similarities, the differences that could cause friction, and the joint opportunities.

2. Set the cultural direction early and use it to support the deal’s goals:

• Focus on the culture elements that drive economic value in the deal and tailor the integration approach to support them.

3. Align the top team around the planned cultural direction:

• Leadership alignment and role modeling are critical to success.
• The top team must be responsible for leading the way.

4. Deliver a clear, coherent program woven into normal integration activities:

• True behavioral change requires both rational and emotional intervention throughout the system.
• Don’t view a cultural program as a separate “Friday-afternoon job” for HR; it must be woven into all integration initiatives.
• Hard-wire the desired culture into the new company’s operating model.

5. Measure cultural integration during and after integration:

• Track metrics on retention, productivity, and employee satisfaction.
• Use the metrics to monitor progress.

To be successful, companies should start this process early—well before close if possible—and act before cultural integration becomes more challenging. The process must be led from the top, the top team must commit itself to the culture effort, and employees must be strongly engaged. To put it simply, culture is everybody’s business; it is not just another item on HR’s to-do list. In fact, HR is merely an enabler. Culture is the soul of the business (see sidebar, “Five key success factors”).

You can’t design your “NewCo” culture until you understand the culture you have already. Bill Kozy, former executive vice president and COO at Becton, Dickinson and Company

Step 1: Diagnose how the work gets done

As early as possible in the merger process, leaders must learn about the culture of each of the companies involved.

From the standpoint of strategy, several key questions should be considered. What is the “secret sauce” of the target company, and where are its “pearls,” or the factors that must be preserved because they are intrinsic to its value for the acquirer? How can the acquirer benefit culturally from the target? How can the target benefit culturally from the acquirer?

As for tactics, it’s important to understand how work gets done at both companies: their management practices and working norms. How do they make decisions (for example, are they centralized or decentralized)? How do they motivate their people (say, through financial or emotional incentives)? And how do they hold people accountable—individually or collectively (as teams)?

A scientific approach is required to diagnose culture. The leaders’ gut instincts are not sufficient to understand it fully at either company.

One thing I wish we had done was [to create] a culture diagnostic right at the start of our planning process. That would have eliminated some of the misperceptions about both company cultures. It would have established an objective set of criteria around which we could have had conversations based on facts rather than just anecdotes or beliefs. Beverly Goulet, former executive vice president and chief integration officer at American Airlines

A variety of diagnostic approaches, ranging from management interviews to employee focus groups to surveys, are available. Surveys can engage large numbers of employees and give people from both companies a voice. While one-on-one interviews and targeted focus groups can offer more specific insights, they are less effective at identifying organization-wide trends or “pockets” of differing behaviors. The best bet for a holistic view is using a combination of diagnostic approaches. But the structure and terminology used across these methods must be congruent. The goals are to generate a fact base about the existing cultures and to build a single common language around this understanding. What are the similarities? What are the opportunities? What differences could cause friction?

Step 2: Set priorities

Once leaders understand the existing cultures, they can begin to set the immediate cultural priorities, which should be based on two focal points. The first is on areas where the culture can help maximize the value of the deal (such as moving to a higher-performance culture to achieve ambitious sales targets). The second is on areas where companies must manage meaningful differences in ways of working to build a single high-performing organization. These are often expressed as a series of “from–to” shifts that are easy to communicate. Drawing on inputs from the diagnostic, the top team should develop a point of view about the shifts. This alignment ought to include target-company leaders where possible, since leadership alignment and role modeling are critical for successful implementation.

To really get at the essence of the challenge, the leadership team needs to understand how they have worked traditionally and to consider whether that’s the right way to work going forward. It has to be an introspective process that says, “What have we done well? What might we do better? And, frankly, does the culture we want to drive going forward even match the culture we’ve brought into this?” Beverly Goulet, former executive vice president and chief integration officer at American Airlines

The next step is to codify a specific set of behaviors, or management practices, that will further strengthen the new company. Articulating these behaviors is an important step in translating the higher-level from–to shifts into practical and tactical actions. For example, one shift could involve transitioning the organization away from a performance-management approach with unclear roles and responsibilities to one with very clearly defined roles and specific performance targets for each employee.

Cultural artifacts—for example, a new vision, mission, and values, reinforced further through symbols, emblems, and branding—can help signpost and encourage these behaviors. Such artifacts, important prerequisites for getting culture right, must be developed with a clear idea of exactly which behaviors they are designed to reinforce.

The top team should also quickly begin role modeling the change in behavior. A compelling, consistent change story should be developed centrally and collectively, and all top-team members should personalize it with their own experiences. They should then use this story to engage with their employees at every opportunity.

The fun thing about a “NewCo”: it’s a new company. So you’re building it. Bill Kozy, former executive vice president and COO at Becton, Dickinson and Company

Once the leadership team agrees on the desired behavior, a comprehensive change plan structured around cultural themes must be developed. Each theme can then be cascaded into concrete initiatives: activities and actions that constitute the change plan and are monitored through defined key performance indicators (KPIs). The target state could, for example, be to create a more agile and performance-driven sales force that works together to cross-sell (exhibit). This can be translated into supporting culture themes, such as working together well and making decisions quickly. For each theme, specific initiatives and metrics can then be developed. Taken together, these themes and their constituent initiatives encourage the desired behavior and promote the overall goals of the merger.

Accountable business leaders must drive all the initiatives instead of delegating them to HR or communications groups. Initiatives should contain a mixture of hard measures (such as structured incentives) and soft measures (including communication and celebration). It’s important to remember that changing a company’s culture often requires a lot of incremental and mutually reinforcing gains. Many of the initiatives will—and should—be very tactical. For example, introducing a disciplined approach to the way meetings are run can help embed a culture of respect for other people’s time. Defining decision rights clearly can directly increase the sense of empowerment and streamline decision making. But the real power lies in the cumulative effect of these individual actions, which must therefore be part of a structured approach.

Step 3: Hard-wire and support change

Case study two.

“To the credit of our CEO and senior-management team, they decided, as this process started, that ‘NewCo’ needed a new purpose. Of course, everybody on the buyer’s side said, ‘You can’t change the purpose of a 117-year-old company.’ But our CEO and our board said, ‘Yes, we can, and it’s in the best interest of the new company to do so!’ They changed the purpose, and they recrafted the values to fit together nicely with this. This was thoughtfully done by our senior-management team. And the organization, particularly on the buyer’s side, was really taken by this. You could hear people saying, ‘This really is going to be a new place.’

“As an individual, you therefore had two choices. Do I want to be a part of this and really get out in front of all these new expectations? Or is this just not for me? And people engaged with this challenge enthusiastically. You quickly saw a series of very practical initiatives grow up, led by business units and regions, including work to really define what we mean by being more agile and to completely redesign a series of key processes.

“When people know exactly what’s expected of them, right from the very early stages, they are more comfortable changing things and moving faster to make improvements. That clarity releases positive energy. You see leaders championing change, communicating broadly, and getting their organization more engaged on what we are trying to do.”

—Bill Kozy, former executive vice president and COO at Becton, Dickinson and Company (who led the CareFusion integration)

Once a series of coherent themes and initiatives has been identified, they can be hard-wired into the new company’s operating model and daily practices (see sidebar, “Case study two”). The redesign of policies, processes, and governance models must reflect these important cultural aspects if change is to stick. For example, nurturing a culture of respect might be reflected in company policy and values statements. It could also become an assessment criterion in individual performance reviews and compensation calculations. And at the end of every governance meeting, participants might reflect on how respected they felt by others during the conversation. Cascading and reinforcing the desired cultural changes through a series of such mutually reinforcing initiatives helps companies to change behaviors quickly and establish the new normal.

To manage cultural integration properly, the merger team must also ensure that the right messages and behavior cascade throughout the new company. That requires more than just passing messages down through the ranks. Formal structures are not always the best way to influence an organization, and executives do not always understand who the real influencers are. By identifying the most influential employees, leaders can recruit them as change agents and give them the training and skills they need to be effective in this role. This would include instruction in how to communicate the change story and how to role-model the behavior required in the influencers’ parts of the business. Signature initiatives involving the top team can also help underline its commitment and create a sense of shared endeavor. This could include changing the company dress code, to match that of the acquired company, to signal the change on both sides.

Companies often fall short when they try to realize their cultural aspirations during this third step. They should track the implementation of themes and initiatives with the same rigor they use for financial targets. Leaders should develop clear milestones, incorporate them into a centrally monitored master plan, and track them closely. KPIs should also be monitored regularly to measure whether the goals of cultural integration are being met, and leaders should take corrective action when needed. Additional employee surveys and focus groups can monitor the effect on workers. The top team should own the process, holding theme leaders accountable and proactively addressing pain points.

A merger provides a unique opportunity to transform a newly combined organization, to shape its culture in line with strategic priorities, and to ensure its health and performance for years to come. By establishing a clear fact base and understanding of the existing company cultures, leaders can use a common language to set the cultural direction for a high-performing new company. An aligned top team can begin to role-model the specific behavior needed and to lead a clear, coherent program of initiatives that communicate and embed the behavior more broadly. By tracking the effect of these initiatives, companies can take further action to correct the course as required.

As we have seen, over the longer term, companies with aligned corporate cultures and strong norganizational health deliver, on average, total shareholder returns three times those of companies whose cultures and organizational health are not closely linked. Given the magnitude of the benefit, cultural alignment should be central to any merger integration

Oliver Engert is a senior partner in McKinsey’s New York office, where Kameron Kordestani is a partner; Becky Kaetzler is a partner in the Frankfurt office; and Andy MacLean is an associate partner in the London office.

The authors wish to thank Beverly Goulet, Bill Kozy, Aileen Stockburger, and Franziska Thomas for their contributions to this article.

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The Missing Ingredient in Kraft Heinz’s Restructuring

• John P. Kotter
• Gaurav Gupta

As the company cut costs, its ability to innovate suffered.

There has been a company restructuring recipe that has worked for decades. Buy a company, trim the fat, then reinvest to facilitate growth, and make lots of money. But sometimes this recipe doesn’t work — and the story of Kraft Heinz is a prime example. Earlier this year, the company suffered a massive loss in less than 24 hours — $4.3 billion, to be precise. As Kraft Heinz focused on aggressive cost cutting, they significantly impaired their ability to innovate to keep up with the changing landscape. Leaders need to understand that the pace of change is accelerating everywhere, not just in packaged foods. Understanding how humans are biologically hardwired to respond to threats and opportunities can help leaders navigate these rapid shifts.

There has been a company restructuring recipe that has worked for decades. Buy a company, trim the fat, then reinvest to facilitate growth, and make lots of money. But sometimes this recipe doesn’t work — and the story of Kraft Heinz is a prime example. Earlier this year, the company suffered a massive loss in less than 24 hours — $4.3 billion , to be precise. And over a two-year period, the fiasco cost Berkshire Hathaway $20 billion, possibly its worst loss ever.

• JK John P. Kotter is a best-selling author, award-winning business and management thought leader, business entrepreneur, and the Konosuke Matsushita Professor of Leadership, Emeritus at Harvard Business School. His ideas, books, and company, Kotter , help people lead organizations in an era of increasingly rapid change. He is a coauthor of the book Change , which details how leaders can leverage challenges and opportunities to make sustainable workplace changes in a rapidly accelerating world.
• GG Gaurav Gupta  is a Director at  Kotter , and founder of Ka Partners, with global business experience translating strategy into successful implementation for clients in diverse industries. He is the co-author of the book  Change , which details how leaders can leverage challenges and opportunities to make sustainable workplace changes in a rapidly accelerating world.  

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Home » Management Case Studies » Case Study: Success Story of Exxon Mobil

Case Study: Success Story of Exxon Mobil

Exxon Mobil Corporation (Exxon Mobil) is an integrated oil and gas company based in the US. It is engaged in exploration and production, refining, and marketing of oil and natural gas. The company is also engaged in the production of chemicals, commodity petrochemicals, and electricity generation. The company operates across the globe. It is headquartered in Irving, Texas and employs about 80,000 people.

Exxon Mobil operates through three segments: upstream, downstream, and chemicals.

The upstream segment explores for and produces crude oil and natural gas. The company’s upstream business has operations in 36 countries and includes five global companies. These companies are responsible for the corporation’s exploration, development, production, gas and power marketing, and upstream-research activities. The company’s upstream portfolio includes operations in the US, Canada, South America, Europe, the Asia-Pacific, Australia, the Middle East, Russia, the Caspian, and Africa.

The company’s downstream activities include refining, supply, and fuels marketing. The company’s refining and supply business focuses on providing fuel products and feedstock. Exxon Mobil manufactures clean fuels, lubes, and other high-valued products. The company has interests in 12 lubricant refineries and manufactures three brands of finished lubricants (Exxon, Mobil, and Esso) through interests in over 31 blending plants. The fuels marketing business operates throughout the world. The Exxon, Mobil, Esso, and On the Run brands serve motorists at nearly 29,000 service stations and provide over one million industrial and wholesale customers with fuel products. Fuel products and services are provided to aviation customers at more than 630 airports and to marine customers at more than 180 marine ports around the world. The company supplies lube base stocks and markets finished lubricants and specialty products.

The chemicals division manufactures and sells petrochemicals. Exxon Mobil Chemical is an integrated manufacturer and global marketer of olefins, aromatics, fluids, synthetic rubber, polyethylene, polypropylene, oriented polypropylene packaging films, plasticizers, synthetic lubricant base stocks, additives for fuels and lubricants, zeolite catalysts, and other petrochemical products.

Success Story

Horizontal merger between Exxon and Mobil, result in 23% increased in market share, according to Fortune 500, ExxonMobil, stands at No1 position in 2006, further mergers are crucial components for the company’s survival and growth in the long term.

ExxonMobil adopted a balanced scorecard strategy .   In general, however ExxonMobil adopted the differentiation strategy with their operational efficiency. ExxonMobil sought to attract customers that are willing to pay additional premiums for their products and at the same time improving efficiency in the supply chain in order to reduce cost. Moreover, ExxonMobil has focused on its strengths on its core business research and development to e-business and venture capital activities.

ExxonMobil, venture to a complete new strategy, apart from their core business such as gasoline related products. ExxonMobil encourages its customers to purchase goods from its convenience stores apart from filling gasoline in the ExxonMobil gas station. Second, with its superior buying experience, the company has also able to provide convenient and fast service, hygiene restrooms and friendly employees to its customers. This exceptional service has made the relationships with its customers to become more bonded than ever before.

ExxonMobil focuses on operational efficiency, margin improvement initiatives, and prudent capital management. To achieve this, the company continues to advance its technologies, introducing marketing innovations , expanding the business lines and established markets in overseas, for example, for the refining process ExxonMobil has continuously improve health and safety procedures to reduce accidents. This focus strategy on controlling costs has helped the company to reduce costs, thus, becoming more efficient. And finally fourth, the success of the company is also derived from the effort and commitment of its employees. The ability and flexibility to continuously change in this volatile industry is a competitive advantage over the other companies.

Innovations in ExxonMobil

ExxonMobil is a greatest industry in the world in terms of oil extraction and production and the business volume is mainly based on oil. World’s prospectus in oil and petroleum products is drastically changed. Consumers are more aware and interested in the renewable energy source. While the people were always talking about the innovation and innovation and the ExxonMobil had nothing to do despite of its billion’s of dollar. The management thus thought to approach the business in different way which would base on technology and innovations. Since the consumers were searching the alternatives of petrol and oil energy where they could stay assured environmentally and personal uses. Some of the socialistic groups which never believed that there is any future of oil and petroleum products as they were badly affecting the personal lives and environment. Their loud voices which was media frenzy and almost everybody was supporting this, ExxonMobil had nowhere to go except recreating them and innovating their classical selling modules, business and ideas. Now it seemed like the ExxonMobil who always wanted to be a leader in energy sector in terms of sales, business, products and innovations as well as technology, was almost same or even gradually losing its image among the consumer level because it was producing, extracting, producing and marketing the highest level of oil and petroleum among all, seemed the major culprit of environmentally disrupting player. They had a challenge with them and if not solved, they were sure to be out of their current leading position.

As it is said that “A leader always wants to remain a leader” and this was enforcing ExxonMobil to get more innovative and technical. Public consumers’ perceptions and the company’s management were the main driving force for all these to happen. From the past, this company did not only sell its brands but also has been advocating the public safety as well. They have been researching, supporting and investing millions of dollars in these issues. ExxonMobil has been talking and working on the issues of climate changes their problems and solutions, advancements in fuel technologies; where consumers can get the efficient fuels in affordable prices, reducing GHG (greenhouse gas reduction) in operations including reduced hydrocarbon flaring, CCS (Carbon capture and storage) technology reducing overall emissions. They have spent more than $100 million in CFZ (controlled freeze zone) technology which ultimately will address the risks in climate change, along with Co2 separations from raw natural gas. Cogeneration is their exciting and ever growing hi-tech innovative approach in producing electricity from raw materials and consumer products; an ultimate scientific recycling process.

ExxonMobil innovations and far citation technologies do not stop there. Their most advancement in vehicle and fuel technology is astounding. They are launching a concept of production the next generation biofuels from photosynthetic algae. This will not be an integral part of pride for the ExxonMobil but also will be shining future in alternative energy source sector. Lithium ion battery technology making a zero-emissions vehicles, new tire lining technology for vehicles tires longevity better fuel efficiency and plastic automotive technology are the another edge of ExxonMobil’s changing world vision.

Thus the public sense who were always wanted to be more and trendy now was pushing ExxonMobil, if not they were indirectly knocking the ExxonMobil to awake. ExxonMobil has always been in business with the slogan of innovations and change. They have not only changed the prospectus of oil business but also have clearly shown their planning up to 2030. This it defines that how far the ExxonMobil is thinking about changing the organization with technology and innovations.

Now, it was a time to come with change in the way to customers and had no options as the newly established oil and petroleum organizations also were coming with at least few publicly demanded issues and this was the threat to ExxonMobil. However, they are always in the favor of changes and innovations, they had not walked dramatically till they brought a concept of bio fuel for an algae. The world was thrilled when it was officially informed that ExxonMobil is not only working to produce the biofuell from algae but also had proved the world that it has worked well in the process. This innovative step of ExxonMobil not only differentiate it and it’s pattern of business from other competitors but also showed and proved how excited and interested the ExxonMobil was about the consumer’s interests, expectations, demands and environmental aware. They not only heightened themselves in terms of business with this but also were successful to win the heart of the consumers.

Being a leader in the energy sector, ExxonMobil has maintained to satisfy its millions of customers worldwide with the commitment to safe operations, developing the employees and providing the huge contribution to the community.

Organizational strategy of ExxonMobil

ExxonMobil has not been in the top position with small games. Their visionary approaches, perfect management, a systematic way of working, cooperative teamwork and open forum for innovation has made them successful. To manage the change in any organization, it is necessary to build the intercultural bridges and highlight the necessity of dedicated training in the area of emotional intelligence . Probability of successes is related to the impact of the human emotions on business development .

ExxonMobil is effectively using the resources within the organization to bring the innovations and managing the change. Effective use of people, technology and processes with smartest workflows is what they are being able to manage the success from. The vision of change can be practiced and realized fully only when most people of the organization know and understand the goals and direction of the company in which they are being led. This mutual goal-sharing and the shared sense of desired outcomes in future can motivate each and every team member and coordinate actions which lead the organizations towards the transformation in the organization.

The primary business value is created with the combining effect of people, updated innovative technology, process and workflow, ExxonMobil management is far ahead in organizing these key factors in managing change and developing the organization . ExxonMobil employs the people who are skilled and do have the passion in adding the value to the organization. They further train and develop the team members to sharpen their productivity thus prepares the valuable assets to bring changes. They always believed in technology and innovation which provides the state-of- the -art tools of the company. ExxonMobil is properly utilizing the capitals, time and a perfect combination of human and machines.

Securing access to reserves is another driving strategy of ExxonMobil. They have changed their policy and physical state of the organization according to the demand of the time from merger and adoption e.g. merger of Exxon, Mobil and Esso. Their attention to technology innovation, speeding up of reserve growth and production growth and cultural diversity is among the key managing factors.

Communication is the major source in the process of organization’s success. An effective approach in communication is necessary across the management level. Organization needs to know well that people’s egos, prejudices, traditions, cultures, conflicting feelings, goals and their strong differences of opinion may undermine the mutual understanding. If the team members do have the opposite feelings, they may not comfortably share the ideas and knowledge at the fullest. Thus the cultural communication gaps needs to be recovered. ExxonMobil is applying the principle of perfect communication . This connection is across the organizations from team member to another team member, within management level, senior management to junior teams including marketing teams, a proper communication is necessary and that is what ExxonMobil is maintaining. There can be the experiential, inter-disciplinal, organizational and cultural communications gaps to be addressed. In the large organization like ExxonMobil, the chain of command may have too many layers to pass the messages from sender to receiver. Even in ExxonMobil has got the multilayered culture but they have the strong and faster communication command which promptly responds to the issues concerned.

Organizational culture plays the vital role in effective management in change. Most of the employee find ExxonMobil a good working place because of the culture of the company.

Strategic Differentiation

ExxonMobil has created the different directories, divisions, groups, units and strategic business units to manage such things within the organization. In support of managing change there should be the processes namely, performance management , where organizations comprises the regular budgeting , monthly reporting, market research , governance, risk management, unintended consequences, performance appraisal etc. thus the challenges are overcome and changes are defined. Governance, where the poorly managed changes are re characterized by unclear accountabilities. Another process is risk management; this is a process of assessing risk in terms of changes outcomes and in terms of risk of disruption associated with implementation of changes. The final process is of solving the unintended consequences. This is a part of risk management while managing the changes but to those issues which need especial or separate treatment .

Employee management is the most difficult and the most admired part of ExxonMobil. Poor team management and poor strategy leads to the disruption in changes and the expected outcomes cannot be achieved. Thus ExxonMobil has ensured the compatibility between structure and change vision. Company is aware that if the structure barrier is not dissolved, managing the change is difficult as the employee get frustrated, less motivated, narrowed leading to the impaired productivity and this undermines transformational effort and changes brought. Employees get empowered are more prone to succeed when they are equipped with right skills, knowledge, motivations and attitude to operate the intended organizational environment. Keeping these things as major issues, ExxonMobil continuously improves the quality of its employee by training them about the technical skills, social skills and attitudes. This way, they have effectively being able to manage the change and innovate their ideas.

The ultimate strategy usually involves the quality or performance of the products, cost and price, sale promotion and service, and strength of the sales channels. There are four segments where ExxonMobil’s strategy is working.

• Product differentiation : ExxonMobil is spending billions of dollars and investing the great deal of time in researching and branding their products to position it uniquely in the market place e.g. biofuels from algae
• Market segmentation : management level of ExxonMobil has cleverly segmented and advertised its products, changes and innovations differently in deferent regions. They have mergers and acquisitions e.g. in India and China.
• Price and cost leadership : ExxonMobil is leader in the market because of quality products and affordable prices, however, the prices have been a subject of concern from last few years.
• Construction of entry and mobility barriers: this is where ExxonMobil leaves every another company far behind. Its vision till year 2030, hi-tech products e.g. biofuel from algae etc makes competitor difficult to enter the market in same specialty.

These are the strategies that ExxonMobil is applying in managing producing and managing changes within the organization.

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Mergers and acquisitions case studies and interviews | a guide for future lawyers.

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 mergers and acquisitions case studies and interviews, a guide for future lawyers.

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If you don’t know what commercial law is or what commercial lawyers do, it’s hard to know whether you want to be one.

I’m going to discuss one aspect of commercial law: mergers and acquisitions or “M&A”, and with any luck, convince you it can be exciting.

I’ll also cover many of the aspects of mergers and acquisitions that you need to know for law firm interviews and case study exercises.

Let’s begin with an example, which highlights the impact of mergers and acquisitions. In 2017, Amazon bought Whole Foods and became the fifth largest grocer in the US by market share. This single manoeuvre shed almost $40 billion in market value from companies in the US and Europe .

The fall in value of rival supermarkets reflected fears over Amazon’s financial capacity and its potential to win a price war between supermarkets. Amazon the customer data to understand where, when and why people buy groceries, and it has the technology to integrate its offline and online platforms. When you’re in the race to be the first trillion-dollar company, acquisitions can take you a long way ( Edit: In August 2018, Apple managed to beat Amazon to win this title ).

But not all companies share Amazon’s success. In fact, out of 2,500 M&A deals analysed by the Harvard Business Review, 60% destroyed shareholder value .

That begs the question:

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Why do firms merge or acquire in the first place?

I’ll use law firms as an example. You’ll have seen that they often merge, or adopt structures called Swiss vereins, which allow law firms to share branding and marketing but keep their finances and legal liabilities separate.

In the legal world, it can be hard to find organic growth or organic growth can be very slow. Clients like to shop around, which can make it hard to retain existing business. It’s competitive: other law firms can poach valuable partners and bring their clients with them. And whilst entering new markets is an attractive option, it’s expensive, often subject to heavy-regulation and requires the resolve and means to challenge the existing players in that market.

Consolidation can help law firms, which are squeezed between lower-cost entrants and the global players, to compete. This is why we’ve seen many mergers in the mid-market. A combined firm is bigger, less vulnerable to external shocks, and has access to more lawyers and clients. The three-way merger between Olswang, Nabarro and CMS is a good example of this. The year before its merger, Olswang had revenues below £100m and a 77% fall in operating profit. Now, under the name CMS, it’s one of the largest UK law firms by lawyer headcount and revenue.

But mergers aren’t only a defensive move. They can allow law firms to speed-up entry into new markets. For example, were it not for its merger, it would have been difficult for Dentons to open an office in China. Chinese clients, especially state-owned enterprises, are often less likely to pay high legal fees, while local expertise and personal relationships can play a bigger role. There’s also regulation, which prevents non-Chinese lawyers from practicing Chinese mainland law, and plenty of competition from established Chinese law firms. That helps to explain Dentons’ 2015 merger with Dacheng, a firm with decades of experience and an established presence in the Chinese market. Now Dentons is positioned to serve clients investing in China, as well as Chinese clients looking for outbound work at a fraction of the time and cost.

Mergers can also synergies, or at least that’s one of the most frequently used buzzwords to justify an M&A deal. The idea is that when you combine two firms together, the value of the combined firm is more than the sum of its individual parts.

Synergies for a law firm merger could come from cutting costs by closing duplicate offices and laying off support staff. It could also be the fact that a combined law firm could sell more legal services than the two law firms individually, which may be bolstered by the fact that they can cross-sell their expertise to each other’s clients and benefit from economies of scale (e.g. better negotiating paper due to their size).

Finally, mergers can offer reputational benefits. Branding is an essential part of the legal world and combinations gain a lot of legal press. Mergers may allow fairly unknown firms to access new clients and generate far more business if they partner with an established firm. Very large global firms often pride themselves as a ‘one-stop shop’, pitching the fact that their size allows them to service all the needs of a client across any jurisdiction.

While it’s true that Swiss vereins have led the likes of DLA Piper and Baker McKenzie to develop very strong brands, collaboration hasn’t always worked out and some law firms have paid the ultimate price. Internal problems and mismanagement plagued the merger of Dewey & LeBoeuf , which, at the time, was called the largest law firm collapse in US history. Bingham McCutchen collapsed for similar reasons. Most recently, King & Wood Mallesons made the mistake of merging with an already troubled SJ Berwin. Poor incentive structures, defections and a fragile merger structure later led to the collapse of KWM Europe. Only time will tell whether Dentons’ 31 plus combinations, as well as the aggressive use of Swiss vereins by other firms, will be a success.

So that’s the why, I’ll now go through the how. Note, in this article, I’ll discuss the mechanics of acquisitions rather than mergers: you can see the difference in the definitions section below. As lawyers, you’ll find acquisitions are more common and you’re more likely to be asked about the acquisition process in law firm interviews and assessment centres.

Mergers & Acquisitions Definitions

• Acquisition : The purchase of one company by another company.
• Acquirer / Buyer : The company purchasing the target company.
• Asset purchase : The purchase of particular assets and liabilities in a target company. An alternative to a share purchase.
• Auction sale : The process where a company is put up for auction and multiple buyers bid to buy a target company.
• Due diligence : The process of investigating a business to determine whether it’s worth buying and on what terms it should be bought.
• Debt finance : This means raising finance through borrowing money.
• Equity finance : This means raising finance by issuing shares.
• Mergers : When two companies combine to form a new company.
• Share purchase : When a company buys another company through the purchase of its shares. An alternative to an asset purchase.
• Swiss verein : In the law firm context, this is a structure used by some law firms to ‘merge’ with other law firms. They share marketing and branding, but remain legally and financially separate.
• Target company : The company that is being acquired.

Kicking off the Acquisition Process

The buy side.

Sometimes the acquirer will have identified a company it wants to buy before it reaches out to advisers. Other times, it’ll work closely with an investment bank or a financial adviser to find a suitable target company.

Before making contact with the target company, the acquirer will typically undertake preliminary research, often with the help of third-party services to compile reports on companies. They’ll look through a range of material including:

• news sources and press releases
• insolvency and litigation databases
• filings at Companies House
• the industry and competitors

The aim is to better understand the target company. The company’s management will want to check for any big risks and form an early view of the viability of an acquisition. Then, if they’re convinced, the first contact may be direct or arranged through a third party, such as an investment bank or consultant.

Note: In practice, lawyers – especially trainees – spend a lot of time using the sources above. Companies House is a useful online resource to find out about private companies. It’s where you’ll find their annual accounts, annual returns (now called a confirmation statement) and information on the company’s incorporation.

The sell side

Sometimes, a target company wants to sell. The founders may want to retire, the company may be performing poorly, or investors may want to cash out and move on.

If a target company wants more options, it may initiate an auction sale. This is a competitive bid process, which tends to drive bid prices up and help the target company sell on the best terms possible. For example, Unilever sold its recent spreads business to KKR using this method.

But, an auction sale isn’t always appropriate. Sometimes the target company will enter discussions with just one company. This may be preferable if the company is struggling, so it can ensure speed and privacy, or the target company may have a particular acquirer in mind. For example, Whole Foods used a consultant to arrange a meeting with Amazon . That was after reading a media report which suggested Amazon was interested in buying the company.

Friendly v Hostile Takeovers

In the UK, takeovers are often used to refer to public companies. While we’ll be focusing on acquisitions of private companies, I’ll cover this here because they’re often in the news and sometimes come up in law firm interviews.

The board of directors are the people that oversee a company’s strategy. Directors owe duties to shareholders –  the owners of the company – and are appointed by the shareholders to manage a company’s affairs.

If a proposed acquisition is brought to the attention of the board and the board recommends the bid to shareholders, we call this a friendly takeover. But if they don’t, it’s a hostile takeover, and the acquirer will try to buy the company without the cooperation of management. This may mean presenting the offer directly to shareholders and trying to get a majority to agree to sell their shares.

Sometimes, it’s not too difficult; Cadbury’s board first rejected Kraft’s bid and accused the company of attempting to buy Cadbury “on the cheap”. Later, when Kraft revised its offer, the board recommended its bid to shareholders.

In other situations, hostile takeovers can be messy, especially if neither party wants to back down. This was the case in 2011 between the infamous activist investor Carl Icahn and The Clorox Company.

Icahn and the Clorox Company

In 2011, Carl Icahn made a bid to buy The Clorox Company (Clorox), the owner of many consumer products including Burt’s Bees. In his letter to the board, Icahn also tried to start a bidding war, inviting other buyers to step in and bid.

Clorox’s board rejected Icahn’s bid and quickly hired Wachtell, Lipton, Rosen & Katz, a US law firm, to defend itself. Wachtell wasn’t just any law firm. Icahn and Wachtell had been rivals for decades. In fact, between 2008 and 2011, Wachtell had successfully defended two companies from Icahn.

This was round three.

Clorox adopted a “poison pill” strategy, a tactic that allowed Clorox’s existing shareholders to buy the company’s shares at a discount. This made the attempted takeover more expensive. Martin Lipton, one of the founding partners of Wachtell, had invented the poison pill to prevent hostile takeovers in the 80’s. It was “one of the most anti-shareholder provisions ever devised” according to Icahn. Now, Clorox was using this weapon to stop the activist investor.

But that didn’t stop Icahn. In a scathing letter to the board , he raised his bid for the company.  A week later, the board rejected it again.

Icahn made a third bid. This time his letter threatened to remove the entire board. But the board didn’t back down.

Eventually, Icahn did.

The war between Icahn and Wachtell didn’t stop there. In 2013, Wachtell successfully defended Dell from Icahn. A few months after that, Icahn tried to sue Wachtell. In response, the law firm said:

“ Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability. Those tactics will not work here .”

Remember when I said corporate law could be exciting?

What are the ways a company can acquire another company?

This is one of the most common questions in law firm commercial interviews.

There are two ways to acquire a company. A company can buy the shares of a target company in a share purchase or buy particular assets (and liabilities) in an asset purchase.

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Share Purchase

In a share purchase, the acquirer buys a majority of shares in the target company and therefore becomes its new owner . This means all of the company’s assets and liabilities transfer automatically, so, usually, there’s no need to worry about securing consent from third parties or transferring contracts separately. This is great because the business can continue without disruption and the transition is fairly seamless.

However, as the liabilities of a company also transfer in share purchase, it’s important the acquirer investigates the target really well. It’ll also want to try protect itself from known risks when negotiating the acquisition agreement.

For example, suppose three months after the acquisition has completed, a former employee brings an unfair dismissal claim against the acquirer. If this was something they had known about pre-acquisition, they’ll want to be indemnified for those costs (we’ll come back to this later).

Conversely, if they didn’t know about it at the time of the acquisition and they didn’t protect themselves in the acquisition agreement, they’ll have to pay out. That’s one of the risks of doing a share purchase. (Although as we’ll discuss later, there are certain things you can do to reduce the risks of this happening.)

Asset Purchase

We call this an asset purchase . It means that the acquirer identifies the specific assets and liabilities it wants to buy from the target and leaves everything else behind. That’s great because the acquirer will know exactly what it’s getting and there’s little risk of hidden liabilities.

However, asset purchases are less common and can be difficult to execute. Unlike share purchases, assets don’t transfer automatically, so the acquirer may have to renegotiate contracts or seek consent from third parties to proceed with the acquisition.

Preliminary Agreements

Confidentiality agreements.

Before negotiations begin, the target company will want the acquirer to sign a confidentiality agreement or a non-disclosure agreement.

This is important because the seller will provide the acquirer with access to private information during the due diligence process. Suppose the acquirer decided not to proceed with the acquisition and there was no confidentiality agreement in place; the acquirer could use this information to poach staff, better compete with the target or reveal damaging information to the public.

So, lawyers for the acquirer and the target company will negotiate the confidentiality agreement. They’ll decide what counts as confidential, what happens to information if the acquisition doesn’t complete, as well as any instances where confidential information can be passed on without breaching the contract.

Exclusivity Agreements

If an acquirer is dead set on buying a particular target company then, in an ideal situation, it will want to be the only one negotiating with that company. This would give the acquirer time to conduct due diligence and negotiate on price, without pressure from competitors. It also ensures secrecy.

If the acquirer has some bargaining power, it may try to sign an exclusivity agreement with the target company. This would ensure, for a period of time, the target company does not discuss the acquisition with third parties or seek out other offers.

While it’s unclear whether an exclusivity agreement was actually signed, Amazon was clear during early negotiations with Whole Foods that it wasn’t interested in a “multiparty sale process ” and warned it would walk if rumours started circulating. That was effective: Whole Foods chose not to entertain the four private equity firms who’d expressed interest in buying the company.

Heads of Terms

The first serious step will be the negotiation of the Heads of Terms (also called the Letter of Intent) between the lawyers, on behalf of the parties. This document details the main commercial and legal terms that have been agreed between the parties, including the structure of the deal, the price, the conditions for signing and the date of completion. It’s not legally binding – so the acquirer won’t have to buy and the target company won’t have to sell if the deal doesn’t go through – but it serves as a record of early negotiations and a guideline for the main acquisition document.

Due Diligence

An acquirer can’t determine whether it should buy a target without detailed information about its legal, financial and commercial position. The process of investigating, verifying and reviewing this information is called due diligence.

The due diligence process helps the acquirer to value the target. It’s an attempt at better understanding the target company, quantifying synergies and determining whether an acquisition makes financial sense.

Due diligence also reveals the risks of an acquisition. The acquirer can examine potential liabilities, from customer complaints to litigation claims or scandals. This is important because underlying the process of due diligence is the principle of  caveat emptor , which means “let the buyer beware”. This legal principle means it’s up to the buyer to fully investigate the company before entering into an agreement. In other words, if the buyer failed to discover something during due diligence, it’s their problem. There’s no remedy after the acquisition agreement is signed.

So if the problems uncovered during the due diligence process are substantial, the acquirer may decide to walk away. Alternatively, it could use this information to negotiate down the price or include terms to protect itself in the main acquisition document.

In an asset purchase, due diligence is also an opportunity to identify all the consents and approvals the buyer needs to acquire the company.

Due Diligence Teams

The acquirer will assemble a team of advisers, including bankers, accountants and lawyers, to manage the due diligence process. The form and scope of the review will depend on the nature of the acquisition. For example, an experienced private equity firm is likely to need less guidance than a start-up’s first acquisition. Likewise, a full due diligence process may not be appropriate for a struggling company that needs to be sold quickly.

Due diligence isn’t cheap, but missing information can be devastating. In a Merger Market  survey , 88% of respondents said insufficient due diligence was the most common reason M&A deals failed. HP had to write off $8.8 billion after its acquisition of Autonomy – which was criticised for being a result of HP’s ‘ faulty due  diligence ‘. Few also looked into organisational compatibility in the merger between AOL and Time Warner, which led to the “ biggest mistake in corporate history ”, according to Jeff Bewkes, chief executive of Time Warner. In 2000, Time Warner had a market value of $160 billion. In 2009, it was worth $36 billion.

Types of Due Diligence

Financial due diligence  This involves assessing the target company’s finances to determine its health and future performance.

Business due diligence  This involves evaluating strategic and commercial issues, including the market, competitors, customers and the target company’s strategy.

Legal Due Diligence

Legal due diligence is the process of assessing the legal risks of an acquisition. By understanding the legal risks of an acquisition, the acquirer can determine whether to proceed and on what terms.

The acquirer’s lawyers have a few ways of obtaining information for their due diligence report. They’ll prepare a questionnaire for the seller to complete and request a variety of documents. This will all be stored in a virtual ‘data room’ for all parties to access. They may also undertake company, insolvency, intellectual property and property searches, interview management and, if appropriate, undertake on-site visits.

Law firms tend to have a system to manage the flow of information and trainees are often very involved. They’ll review, under supervision, much of the documentation and flag up potential risks.

Legal due diligence reports are typically on an ‘exceptions’ basis. This means they’ll flag to the client only the material issues. You can see why this is valuable to the client; rather than raising every possible issue, they’ll apply their commercial judgement to inform the clients about the most important issues.

The report will propose recommendations on how to handle each identified issue. This may include: reducing the price, including a term in the agreement or seeking requests for more information. If the issue is significant, lawyers will want to tell their client immediately, especially if what they find is very serious.

Note, due diligence is a popular topic for interviews. You may be asked to recommend possible solutions to issues uncovered during the due diligence process or asked to discuss the issues that different departments may consider (see examples below).

What are lawyers looking for during due diligence?

What might corporate investigate.

The group structure of the target, including the operations of any parent companies or subsidiaries

The company’s constitution, board resolutions, director appointments and resignations, and shareholder agreements.

Important details from Insolvency and Companies House searches

Copies of contracts for suppliers, distributors, licences, agencies and customers.

Termination or notification provisions in contracts

What do they want to know?

Whether shareholders can transfer their shares (share purchase)

Whether shareholders need to approve the sale and the various voting powers of shareholders

Any change of control provisions in contracts

Whether the target can transfer assets (asset purchase)

Any outstanding director loans, director disqualifications, or conflicts of interest

What might Finance investigate?

Existing borrowing arrangements including loan documents and any guarantees

Correspondence with lenders and creditors

Share capital, allocation and employee share schemes

Assets and financial accounts

The company’s ability to pay current and future debts

Any prior loan defaults, credit issues or court judgements

Details of ownership and title to the assets

Any liabilities which could limit the performance of the target

Whether borrowing would breach existing loan terms

Whether the loan agreements have any change of control clauses

Whether security has been granted over the target’s assets to lenders

What might Litigation investigate?

Details of any past, current or pending litigation

Disputes between the company, employees or directors

Regulatory and compliance certificates

Any judgements made against the company

Insurance policies

The risk of outstanding or future claims against the company

Details of any regulatory or compliance investigations

Potential issues or threatened litigation from customers, employees or suppliers in the past five years

What might Property investigate?

Documents relating to freehold and leasehold interests

Inspections, site visits, surveyors and search reports

Health and safety certificates and building regulation compliance

Leases and licences granted to third parties

Whether the property will be used or sold

Property liabilities

Title ownership and lease/licensing terms

The value of the properties

Details of regulatory compliance

What might Employment investigate?

Director and employee details, and service contracts

Pension schemes and employee share schemes

Pay, benefits and HR policy information

Information in relation to redundancies, dismissals or litigation

Plans to retain key managers, redundancy and compensation

Pension scheme deficits

Termination or change of control provisions

Compliance with employment law and consultation

Risks of dismissal claims

Evaluate post-acquisition integration

What might Intellectual Property investigate?

List of any trademarks, copyright, patents, domain names and any other registered intellectual property

Registration documents and licencing agreements

Litigation and related correspondence

Searches at the Intellectual Property Office

Current or potential disputes, claims of threatened litigation in relation to infringement

Whether the seller has renewed trademarks

Who has ownership of the intellectual property

Whether they can transfer licenses and gain consents

Details of critical assets, confidentiality provisions and trade secrets

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The Acquisition Agreement

The main legal document is the sale and purchase agreement or “SPA”. It sets out what the acquirer is buying, the purchase price and the key terms of the transaction.

Purchase Price

A company will usually pay for an acquisition in cash, shares, or a combination of the two.

Cash is a good option if an acquirer is confident in the acquisition. If it believes the shares are going to increase in value (thanks to synergies), paying in cash means it can soak up the benefits without having to give up ownership of the company. It is, however, expensive to pay in cash. The buyer must raise money if it doesn’t already have enough cash reserves by issuing shares or borrowing.  Most sellers also want cash. It means they’ll know exactly how much they’re getting and don’t have to worry about the future performance of a company.

Other times, an acquirer will want to use shares to pay for an acquisition. The target’s shareholders will get a stake in the acquirer in return for selling their shares. If the value of the acquirer’s shares increases, the shareholders may get a better return. Often, this option will be more attractive for an acquirer as it doesn’t use up cash. Receiving shares can also be valuable for the seller if they’re gaining shares in a promising company. Conversely, however, they must bear the risk that the value of the acquirer falls.

Key terms of the transaction

Both parties will make assurances to each other in the form of terms in the SPA. These terms are heavily negotiated between lawyers.

Warranties and representations

Warranties are statements of fact about the state of the target company or particular assets or liabilities. For example, the seller may warrant that the target isn’t involved in any litigation, that its accounts are up to date and that there are no issues with its properties. If these warranties turn out to be false, the acquirer may claim for damages. However, there are limitations: the acquirer will have to show that the breach reduced the value of the business and that can be hard to prove.

During negotiations, the seller will try to limit the scope of the warranties. It’ll also prepare a disclosure letter to qualify each warranty. For example, the seller may qualify the above warranty with a list of outstanding litigation claims. If the seller discloses against a warranty, they won’t be liable for a breach. Disclosure is also useful for the acquirer because it may reveal information that was not found during due diligence.

The acquirer will want some of these statements to be representations. Representations are statements which induce the acquirer to enter into a contract. If these are false, the acquirer could have a claim for misrepresentation. That could give the acquirer a stronger remedy, including termination of the contract or a bigger claim for damages. This is why the seller will usually resist giving representations.

Indemnities

Indemnities are promises to compensate a party for identified costs or losses. This is appropriate because the acquirer may identify potential risks during due diligence; for example, the risk of an unfair dismissal claim or a litigation suit. The acquirer can seek indemnities to be compensated for these particular liabilities arising in the future. This is a way to allocate risks to the seller: if the event occurs the acquirer will be reimbursed by the seller.

Conditions Precedent

The SPA may be signed subject to the satisfaction of the conditions precedent or “CPs”. These are conditions that must be fulfilled before the acquisition can complete. That could mean, for example, securing consent from third parties, shareholder approval or merger clearance. Trainees are often responsible for keeping track of the conditions precedent checklist, and they’ll need to chase parties for the approvals to ensure all conditions are satisfied.[divider height=”30″ style=”default” line=”default” themecolor=”1″]

Signing and Completion

This is the big day. Signing can take place in person or virtually. Each party will return the SPA with their signature in accordance with the relevant guidelines. It’ll be the trainees responsibility to check that the SPA has been signed correctly and to collate the documents.

Final Thoughts

If you’re reading this to prepare for an interview, I’d suggest you explore the “acquisition structure”, “legal due diligence” and “warranties and indemnities” sections – these are common case-study questions. We cover this in more detail and with practice interview answers in our mergers and acquisitions course, which is free for TCLA Premium members.

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• Case Studies

FIVE SUCCESSFUL MERGERS

Case studies provide useful narratives of the details and learnings from particular mergers. This report includes five in-depth cases intended to provide valuable insights to practitioners considering a merger. In most cases, multiple interviews were conducted.

• BBBS Metro Chicago—BBBS Lake County

• CFW—The Eleanor Foundation

• JourneyCare—HHPC and MPC

• Seguin Services—UCP

• WITS—Boundless Readers