Mergers and Acquisitions (M&A) are a common tool used by companies to position themselves to take advantage of market conditions, realign assets, or manage financial obligations.
In 2015, Bloomberg estimates there were over $3.8 TRILLION in M&A transactions. For the US market, especially for companies with strong balance sheets in areas including the broad Energy sector as well as Manufacturing & Services, there is an expectation that M&A (or Acquisition & Divestitures for those focused on asset only trsansactions) will be at an all-time high as struggling companies look to avoid bankruptcy, strong market players consolidate their market share and new Private Equity money comes into the market to build new, lean competitors by funding, acquiring and restructuring existing, overleveraged firms.
The failure rate of M&A transactions is estimated by the Harvard Business Review to be between 70% and 90%. Among the primary reasons cited for this are Culture, Due Diligence failures, and unreaslistic “Synergies”. A study by Bain and Co. identified the top 2 causes as being errors in Due Diligence, and unrealistic “Synergy” expectations. Looking at the WG Acquisition Planning and Merger Integration Process below, we can see these fundamental mistakes can happen as early as “Target Identification & Planning” and become fundamental to the deal’s valuation by the time “Operational Due Diligence & Integration Requirements” are complete.
Enterprise Performance Management (EPM) as a discipline supported by tools, dramatically improves M&A transaction success rates by quickly delivering the fact based business scenarios that give management the real information needed to understand the impact of their assumptions, understand the range of possible performance based on key market drivers and carry that plan forward into the consolidated entity with “day 1” visibility into operational execution and improvement possibilities. With this greater grasp of the facts, management can also more effectively address the softer sides of M&A like cultural and management alignment, your culture is what your results reveal.
What is Enterprise Performance Management?
Enterprise Performance Management or “EPM” is a way of doing business that creates an information-centric business management culture. Focused on setting goals. Monitoring operations and optimizing performance, EPM solutions deliver significant benefits including:
- One Version of the Truth: A single set of numbers from a single source that are the basis for all discussions and decisions across the enterprise
- Dynamic Business Behavior: With the ability to integrate information from operational and financial systems and sources, EPM solutions provide daily insights used to course adjust a business when changes can still make a difference.
- Operational and Financial Views: Operations and Finance often look at the same data through different filters. EPM solutions establish a single set of data but still allows finance and operations professionals to operate on it in their context, rather than learning each other’s “language”.
- Broad Information Visibility: EPM solutions are affordable and usually “web accessed”, which provides access form a range of mobile devices like tablets and phones. This allows managers at all levels to share a view of performance consistent with their responsibilities.
Historically limited to Finance or FP&A functions, today’s EPM encompasses a broad set of corporate functions to deliver a truly Enterprise view of performance while providing a broad set of analytics to rapidly perform “root cause” analysis and business optimization.
EPM Changes the Game in M&A
How does EPM change M&A? First, Enterprise Performance Management is not a tool, it is a fundamental cultural value of a company, a commitment to precise, fact-based analysis. In Mergers and Acquisitions, Valuation is based on a set of assumptions, and most M&A processes execute 2-3 different “scenarios” designed to test boundary conditions and key assumptions. For example,
- A Power Generation Acquisition: Driven off the price of a megawatt of electricity in various markets as well as the cost of fuel and assumptions around pollution remediation expenses caused by possible environmental regulations.
- A Transportation Acquisition: Driven from the cost of gasoline and assumptions about “synergies” from consolidating maintenance and distribution facilities or the average capacity utilization of each truck by consolidating routes and trips.
No matter the industry, the ability to create and iterate these models and then capture them for use in post-merger management is key to not only understanding the influences on success, but also to identifying the key management points to monitor after the transaction closes
Winners in the M&A space undertake the process with speed and confidence, backed by the pricing precision and ability to quickly run scenarios that that only EPM, and supporting technology platforms, deliver. In today’s fast moving world, the ability to quickly and accurately value, negotiate and close can be the difference between success and failure.
In part 2 of this series, I'll review how EPM solutions help in the M&A planning and integration process. To learn more about the services offered by WG Consulting, please visit our web site.