Growth Insights for CEOs

3 Keys for Increasing Odds of M&A Success

Posted by Clay Spitz

Recently, I was visiting with a colleague from my days at Waste Management Inc. (WMI), reminiscing about a major industry roll-up of which we were a part. WMI had decided to create value for shareholders by acquiring and consolidating companies in the very fragmented pest control business, creating a new national player in the industry.

We were part of the 5-person acquisition team – four of us being owners of acquired pest control companies, plus a long-time WMI executive.  In two years, this team directed the acquisition and consolidation of over 100 companies, resulting in a roll-up of about $100 million in annual revenue.  The entire consolidation was eventually sold to Terminix (but that’s a story for another time).

Successes and Messes

My colleague and I were recounting our M&A successes and messes in light of the long accepted axiom that “most acquisitions fail to achieve their objective.” A recent Harvard Business Review article states, “…study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.”  During the Waste Management roll-up days, we did much, much better.  As you might imagine, we learned a lot about acquiring, transitioning and consolidating businesses during those two years which I’ll summarize here:

  1. Financial and operational due diligence: Important, but not enough
    We had a team focused almost entirely on financial and operational due diligence on the businesses we were acquiring.  They were seasoned pros.  But WMI recognized that all the numbers and formulas and spreadsheets would not alone assure a successful result.

  2. Marketing due diligence: Critical to success
    Having a clear understanding of the market positioning and market perception of both the acquiring and acquired companies is essential.  Just a few of the critical questions to ask and research include:
    • Customer Perceptions: How does each company present itself?  What do customers and potential customers think of each company?  And how will that change when the two companies are merged?
    • Products and Pricing: How do the product sets and pricing strategies of each company compare?  How will they change once the merger is complete? 
    • Customer Loyalty: What are the customer satisfaction levels of each company and how do one company’s customers feel about the acquiring or acquired competitor?  And how will these things affect customer retention post-merger?
    • Market Gaps: Are the unfilled gaps in the market that present opportunities for the newly merged company to fill creating additional avenues for future growth?
    • Acquiring Research: And how do all these questions (and more) get answered prior to the acquisition?  The answer is market research.  This may be done by the due diligence team or by a third party market research firm.
  3. Transition and integration planning: People are key
    There are many areas of transition that need to be considered.  The areas that get the most attention are usually the obvious operational concerns, e.g., how do we choose which systems and procedures are best for the new company going forward?  However, the most overlooked aspect of the transition is people.

People and Culture are Key

The pest control business, like most service industries, is highly dependent on the caliber and training of the people in the business.  The service technicians, customer service representatives and even the customer-facing accounting people are keys to customer satisfaction and retention.  And yet they are often the most neglected part of a transition plan.  What specifics should be considered in this area?

  • Culture: How are the cultures of the two companies different?  Will they clash upon integration?  If so, how can that be avoided and a positive outcome attained?
  • Change is Coming: What will the people in the acquired and acquiring companies be told about the merger?  The biggest lie ever told is when the acquiring company tells the acquired employees, “Don’t worry, nothing is going to change.”  Of course things will change!  People cope with change better when they know what is coming.  Tell people how they fit into the new plan and what is expected of them and you will be amazed at how well they can meet or exceed expectations.
  • Messaging: What should the employees say to customers and others who ask about the merger?  Messaging to the marketplace is critical to the success of the newly created venture.  Develop the messaging before the acquisition takes place and train people to deliver the messages immediately upon closing the transaction

The importance of marketing due diligence and transition/integration planning cannot be emphasized enough.  One way to make sure that all the bases are covered is to hire an outside expert with extensive (and successful) M&A experience to help guide you through the process.

I would appreciate your thoughts and feedback on this topic.

Topics: Business Growth Strategy, Mergers & Acquisitions

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