How to avoid common mistakes during high M&A activity


By Sabine Vollmer

Conditions remain strong for mergers and acquisitions, prompting 63% of CFOs to anticipate pursuing deals in 2016, according to global surveys Deloitte conducted in the fourth quarter of 2015. More than half of the CFOs who expressed interest in an M&A said they are pursuing deals to expand in existing markets, diversify in new markets, or achieve scale efficiencies.

Low interest rates, accessible and inexpensive financing, and healthy balance sheets boosted M&A activity to $3.8 trillion in 2015, surpassing the previous record set in 2007, according to data compiled by Bloomberg.

Uncertainty that is curbing the risk appetite in some countries may also slow M&A activity, but exuberance during periods of rapid M&A activity can lead to mistakes that companies aren’t usually prone to make. The three most common are:

  • Lacking a clear strategy as to what role an M&A will play in the company’s growth.
  • Paying too much for a deal because average bid premiums are driving up prices.
  • Resorting to an M&A as a last-ditch option to drive corporate growth.

To avoid the mistakes, CFOs can take these five steps:

Assess strengths, weaknesses, and opportunities for growth. The CFO and executive management should assess the company’s opportunities for growth in revenue and value and develop a strategy to complement strengths and backfill weaknesses. That may include deciding which customer segments in which geographic locations to serve and how to distinguish the company from its competitors, as well as understanding the capabilities and market access required to achieve the goals. 

Identify priority pathways for growth. As part of the strategic assessment, identify new products or solutions that should be brought to market by a specific business unit at prices adding value for customers. These priority pathways for growth can highlight gaps and the role of M&A across specific units.

Examine competitors’ deals. Deals competitors have made in the past, including the size and geography of the deal, customer segments affected, and capabilities, can help prioritise M&A targets based on the company’s strategy.

Strategically screen identified opportunities. Generate portfolios of priority M&A candidates by screening identified opportunities. Screening filters such as size, geography, technology, and management talent, are important strategic choices that can help management and the board understand why a particular target was identified in the first place.

Execute with discipline. Anticipate potential culture clashes, labour disputes, and distribution gaps in a particular deal and factor them in during the screening process. With the integration risk identified, differentiate M&A opportunities and determine resources and talent needed to integrate effectively.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.