“Europe now offers great opportunities for M&As”
Danny A. Davis, Consulting Partner of DD Consulting, a London-based M&A consultancy, talks about how companies entering into M&A deals should work out their strategy and planning in advance to enjoy the fruits of synergy and integration
As a Programme Director at Henley Business School for M&A, Davis is always in demand as guest speaker at international seminars on strategy and M&A. He has also recently written a book – M&A Integration: How To Do It. Planning and Delivering M&A Integration For Business Success – easily available on Amazon. What are the stages of a successful integration? How do you achieve the announced synergies? When do you start planning the programme? Who needs to be involved and when? Davis’s book not only offers solutions to these questions but also covers new ground as well. It’s a very practical and useful book from a man who has helped plan and run some of the largest mergers and separations in the world, including the European side of the BP-Castrol merger, which had 180 projects across 30 countries.
In an exclusive interview with Business & Economy, Davis expounds on the dynamics that shape M&A deals in today’s world and the tools and techniques for ensuring their eventual success. He says integration issues should be thought through and planned well before the deal is agreed. But even a well-intentioned acquisition can go awry if the management fails to work around the challenges needed to successfully deliver integration projects and bring about transformative change. As a strategy consultant who has been involved with integration for two decades, Davis says that apart from strategy and planning corporate functions such as HR, finance, IT, sales and marketing, supply chain, etc. also play an important role in determining the outcome of M&As. Edited excerpts from an interview:
B&E: How do you think the global M&A market is doing at present?
Danny A. Davis (DAD): The global market is doing well, and picking up. The types of deals have changed over the last few years. Deals are now smaller and will continue to be remain small in comparison to the big acquisitions we saw in the past.
B&E: What is your outlook for the future of M&A’s?
DAD: M&A’s will continue to improve and increase. We will see them happen more often and in different geographies unlike in the past when they took place mostly in the West and Europe.
B&E: Do you think the current plight of Europe could help catalyse more M&A’s in the days ahead?
DAD: Yes. A downturn in an area leads to opportunities. There are many companies in Europe, which have a good underlying base, management and product. However, for various reasons, they are struggling. The purchase of struggling companies or assets will prove very profitable in the long term. The issue is about deciding which companies are good and will stay afloat and which are poorly managed and will go under after the purchase. Clearly, some good due diligence will be needed. Also prospective buyers need to have a very strong integration plan to ensure that a currently failing business is turned around. I recently managed a turnaround deal for a FTSE 100 client. The trick is to move rapidly and deliver substantially faster than is normally done during integrations.
B&E: How relevant and useful would be the M&A’s done under distressed conditions such as in the current global economic and business environment?
DAD: There are a number of companies with distressed business and a merger can be useful in gaining scale and restoring the impetus to turn them around. So consolidation will happen as it can increase the profit. Also, there will be a number of opportunistic purchases in the hope that currently ailing companies can be turned around, at least on a standalone basis. However, I must say that it’s tough to sort the wheat from the chaff, currently.
B&E: How different are the distressed M&A’s from the normal M&A’s?
DAD: From an M&A integration view point the process we need to think about in both the cases are similar. Look at the strategy of the business we are purchasing and how we will run it once it has been bought? What does the merged entity look like? Think about the process and governance needed to plan and deliver the integration well, starting 3-6 months pre-deal and putting in place a good, very detailed plan. This is even more important for distressed M&A’s because we will need to deliver change much faster than normal.
Next, we mobilise the integration resource both internally and externally and start to deliver rapidly. The aim being to change the management, products or process as rapidly as possible. Usually, we zero in on a loss-making part of the business. Often the current management is moving slowly or is stuck in the paradigm of how they used to do business. Know what you want to do, then get in there and do it immediately.
In a turnaround deal that I oversaw as integration director earlier this year, we cut 60% of the management. We cut down on 60% of the managers and cut out an entire layer of management. Once it was completed, we went back up to the top and removed another 30% of the top team and replaced them all. Why did we do it in two phases? Well, we needed some managers in place to run the business whilst we made the changes below them and to choose the people below. However, the aim was to change everything at the top. We turned a 5% loss- making business around into a 25% profit-making business.
As the local labour laws are different in every country, ensure that you get on board some M&A integration people who know what they are doing.
B&E: What do you think are the main drivers of distressed M&A’s?
DAD: First, we must have a unit which is doing poorly that we can improve through acquisition. Second, there should be an opportunity for making a good acquisition. As prices are low currently, there is opportunity. There are companies that don’t have enough cash and are sitting ducks, ready for you to take over and improve.
B&E: Do such M&A’s create value for the promoters/shareholders in the long-run?
DAD: This is a tough question. M&A’s should create value for shareholders. However, that’s not the case if you do a bad deal. But what is a bad deal? Buy a company and pay too much, it’s a bad deal. Buy a company that is on its way down and can’t be turned around, it’s a bad deal. How do you know which companies can be turned around and which can’t? Well, that’s the million dollar question. I would be happy to help you look and think about it, but none of us have a crystal ball. Clearly, the experience of doing deals and planning and running integrations will prove useful in a pre-deal assessment of synergies and valuation. We use a valuations estimate to come to a more scientific and knowledgeable answer based on our years of experience to determine the chances of an M&A delivering positive results. However, never lose sight of the principle of buyer beware.
B&E: Do you think that buyers are now more careful in picking and choosing their M&A target?
DAD: I see people thinking more strategically about what they are going to do with the companies after purchase, i.e. doing their integration planning and thinking about it more upfront and more deeply. People are already using M&A experts to do a mini integration plan before the deal goes to the board for approval. So companies are getting external help for integration planning, especially when buying in a new geography.