What Can Help Make A Merger Or Acquisition Succeed? by [email protected]
Research shows that most mergers end up destroying shareholder value. Some experts claim the number of destructive mergers is as high as 85%. But when they are handled right, mergers also offer companies tremendous opportunities for growth. So what can firms do to avoid the pitfalls of value destruction? Rajesh Makhija, chief marketing and M&A officer of Mphasis, a global IT services firm whose acquisition by the Blackstone Group was announced on April 4, reflects on lessons learned during his years in the M&A trenches.(Editorial disclosure: Mphasis is a corporate sponsor of [email protected])
Mphasis, a global IT services provider for whom I serve as Chief Marketing and M&A officer, hit the news on April 4 with the announcement that the Blackstone Group would acquire a majority stake in the firm from Hewlett Packard Enterprises. Now the welcome object of a headline-making acquisition, Mphasis has itself been frequently acquisitive since its inception in 1998 — almost always buying firms with the desire to “grow the business.”
The portfolio of acquisitions that Mphasis has made over the past two decades has been diverse. We have bought services companies and software product companies, predominantly from India and the U.S., but also from the U.K., France and China. There have been large companies (worth more than $100 million) and niche units (of less than $5 million). All these takeovers have brought their own cultural and operational flavors to Mphasis.
The value these mergers promised largely fell into two buckets — primary business resources (i.e., customers, employees, technology, facilities etc.) and business value offerings (i.e., products or “productized” services). In some cases, Mphasis bought a firm because we initially found its business model or functional processes interesting, but eventually we could not apply these at a larger level.
M&A experts claim that an overwhelming majority of mergers destroy value, with some citing a figure as high as 85%. So how have mergers worked out for Mphasis? In my 15 years with the company, I have been witness to all our acquisitions. We have had a few duds, to be sure. Fortunately, none of them were debilitating. Still, we have also had very successful acquisitions, which delivered the catalytic boost and multiplier effect we had expected. As I look back and reflect on Mphasis’s experience with acquisitions, I believe following a few principles helped us avoid the pitfalls of many mergers that end up destroying value. Here are a few takeaways from that experience:
How To Make A Merger Work – Layer the Value Pyramid
I believe that to make a merger work, one needs to focus on getting the fundamental value proposition right. In our experience, this approach works like a charm.
“I believe that to make a merger work, one needs to focus on getting the fundamental value proposition right.”
In fact, we learned this lesson with the first significant transaction that Mphasis engaged in, a (reverse) acquisition of BFL in 2000. Before the merger, both Mphasis and BFL were losing money. Mphasis was a high-end technology firm, which offered high-end business and technology architecture consulting services, while BFL was focused on downstream software development and had scale, quality and speed. Within a year of the merger, the merged entity — Mphasis BFL — became profitable. The reason for this transformation was that a holistic, end-to-end set of services, beginning with business needs to deployment of the complete system, could be delivered to the existing clients of both legacy Mphasis and legacy BFL.
The merged entity could not only lay out the strategy and architecture but also develop and deliver the system. There was complete ownership and accountability. This would have been impossible when both were separate companies.
A couple of recent Mphasis acquisitions appear to be delivering a similar impact to segments of our operations by following the same strategy. These include Digital Risk, a risk compliance and technology services firm that Mphasis bought in 2012, and Wyde, a firm that provides technology solutions for the insurance industry, which Mphasis purchased in 2011.
Acquire a Direct (Smaller) Competitor
This strategy offers the next-best substitute for strong organic growth. In the case of Mphasis, such acquisitions have brought us new customers, talent and more facilities. Similarity in organizational culture, business models, and geographical locations ensured that the integration was quick and smooth.
While these acquisitions did not deliver a catalytic upside — of the kind one gets with the value acquisitions I described above — they did bring benefits of economies of scale, a critical mass for larger engagements and cost savings. For a software industry player like Mphasis, acquiring critical mass was almost a necessity to even be in the running for mission-critical assignments from our clients.
“… Whenever Mphasis has left an acquired company to its pre-acquisition “business as usual” ways, we have regretted it.”
Examples of such acquisitions include Kshema Technologies in Bangalore, which was acquired in 2004, and Princeton Consulting, located in London, which was also taken over in 2004. These organizations which, just like Mphasis, were predominantly focused on delivering technology services, had their origin, customer and employee base in geographies in which we were already operating — the U.S., India and the UK — and had similar revenue and cost-basis operating models. After acquisition, different divisions of these organizations were aligned and smoothly subsumed under respective similar units of the Mphasis organization, thus making cultural integration a non-issue. Each of these firms have now become seamless parts of the Mphasis system, driving new revenue lines and enhancing existing ones.
Never Leave the Acquired Company Alone
After a merger, a few experts argue that, the acquirer should leave the target firm alone so as not to risk destroying value. This is often the case when a large company buys an entrepreneurial start-up, the argument being that you don’t want the bureaucracy of the larger firm to stifle the entrepreneurial verve and creativity of the start-up. In our experience, though, whenever Mphasis has left an acquired company to its pre-acquisition “business as usual” ways, we have regretted it.
We learned a couple of bitter lessons. In one instance, a profitable firm that Mphasis had acquired began to bleed significant sums of revenues after the merger – a situation that worsened as it was left to its devices. This persisted for years.
But after Mphasis intervened by replacing key managers and making other significant changes — the unit has become one of the most profitable in the Mphasis ecosystem. The primary changes involved applying the mature and proven business processes from Mphasis, and of managing and delivering to client expectations. These were not easy decisions, often they had significant transformative impact on the acquired organization operating model and personnel. Once we reversed course, we found success.
“Ultimately it boils down to having a key executive who is fully focused and dedicated to the integration process and to making sure that all the goals of the merger are met.”
To be sure, there have been a few deserving cases, like a software product development unit, where Mphasis management decided to let the acquired companies operate independently. We decided that Mphasis would provide the financial investments required to develop the product or offerings, with the objective of preserving the key attributes of the