This article is written by Sakshi Deo, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

Introduction

The primary purpose of creating a business is to generate value. Giving something valuable in exchange for something more valuable is the definition of value creation. For shareholders, owners, and stakeholders, value generation might mean different things. During the early stages of a business, an owner may try to create value for himself by earning returns that not only exceed his capital costs but also reach his desired return on investment. As the company grows, it must also consider the interests of other stakeholders in terms of creating value. Essentially, the company seeks to match the value expectations of its customers, resulting in increased sales of its goods and services. Companies acquire other companies as global competition grows. As a means of increasing shareholder value, owners seek higher top-line growth. A merger or acquisition makes sense only if it results in operational and/or financial benefits that the individual entities could not achieve on their own, hence generating value for both principal firms’ shareholders.

Observation

Mergermarket and Casa Business School surveyed 600 worldwide senior corporate leaders from various countries and industries about their experiences with value creation through mergers and acquisitions. As a result, while 92% of acquirers stated they had a value creation strategy in order for their most recent deal, just 61% of buyers thought their most recent acquisition added value. From the standpoint of a seller, 42% of divestors agreed that their most recent transactions generated value when compared to the value the business would have earned if it had not been sold. Around 13% of respondents indicated their most recent disposal added considerable value, while 35% said it cost them money.

Simply stated, some acquirers place an emphasis on incorporating hard tangible assets in order to maximize value. However, they overlook the intangible assets, which are just as vital as hard assets (e.g. people and culture). Acquirers’ failure to establish synergy, paying too much of a premium, selecting wrong targets and inefficient integration processes could all be contributing factors in failing to create value post a merger or acquisition. The management of the process from merger preparation through post-merger integration determines how much value is created. A solid strategy, a thorough assessment of whether the deal is worth pursuing, and a clear M&A strategy are all part of this process. In their long-term strategy, acquirers should include their value creation plan, as well as their experience in the art of deal-making and cultural obstacles that may obstruct value realization.

Synergy and value can be achieved through careful target selection and well-executed acquisitions. The size gap between the acquiring and target companies, for example, has an impact on value creation. It is doubtful that the target firm will affect value creation if it is substantially smaller than the acquiring company. If the target company’s capabilities are complementary to the acquiring company’s, there is a chance for synergy to be created. However, as the gap between the two narrows and the value created expands, integration frequently becomes difficult. Even if the two companies are of similar size, it results in a value loss. While acquiring a competitive edge through M&A is a viable corporate strategy for expansion, acquirers must understand the importance of transaction selection, deal management and governance, and post-deal integration to continue to be successful.

Deals should be approached as part of a defined clear strategy, with transaction activity aligned with the company’s long-term goals. Capture both organizations’ strengths and what they will require to become a global entity. Strong messaging about a precise and ambitious goal to capture value could operate as a “sharp repellant” to activist investors. Even yet, viewing a deal via an activist lens might help to concentrate attention on what will be accomplished, showing the deal’s short-term merits while clarifying its long-term value-creation promise.

Organizations must take advantage of synergy and transformational potential. Steer the combination for increased profitability and growth, as well as the organizational structure and operational setups that are required. It must look for overlapping operations to save money, such as product offerings, buyers, and markets serviced, as well as technological capabilities and R&D projects. Determine modifications that can add substantial value on their own. Examine possibilities for the combined company’s transformation.

In addition, businesses should make sure you understand every aspect of your comprehensive value development plan, which is more of a roadmap than a checklist. Ascertain that a full and effective procedure for performing the transaction exists, with the required diligence and focus in the value creation planning process across all aspects of the organization. Analyze how each of these value generation activities contributes to the company’s business model, synergy delivery, operating model, and technology ambitions. Starting with due diligence is an excellent idea. Blend the integration program into the transaction logic and set priorities for it based on the strategic and value-creation logic of the merger. Make early decisions about what to incorporate and what to leave out, as well as when to do so. When the agreement is signed, create an integration transition plan that includes the schedule and, in particular, top-level leadership assignments.

Organizations must place culture at the centre of their strategy. Human resources and talent management have an impact on how firms produce value. Many mergers falter because they fail to acknowledge and address cultural differences or clashing management philosophies. Culture influences senior management behaviour, organizational practices, strategy creation, and leadership styles by providing purpose, orientation, and coordination. Mergers and acquisitions are understood as a process in which two different cultures interact and, as a result, the cultures of the companies are accommodated. To succeed, organizations must devote time and resources to the process. Organize events, such as operational visits and activity seminars and training, so that teams from both firms may get to know one another. Address important changes in management practices and processes head-on, stressing new methods of working and the rationale behind them to staff.

Examples of successful value creation and failed value creation post-merger and acquisition

ArcelorMittal and DaimlerChrysler Mergers

ArcelorMittal was a success thanks to rigorous planning and execution, while Daimler Chrysler remained entangled in cultural, operational, and financial challenges.

The mergers of ArcelorMittal and DaimlerChrysler were notable for bringing together two industry giants. In both situations, one of the companies (Mittal and Chrysler) was in a moderate volume-based business, while the other was in the superior segment (Arcelor and Daimler-Benz). The estimated synergy value for ArcelorMittal was set at $1.6 billion, while it was set at $1.4 billion in Stage I and $3 billion in Stage 2 for DaimlerChrysler. Both transactions were estimated to be worth $37 billion. Both the mergers took place in similar macro circumstances, with cross-border operations, capital-intensive businesses, and strong industry-wide leverage.

Here is how the outcome for both the transactions differed

Firstly, before approaching ArcelorMittal Steel spent a significant amount of time and effort conducting due diligence. Before initiating a hostile bid to take over Arcelor, Lakshmi Mittal attempted to reach an amicable agreement. Daimler, on the other hand, seems to have sacrificed due diligence in order to take advantage of tax benefits ($1.3 billion per year) allowed under German law in exchange for a fast track arrangement.

Secondly, in the case of ArcelorMittal, the merger was continuously portrayed as a growth-oriented rather than a capacity-reduction transaction, which alleviated fears about layoffs while still keeping top talent. Employee issues were heard and addressed through a variety of means. Employees at DaimlerChrysler, on the other hand, lived under constant fear of layoffs given the lack of clear communication. Chrysler’s top executives began resigning even before the merger was announced. In addition, the disparity in layoffs between German and American workers created resentment among American workers toward their German colleagues.

Thirdly, all post-merger corporate entities, such as the Board of Directors, in ArcelorMittal had uniform participation from the two firms. The new entity’s headquarters were relocated to Luxembourg, which was formerly home to Arcelor. This aided in the formation of a bond of trust between the two groups. On the contrary, the executive bodies constituted by Daimler Chrysler were slanted in favour of the Germans, which only worsened with time. Parallel management was planned, with two CEOs – Robert Eaton (Chrysler) and Juergen Schrempp (Daimler-Benz) – and two headquarters – Auburn Hill (Chrysler) and Stuttgart (Daimler-Benz) (Daimler-Benz). These plans, meanwhile, were not carried out in spirit. Robert Eaton resigned before the end of his term, and the operational headquarters continued in Stuttgart. Employees at Chrysler felt misled as a result of this.

Fourthly, through various communication channels, ArcelorMittal attempted to resolve the concerns of numerous stakeholders. Daimler Chrysler’s messaging lacked the same level of transparency. The DaimlerChrysler merger was billed as a “merger of equals,” but the CEO of Daimler openly admitted in the year 2000 that the equal partnership was just a ruse to seal the agreement.

Lastly, ArcelorMittal was able to generate value from the merger’s synergies, as evidenced by higher profitability levels than the pre-merger independent firms. In 2007, however, the nine-year merger between Daimler and Chrysler finally ended when Daimler sold its 80.1% ownership in Chrysler to Cerberus Capital Management.

Conclusion

Mergers and acquisitions are widely recognized as useful tools for executing a corporate strategy aimed at maximizing shareholder value. However, this path is not without its drawbacks, and careful preparation of both the execution and post-deal integration stages is required. Many mergers and acquisitions fail to realize the synergies that are frequently touted when a deal is first announced. The bottom line comes down to successful integration after a company has developed its M&A strategy and executed the deal. A solid strategy, a thorough assessment of whether the deal is worth pursuing, and a clear M&A methodology are all part of this process. In their long-term strategy, acquirers should include their value creation plan, as well as their experience in the art of deal-making and cultural obstacles that may obstruct value realization. Whether deals succeed or fail to produce the much-anticipated synergies depends on the management’s ability to merge two organizations into an effective and streamlined operation. Successful integration starts with a strategy that allows those synergies to kick in right away. During the closing stages of a merger, senior management should consider defining an implementation programme as well as a governance framework to maximize the likelihood of synergies materializing.

References

• https://www.pwc.com/ph/en/pwc-needles-in-a-haystack/2019/creating-value-through-ma.html
• https://isbinsight.isb.edu/value-creation-mergers-acquisitions/
• https://journal.rostrumlegal.com/value-creation-through-mergers-acquisition/
• https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/the-organization-blog/create-value-from-your-merger-in-five-steps

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