An investment in mergers and acquisitions is a smart move for companies that want to scale. It may allow them to gain intellectual property and lead to increased revenue. Yet, especially in building products M&A, it’s important to do so wisely, minimizing risks along the way. The most successful companies to grow like this do so with calculated steps and ample support throughout the process. Because the failure rate is as high as 70% to 90%, avoiding mistakes is priority number one.
Building products M&A can be very successful. For that to happen, avoid these common mistakes.
#1: Not Identifying the Right Industry Segment
Investing in the right business is critical. The key is learning about the company’s industry segment. Determine precisely if the company to be acquired is in the right industry segment. To do this, ask questions:
- Does this segment add value to your company’s growth and development?
- Does the target organization compliment or expand your company’s reach?
- When the two companies are combined, does it improve your organization’s position in the marketplace?
Determine if this is true by examining the existing company’s position in the marketplace including customers, stakeholders, and partners. Use data to better estimate the industry segment and reach of that organization.
Another component in identifying the proper segment is to consider valuation and what could happen after a merger. For example, a precedent transaction analysis can shed light on the expectations of stock worth after an acquisition occurs. That can provide insight into whether the company to be acquired is a good fit, and true value will be added in the merger.
#2: Not Having a Strategic M&A Process
It’s impossible to have a successful merger without having a strategy in place to address specific value and risks. A strategy-oriented M&A process is perhaps the most sound method of determining risk and reward in any move.
This all centers around due diligence. If a company does not do enough due diligence—research and data gathering—it creates numerous opportunities for risk. Often times, failed mergers happen because this information was not acquired in the proper format, if at all. Only once this is fully completed can the value and benefit of an M&A deal be fully understood. Unfortunately, however, failed mergers as a result of poor due diligence is all too common.
An M&A strategy should look at the company's:
- balance sheets
- business model as a whole
- the business environment
Your strategy should consider all aspects to maintaining the organization as it is, as well as the costs to improving or changing that company to make it a better fit or to increase profitability.
This strategy should be a systematic and professional process conducted by an industry expert whenever possible. This ensures that the business opportunity is completely understood but also that a full risk assessment is completed. This may include aspects of operations, financial, taxation, legalities, human resources, technology, and areas of environment impact.
Only then can a full strategic process offer the insights necessary. That includes determining what the fair value of the company is. Quite often, these oversights lead to paying more than fair value.
Mergers without due diligence can suffer a number of obstacles. This can lead to financial strain on the organization, failure of one or more components of the company, excessive spending, poor brand recognition (or complications to branding strategies), and customer loss. Yet, all of this ties back to having a poor process for evaluating a company.
#3: Not Casting a Wide Enough Net
In some cases, mergers and acquisitions become too narrow-focused. A company picks which business it wants to acquire and goes after that organization. Think bigger.
This is a decision that takes countless months, if not years, to prepare. Having a large net that offers a comprehensive view of all opportunities is key. If a wide enough net is not cast, that can result in not finding the company that is the best fit for the M&A to occur—and that leads back to the original failure of not choosing the right company within the best industry segment for the business.
#4: Not Having a Well-defined Post-Merger Plan
A well-defined post-merger plan is often the biggest failure of today’s building materials mergers. Having a post-merger plan that’s detailed helps spot conflicts or concerns early on, reducing costs and eliminating risks. That plan should include, at the very least, steps to:
- Reduce employee turnover
- Maintain buy-in from partners in their channel
- Alignment of branding efforts and digital cleanup efforts, rebranding a company based on expectations and goals, name merger considerations
- Data merge (including ERPs, CRMs, PRMs, and other tools in place)
- Documentation of every component of the process
If there are post-acquisition concerns, this should be addressed prior to the transaction, whenever possible.
#5: Not Promoting the Plan with Employees on Both Teams
In every company, employees are the biggest asset. Yet, in an M&A, they may be even more valuable. When two companies come together, there are people who will be hurt, confused, and worried about their own future. Suspicions like this in the beginning can cause conflicts later. Investing in proper transparency, to the level that is necessary and appropriate, lowers the risk of losing key talent. A core component of this process is to invest aggressively in the promotion of the merger with employees, showing them (not just telling them) why this is a good move for all involved.
M&A failures occur for multiple reasons, including a lack of transparency, poor communication, lack of due diligence, and a poor M&A process. Poor decision making, poor integration processes, and misevaluation are also key factors in why many mergers fail. This includes the deal falling through as well as the failure of the company in the short- or long-term as a combined entity.