Every business, no matter what industry or sector they operate in, must manage the basic conflict between three key stakeholders: shareholders, staff and customers.
While a symbiotic relationship exists between all three, as they are each essential for organisational success, they care about different things.
Shareholders are primarily concerned about maximising profits, dividends and market value because they expect a good return on their investment.
Staff want safe employment conditions, job satisfaction, career development and to be properly remunerated.
Customers want to be treated fairly and receive high quality, value-for-money goods and services.
It is the responsibility of management and the Board to balance the interests of various groups, which is relatively easy to do in the good times but infinitely harder when a company is underperforming.
It is also tough to do during M&A discussions when the desires of all parties are heightened, on both sides of a transaction, and everyone is jockeying for what they want.
Shareholders, if they’re sellers, will usually opt for the highest bidder, regardless of whether they’re the best strategic and cultural fit.
If they’re the buyer, shareholders want to snag a good asset for a reasonable price, with the potential to maximise revenue and cost synergies, build scale and achieve long-term growth.
Employees want job security and opportunities for career progression, and customers want more valuable products and services.
How to identify a good deal
Determining the quality of a deal requires looking at a transaction through the lens of each stakeholder.
If it benefits shareholders, staff and customers, then it’s a good deal that’s likely to achieve its targets and objectives.
In the aftermath of any merger, there is a period of disruption. Shareholders, employees and customers face a period of integration, rationalisation and restructuring before the possibility of growth. A company’s ability to facilitate a speedy integration is critical to M&A success.
But despite promises of transformational changes, revenue growth and long-term value creation, many acquirers end up hamstrung by legacy and complexity. How long this disruption lasts varies and depends on a myriad of factors.
Legacy encompasses outdated systems, processes and products, expensive long-term contracts and – in today’s heightened regulatory environment – the potential for complaints, claims and reputational damage related to historic actions.
Inside every old, large organisation, there are systems and products that are no longer fit-for-purpose or suitable for today’s business environment, nor are they supported or maintained. These systems are hard and expensive to replace and, as the focus shifts to innovation, getting budget approval to convert old systems is difficult.
Shareholders effectively own that legacy and staff are responsible for managing and fixing it. Customers are often tied to legacy products and platforms.
I’ve been asked a lot recently about what I think of IOOF’s $1.4 billion acquisition of MLC. To answer that question I’d need to assess it through the eyes of shareholders, staff and customers.
While I haven’t studied the deal in detail, my initial thought is that there’ll be a lot of legacy in one place, considering that MLC’s origins trace back to 1886 as the former Citizens’ Assurance Company and IOOF started out in 1846 as the Independent Order of Odd Fellows.
What really matters?
Most shareholders are looking for growth. Employees also want to work for a dynamic, progressive company.
M&A is an important tool for growth. It can help an organisation build scale, gain capability and capacity, and boost long-term performance.
That said, immediately after an acquisition, growth is typically put on the back burner, with the focus turning to integration and cultural alignment. As such, it is up to management to extract maximum value through scale, synergies and cost cutting.
Creating synergies isn’t only about stripping out costs. It includes eliminating duplication, leveraging capacity and capability, and accessing new customers and markets.
However, while synergies are used to sell the benefits of acquisitions, most deals result in a “high level of unrealised synergies”, according to research by Deloitte1.
Actual synergies achieved range from 1 to 5 per cent of projected synergies and total combined costs, based on Deloitte’s dataset of over 800 global transactions.
Whether a deal is beneficial for shareholders, staff and customers ultimately hinges on the ability and track-record of management to orchestrate an effective and efficient integration, manage legacy and hit their targets.
If everyone wins, then it’s a good deal.