How to Create Value Through Mergers and Acquisitions | Hilton Smythe

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A Simple Guide to Concentric and Conglomerate Mergers

Managing directors must think carefully before greenlighting any M&A deal. We discuss how your company can create value through your next M&A deal to enable you to take your brand in the right direction.

Mergers and Acquisitions (M&As) are among the most common ways businesses look to expand and grow their operations. Yet, creating value from M&As is never a guarantee.

It is thought that two-thirds of deals fail to generate the financial value shareholders expect. In other words, managing directors must think carefully before greenlighting any M&A deal.

Let’s discuss how your company can create value through your next M&A deal to enable you to take your brand in the right direction.

What makes a valuable M&A?

Creating value is the ultimate goal of any M&A within any industry. Some would argue that the value depends on why you proceeded with such a deal in the first place, but this is only half right.

For example, some may say that if the purpose of an M&A transaction is to remove a competitor from the board, doing so would make an M&A valuable.

However, eliminating a competitor should generate financial value through access to their customers, expansion of services and the acquisition of valuable assets. After all, there is a reason why large multinationals don’t simply buy up as many competitors in their sector as possible.

Such moves are highly targeted based on overall potential financial value.

Example – Royal Dutch Shell Acquisition

Let’s use an example to see how this works in practice.

In 2015, energy giant Royal Dutch Shell acquired BG Group as part of a consolidation move in one of the UK’s largest-ever M&A deals.

Through the £46.7 billion acquisition of BG Group, Shell entered a similar but different industry, leading to faster growth, smoother workflows and greater accessibility to valuable resources.

Crucially, it also ensured that Shell would be associated with more than just oil production. In a greener world, Shell is diversifying. Now, the company is moving toward net-zero greenhouse gas emissions and has also become the world’s largest supplier of Liquid Natural Gas (LNG).

It’s easy to see where the value comes from, which has been reflected in its profitability in the years since.

How can mergers and acquisitions create value?

M&A value must always be defined by the growth and profitability of the new combined entity in the medium to long term.

However, creating value is easier said than done. Most of the focus is on getting the deal across the line in the first place. As managing directors look at statistics like 70-90% of M&A deals falling through, it’s easy to become obsessed with simply making the deal happen.

Instead, companies must take the longer-term horizon, particularly initial research and post-deal integration. So, how can these types of deals create value?


Synergy is the number one principle of an M&A transaction that creates value. To generate value, the combined performance of the two companies should exceed what they could achieve alone.

Two merged companies can be used to:

·  Carve out economies of scale.

·  Boost revenues.

·  Access advanced technology.

·  Bring top-tier performers together.

Regardless of the primary motive, synergy is fundamental to achieving those goals. Where so many deals go wrong is when incompatible companies come together.

What is incompatibility though? It could be a problem of goals, functions, workflows or even internal culture.

Culture compatibility

Cynics often view corporate culture as a buzzword, but there is real strength in bringing multiple entities together with similar cultures.

According to studies, as many as 75% of M&A deals fail to create value due to cultural clashes. So, why is it so vital within the context of an M&A deal?

For this, we examined the Gallup report “Building a Culture That Drives Performance” to pinpoint four sticking points:

1. Uniqueness – Culture is unique to every company. Companies must understand how their missions, brands and cultures interact.

2. Talent – World-class talent is vital to the success of any company, and it is culture that attracts this talent. The world’s most successful companies are brimming with industry superstars for a reason – and not just wages and benefits.

3. Alignment – Culture also creates alignment. When M&A deals result in two teams operating on different levels, achieving any common goal becomes difficult.

4. Performance – Culture also has a measurable impact on performance. It provides a competitive advantage and has been proven to improve outcomes across all metrics.

Yes, completing an M&A deal and changing the culture is possible, but this takes time and effort. Moreover, it creates disruption, resulting in lost productivity and profitability. It underlines the importance of emphasising culture when researching potential M&A candidates.

Shaping the narrative

Before opening initial negotiations, the acquiring company must have a compelling value-creation story. This is crucial for getting the deal across the line and reassuring shareholders that this is the right move forward.

Value-creation stories should take a strategic view of where your brand is heading, including identifying the strengths of both companies and providing a clear pathway for building a world-class brand.

This is not about simply throwing out a marketing pitch to reassure renegade shareholders. It also discusses goals and how the two companies will integrate themselves should the deal succeed.

Strong communication demonstrates where the value comes from before committing to a deal. Managing directors trip up when they are vague and attempt to figure out where the value comes from later on.

What approach to an M&A builds the most value?

Initially, you may think there is no specific approach because every M&A deal is unique. However, every deal can be boiled down to the bare bones.

Here are five of the most common characteristics successful M&A deals have:

  1. Communication and Planning – Strong communication at every stage of the M&A process isn’t a courtesy but a guarantee that everyone is on the same page. It encourages brainstorming and ensures your company is ready to execute from day one.
  2. Clear Opportunity – All successful M&As involve spotting transformation opportunities and how to leverage synergies to generate long-term values. It could be becoming more productive, entering new geographic markets, expanding vertically or horizontally, and more. Either way, M&A deals must have a clear opportunity to take advantage of.
  1. Integration StrategyIntegration is where the real work begins. Managing directors often begin this process during the M&A due diligence phase so that everyone knows their role when the deal goes through.
  2. Overinvestment in Cultural Integration – Many mergers fall short due to a failure to align cultures. Through integrating cultures, everyone is on the same page, from the most junior employee to the most senior manager. By overinvesting in this sector, you can address critical differences in practices and processes before they begin to weigh on your forward motion.
  3. Minimise Dayto-Day Disruption – Understandably, your attention will be diverted toward your merger or acquisition. However, successful companies never allow this to impact their day-to-day operations and existing customer relationships. To combat this, companies should create a cross-company integration team that maintains current operations while maximising the opportunities a confirmed M&A deal presents.

What managing directors can draw from these points is the importance of early-stage planning, strong communication and an emphasis on cultural melding.

None of these points imply that you won’t encounter bumps in the road, but they put you in a position to keep moving as you deal with the natural challenges of a merger or acquisition.

Is it difficult for M&As to create value?

Several sources of M&A value exist, but all of these sources contribute to your long-term bottom line. All M&A initiatives put tremendous challenges in your way that must be overcome, whether this is your first deal or your tenth.

The difficulty of creating value is often defined before opening initial negotiations. Identifying the best candidate for you will determine how difficult it is to generate value. This is why spending as much time as possible on target identification and due diligence is strongly recommended.

Can M&As reduce value?

M&As are no guarantee of value creation – they are equally capable of reducing the value of your operations when problems arise that management cannot solve.

For example, in 2014, Microsoft found itself late to the mobile gaming niche. Its 2010 Windows Phone failed to catch on with consumers, resulting in then-CEO Steve Ballmer acquiring Nokia for $7 billion.

However, the new joint project, Lumia, failed to establish the developer and carrier partnerships required for the phone to succeed. It cost Ballmer his job, and his replacement, Satya Nadella, was forced to restructure the company and cut over 15,000 Nokia employees.

The primary reasons for failure were identified as:

·  Integration Problems – Microsoft struggled to integrate everything from culture to operations to technology from Nokia, leading to a clash in management and preventing collaboration.

·  Late Entry – To put it simply, Microsoft was far too late to catch up to competitors like Apple and Samsung.

·  Ecosystem Cohesiveness – Microsoft had an ecosystem of products like Windows, Xbox and Office. On the other hand, Nokia focused on mobile hardware and related services. Both companies failed to create cohesiveness between their respective ecosystems, which contrasted sharply with the well-oiled machines of Apple and Google.

This demonstrates the importance of choosing M&A candidates with a straightforward value-creation story attached – and the integration pathway to match.At Hilton Smythe, our team is equipped with the skills and know-how needed to plan your M&A deal for success. To learn more about the services we provide to UK brands, contact the team now.

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