The Economic Times

Four ways to improve your chances of success in M&As

Bain research shows that winners in Asia-Pacific M&A share four traits.

Published on 二月 03, 2012
min read


Buoyed by strong economic growth, robust corporate profits and greater government deregulation, M&A activity in Asia-Pacific has staged a healthy recovery from the financial crisis of 2008-09. The Dealogic database says the value of strategic M&A deals in the region (inbound and domestic) grew 13% in the first nine months of this year against the same period in 2010, and Asia-Pacific now accounts for 25% percent of global M&A deals. This reflects Asia's increasingly important position as a growth engine for the world. In fact, despite the current uncertain economic environment, M&A deals in Asia-Pacific will continue their upswing. However, in India, the picture has been mixed. The value of cross-border outbound M&A deals and domestic deals fell sharply by 65% and 80% respectively in the first nine months of 2011 against the same period in 2010. This decline has been driven by continued uncertainty in the global economic environment and domestic challenges such as higher lending rates and high inflation. On the other hand, the value of crossborder inbound deals more than doubled to around $23 billion. This is the result of foreign MNCs looking to establish a presence in India or grow existing operations, as their home markets grapple with tepid growth at best in the US and declining or stagnant growth in Europe. Acquisitions in 2010 and 2011 by Indian companies are still much higher than 2009 levels and an uptick in activity is expected in the coming years as India Inc is patiently scouring foreign shores for acquisitions. For many Indian companies with aggressive growth targets and global aspirations, outbound M&A offers a chance to acquire distribution, product, and brand capabilities, as well as talent in new markets. But the odds of success are daunting. Even in the best of times, Bain & Co research shows that in the US the stock price of 55% of companies failed to outperform their peer index one year after an M&A announcement. In this environment, a number of Indian companies are setting an example of how to improve the odds of successful M&A. Delivering on an acquisition's promise requires a clearly defined acquisition strategy that ties to the core strategy and an execution plan. Experience matters as well. Serial acquirers that have conquered a steep learning curve outperform companies that do deals infrequently. When we surveyed 243 companies, we found that 86% of successful deals were made by companies that had institutionalized an M&A capability. We have learned that M&A winners share four traits for success. Align with a bigger picture The first is an M&A strategy linked to the company's overarching growth strategy. India-based conglomerate Aditya Birla Group uses M&A to build and reinforce leadership positions in its core businesses to expand internationally, as well as access new capabilities-ranging from technology to talent. Its appetite for transformational deals helps achieve these objectives. A case in point is its $875 million acquisition of US firm Columbian Chemicals Company, which is more than three times the size of Birla's carbon black division in India. The acquisition catapulted the group to become the world's largest producer of carbon black and gave it access to markets where it had no presence. The buyout is also expected to create synergies for the group to the tune of $50 million every year. Overall, Birla's M&A strategy has led to 24 buyouts over 15 years. Similarly, serial acquirer Godrej has used a well-honed acquisition strategy to grow its domestic leadership and international reach. Recognising that M&A was critical to achieving its global goals, the company spent two years of disciplined preparation before setting foot in the M&A market. Godrej focuses on three categories (hair care, home care, and personal wash) and targets companies with leading positions. Recent acquisitions are market leaders: Megasari is Indonesia's second-largest household insecticides player; Issue Group and Argencos are the hair-colour leaders in several Latin American markets; and Darling Group is the leader in hair extensions across 14 countries in sub-Saharan Africa. Get processes right The second trait for successful M&A is the institutionalisation of M&A policy, process, and people to ensure discipline and focus. Godrej set up a strong M&A team and developed an M&A playbook to pursue inorganic growth strategies. Armed with this focused playbook and a detailed integration manual, Godrej has carried out several deals over the last two years worth several hundred million dollars in total. The firm maintains essential discipline in the M&A process by following a rigorous screening process which involves a robust investment thesis and conducting detailed due diligence. Focus quickly on essentials The third essential ingredient for M&A is a focus on value creation, tight process control, and quick resolution of people issues. Leaders plan early, integrate quickly where it matters most, prioritize culture, and maintain firepower in the core business. A case in point is the Aditya Birla Group subsidiary Hindalco, an aluminum producer. It has four focus areas, organisation, finance, business processes and market issues, that go a long way towards meeting its immediate post-merger goals. As a result, unlike most firms, Hindalco swiftly works out organisational, people and financial challenges and then homes in on integrating business processes to grab swift successes. Persistence pays The fourth characteristic of successful dealmakers is persistence. Serial acquirers do better than one-off acquirers. When it comes to M&A, experience counts. For example, Hindalco bought several companies before it picked up Novelis in 2007. It internalised learnings from each acquisition and capitalised on those lessons to successfully acquire Novelis, which was more than twice its size. These four traits of maintaining a well defined strategy, institutionalising the M&A program, focusing integration where it matters most, and learning from experience will separate the Indian companies that profit from Asia's growing M&A marketplace from those that are left behind. Arpan Sheth is a partner at Bain & Company's Mumbai office and heads the firm's M&A practice in India. Satish Shankar is a partner at Bain & Company's Singapore office and heads the firm's M&A practice in Asia.

Buoyed by strong economic growth, robust corporate profits and greater government deregulation, M&A activity in Asia-Pacific has staged a healthy recovery from the financial crisis of 2008-09.

The Dealogic database says the value of strategic M&A deals in the region (inbound and domestic) grew 13% in the first nine months of this year against the same period in 2010, and Asia-Pacific now accounts for 25% percent of global M&A deals.

This reflects Asia's increasingly important position as a growth engine for the world. In fact, despite the current uncertain economic environment, M&A deals in Asia-Pacific will continue their upswing. However, in India, the picture has been mixed. The value of cross-border outbound M&A deals and domestic deals fell sharply by 65% and 80% respectively in the first nine months of 2011 against the same period in 2010.

This decline has been driven by continued uncertainty in the global economic environment and domestic challenges such as higher lending rates and high inflation. On the other hand, the value of crossborder inbound deals more than doubled to around $23 billion. This is the result of foreign MNCs looking to establish a presence in India or grow existing operations, as their home markets grapple with tepid growth at best in the US and declining or stagnant growth in Europe.

Acquisitions in 2010 and 2011 by Indian companies are still much higher than 2009 levels and an uptick in activity is expected in the coming years as India Inc is patiently scouring foreign shores for acquisitions. For many Indian companies with aggressive growth targets and global aspirations, outbound M&A offers a chance to acquire distribution, product, and brand capabilities, as well as talent in new markets. But the odds of success are daunting.

Even in the best of times, Bain & Co research shows that in the US the stock price of 55% of companies failed to outperform their peer index one year after an M&A announcement. In this environment, a number of Indian companies are setting an example of how to improve the odds of successful M&A. Delivering on an acquisition's promise requires a clearly defined acquisition strategy that ties to the core strategy and an execution plan.

Experience matters as well. Serial acquirers that have conquered a steep learning curve outperform companies that do deals infrequently. When we surveyed 243 companies, we found that 86% of successful deals were made by companies that had institutionalized an M&A capability. We have learned that M&A winners share four traits for success.

Align with a bigger picture

The first is an M&A strategy linked to the company's overarching growth strategy. India-based conglomerate Aditya Birla Group uses M&A to build and reinforce leadership positions in its core businesses to expand internationally, as well as access new capabilities-ranging from technology to talent. Its appetite for transformational deals helps achieve these objectives.

A case in point is its $875 million acquisition of US firm Columbian Chemicals Company, which is more than three times the size of Birla's carbon black division in India. The acquisition catapulted the group to become the world's largest producer of carbon black and gave it access to markets where it had no presence. The buyout is also expected to create synergies for the group to the tune of $50 million every year.

Overall, Birla's M&A strategy has led to 24 buyouts over 15 years. Similarly, serial acquirer Godrej has used a well-honed acquisition strategy to grow its domestic leadership and international reach. Recognising that M&A was critical to achieving its global goals, the company spent two years of disciplined preparation before setting foot in the M&A market.

Godrej focuses on three categories (hair care, home care, and personal wash) and targets companies with leading positions. Recent acquisitions are market leaders: Megasari is Indonesia's second-largest household insecticides player; Issue Group and Argencos are the hair-colour leaders in several Latin American markets; and Darling Group is the leader in hair extensions across 14 countries in sub-Saharan Africa.

Get processes right

The second trait for successful M&A is the institutionalisation of M&A policy, process, and people to ensure discipline and focus. Godrej set up a strong M&A team and developed an M&A playbook to pursue inorganic growth strategies. Armed with this focused playbook and a detailed integration manual, Godrej has carried out several deals over the last two years worth several hundred million dollars in total. The firm maintains essential discipline in the M&A process by following a rigorous screening process which involves a robust investment thesis and conducting detailed due diligence.

Focus quickly on essentials

The third essential ingredient for M&A is a focus on value creation, tight process control, and quick resolution of people issues. Leaders plan early, integrate quickly where it matters most, prioritize culture, and maintain firepower in the core business. A case in point is the Aditya Birla Group subsidiary Hindalco, an aluminum producer. It has four focus areas, organisation, finance, business processes and market issues, that go a long way towards meeting its immediate post-merger goals. As a result, unlike most firms, Hindalco swiftly works out organisational, people and financial challenges and then homes in on integrating business processes to grab swift successes.

Persistence pays

The fourth characteristic of successful dealmakers is persistence. Serial acquirers do better than one-off acquirers. When it comes to M&A, experience counts. For example, Hindalco bought several companies before it picked up Novelis in 2007.

It internalised learnings from each acquisition and capitalised on those lessons to successfully acquire Novelis, which was more than twice its size. These four traits of maintaining a well defined strategy, institutionalising the M&A program, focusing integration where it matters most, and learning from experience will separate the Indian companies that profit from Asia's growing M&A marketplace from those that are left behind.

Arpan Sheth is a partner at Bain & Company's Mumbai office and heads the firm's M&A practice in India. Satish Shankar is a partner at Bain & Company's Singapore office and heads the firm's M&A practice in Asia.