M&A deal values are soaring, but one in five companies report falling short post-merger

M&A deal values are soaring, but one in five companies report falling short post-merger
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After several years of cost cutting during the recession, spending on mergers and acquisitions (M&A) is steadily increasing. Driven by low interest rates, huge cash reserves, slowing revenue growth, and a soaring dollar, companies are looking to mergers and acquisitions as a way to expand into new markets and gain additional revenue streams in uncertain economic times. Though such deals have attracted much media attention, little interest has been paid to what happens after the contracts are signed and hands shake.

Massive deals, exceeding $10 billion in value, have been on the rise since 2010, but have seen particularly robust growth since 2014. This growth drove a 27% year over year increase in global M&A activity in 2014, with cross-border deals alone rising from $625 billion, up from $463 billion in 2013. This pace has continued into 2015; in total, deal volume is expected to reach $4.1 trillion in value, the highest value since 2007.

This trend is likely to continue in the short term. In a lackluster economy, successful deals offer companies the opportunity to add value. By bringing in additional revenue, adding new product lines, elevating share prices, or expanding into markets, these deals allow companies to grow without having to build out the entire new portion of the business on their own.

Executive surveys and corporate assets also suggest M&A will remain high. No less than 96% of CFOs expect corporate M&A activity to grow in the next 12 months. In fact, 82% of companies report planning at least one acquisition in 2015; 19% report planning two acquisitions; 11% report planning three, and 10% report planning a whopping 11 or more deals for the coming year.

Companies certainly have the assets to spend. Faced with economic uncertainty and unstable interest rates, corporate cash hoards have skyrocketed, allowing organizations to finance deals with little debt, like the Intel all-cash acquisition of Altera for $16.7 billion earlier this year.

While much attention has been paid to the astronomical size of these recent, cash-driven deals, the real issue for those involved is how to effectively integrate newly joined entities after the deal has been completed. In fact, when surveyed, executives report integration planning as the most significant factor contributing to the success or failure of an acquisition, while economic climate ranks surprisingly low.

Companies pursuing deals are right to be concerned about integration. The process of combining businesses can be profoundly complicated and time consuming. Internal talent, financial assets, IT assets, and cultural practices must be reconfigured to create value, often while using old, fragmented IT systems. These systems were initially brought into organizations to support singular functions, like finance accounting, over 20 years ago. But shifting business conditions have necessitated the piecemeal expansion of these systems, saddling companies with inflexible and disparate on-premise software.

Thanks to this complicated and unwieldy technological environment, leaders responsible for executing post-merger integration plans encounter a range of technical challenges: fragmented data across departmental silos; manual data entry; inconsistent formatting; slow and cumbersome report processing; and lack of real-time insight into numbers and underlying transactions. Integration of financials alone can take upwards of six to nine months. Perhaps unsurprisingly then, at least 30% of surveyed executives would describe their efforts navigating post-M&A integration as “falling short of success.”

Failure to adequately address these issues can have profound implications for the organization. One in five companies report falling short of a deal’s intended cost efficiencies. As a result, financial benefits are dwarfed by the deal’s original value, leaving the company no choice but to write off portions of an acquired entity.

Even worse, upwards of 25 percent of top performing employees in an organization leave within 90 days of a major change event such as a merger or acquisition, draining a company of the resources it needs the most at a critical juncture. In an era where talent can make or break an organization, the process of replacing these employees can siphon away precious value gains.

Clearly, for companies looking to grow, properly planning for what follows the thrill of the chase is crucial. Achieving a deal’s intended cost efficiencies starts with having a unified sense of where all of your company’s assets stand—financial or otherwise.

Learn more

about how Workday’s unified cloud-based finance and HR system can put your company on the path to a successful post-M&A integration.

This article was produced on behalf of Workday by the Quartz marketing team and not by the Quartz editorial staff.