Mergers and Acquisitions (M&A) remain the most popular method of corporate growth within the accounting and financial advisory sectors despite challenges.
Reasons for undertaking a merger or acquisition include:
- An increase in revenue, profit and value of the firm
- Acquisition of new services, products, capabilities or technologies
- Strengthening of the business by growth of core services
- Geographical expansion to develop a stronger regional or national brand
- Achieve critical mass to allow greater leverage and economies of scale
1. Different mergers, different outcomes
For smaller firms looking at horizontal integration (merging of firms with similar services), it seems that, at best, the performance of the new firm simply matches the performance expectations for the two ‘stand-alone’ companies.
Vertical mergers (acquisition of new services) are more likely to achieve an increase in value, as they have the potential to increase ‘share of the client’s wallet’ There is real value to be achieved from combining compliance and advisory services, but firms involved in these transactions struggle to identify and leverage these opportunities.
Overall, there appears to be a ‘hunter’ mentality as buyers focus on the financial aspects of the deal and pay little if any attention to cultural and behavioural issues that need to be addressed. Proactive planning and ongoing communication are the keys to success.
2. Plenty of interest in M&A but an ad hoc approach to integration
With these issues in mind, MergeAssist surveyed 46 accounting and financial advisory firms directly involved in M&A transactions in recent years. We asked questions around transition and integration strategies following completion of the deal.
It is clear from the feedback that most transitions are handled in an ad hoc manner with key issues arising in relation to communication of expectations and opportunities to both staff and clients. Specific issues raised in this report included lack of effective communication with staff and clients, challenges with change management and a lack of focus on business strategy.
A lot of interest in purchases up to $2 million in value
At this time, bank lending for M&A transactions is relatively easy to arrange. For many sole practitioner and two-partner firms looking for a succession strategy, the best option is to sell or merge with a larger firm that already has strong internal systems and processes. These buyers are firms looking to acquire fees between $500,000 and $2,000,000 that they can tuck into existing business structures. Firms that have already embarked on tuck-ins will continue to do so as the opportunity arises. Mostly these opportunities come through existing networking relationships and are completed in an informal manner. However, transactions involving brokers are feature a more rigorous due diligence and stronger post M&A integration.
3. The majority of firms feel that the M&A transition is not as successful as expected
Just 29% of firms felt that financial outcomes (revenue, profit, value) were consistent with or exceeded expectations at the time of the transaction. This is despite the fact that due diligence focuses primarily on the financial aspects of the deal. Little or no attention is given to cultural and behavioural integration, which can have a significant impact on financial outcomes.
After the initial excitement associated with a successful M&A deal, the leaders of accounting firms often find themselves back in their comfort zones as they deal with day-to-day operational matters. They are in the zone of ‘conscious incompetence’ in relation to M&A integration, knowing what issues are likely to arise, but lacking either the capability or the motivation to deal with them effectively. There is relatively little strategic thought given to planning or identifying and addressing risks.
4. The top three challenges with M&A integration all relate to the management of staff expectations and behaviour
The top three causes of M&A challenges were conflicting cultures (63%), management issues (52%) and poor internal communication (50%). It is clear that cultural issues often provide the biggest roadblock to a successful merger or acquisition, but are largely handled in an ad hoc manner.
Key challenges raised by survey participants included dealing with new management styles, capabilities of incoming staff, handover of client relationships, cultural integration and adapting to new systems and processes. For many firms involved in M&A, cultural integration may be nothing more than a series of workshops and training on ‘what we do,’ with less focus on discussing ‘why we do it.’ There is a serious gap that reflects the overriding focus on dollars versus people.
5. Firms acquiring client fees are likely to be hands-off with clients in the short term
Almost 60% of firms in this survey said that their post M&A integration process was loosely planned or completed in an ad hoc manner. It is clear that buyers are generally keen to avoid interfering with existing client relationships or even pre-existing workflow processes.
Integration of IT hardware and software is usually the first action taken following M&A. This also incorporates the integration of workflow systems and client databases. Dealing with client relationship issues is a greater challenge and threat to a successful transaction.
Whilst this may make sense in the short term, a hands-off approach to client transition can have a significant impact on integration of goodwill. Mismanaged expectations of the buyer or seller can result in a ‘blame game’ where each party accuses the other of not following through. The result is inevitably loss of clients to another firm or worse still, to the seller who remains ‘in the wings’ ready to pick up the pieces if clients are not engaged. At this time, it is often too late to start being proactive.
The proportion of firms that do plan rigorously and are seriously proactive in driving integration following M&A generally have a stronger infrastructure and capacity to deal with these issues.
6. Despite the challenges, there’s still a strong appetite for M&A
It is clear that, whilst there are plenty of challenges associated with M&A, it’s still the quickest and most effective way to grow revenue and profit. Buyers are relatively satisfied with the result, but could definitely get more value from a focus on communication and cultural issues with both staff and clients.
MAgnus Yoshikawa | Jadeja Partners and MergeAssist | www.mergeassist.com.au