Our Viewpoint is that PMI Operations Will Remain Risky Not Because of their Complexity, But Because they are a Major Aspect of the Competition Between Firms.
Because of insufficient information, board members cannot develop a comprehensive view of all the risks at stake. The decision-making process, based on the accumulated M&A experience of the different stakeholders involved, is hence a proxy in terms of risk assesment : it may have an over or an under-estimate of the actual risks(figure below).
Globally, observed PMI low success rates indicate that there is a significant over-estimate of skills and capacities to manage actual deal complexity. The percentage of executives under-estimating risk and engaging transactions on that basis seem to be quite stable over time (c. 50-70%). This stable pattern may reflect the strong confidence of executives on management methods and techniques and be correlated to personal psychological traits in terms of risk perception.
In terms of corporate strategy, the result is that the more companies get experienced in M&A transactions and PMI management, the more they may accept to set-up complex deals to improve their competitive position.
Accumulation of knowledge does not translate into risk reduction unless target screening is based on fixed and PMI risk-related filtering criteria (eg. target size, number of sites, expected synergy levels as a percentage of investments...). This is typically what has been done in serial acquisitory groups, and it shows on high success rates.
When deal logic is more based on a case-per-case approach, accumulation of knowledge may be used in order to stand for more complex and bigger deals. Historically, this is why the size of deals increases with accumulated experience.
As a synthesis, apart from serial acquirers, M&A knowledge does not translate automatically into improved profits of same types of deals, but also into bigger deals with bigger risks. Knowledge is effective when its application horizon is unchanged. The productivity gains of accumulated knowledge and experience do not translate in profit gains if probability of success does actually decrease due to the higher complexity of the deal.
Conclusions - Recommendations.
The low performance of firms in implementing M&A deals should not only be viewed as a direct result of corporate knowledge and experience - at least in absolute terms. It reflects also the degree of competition between firms and the executive teams' perception of available experience and knowledge in dealing with such projects. Taking these factors into account, there seems to be no rationale for a strong improvement in the implementation of M&A deals. As a consequence, we anticipate the M&A and PMI advisory services to continue to be leveraged by investors.
Author: Gilles Ourvoie (gilles.ourvoie@pmifactory.com).
Gilles has worked for c.15 years on strategy and PMI projects for major international groups. Within the Strategy & Transformation consulting activity, he has developped the French PMI Center of Excellence at Gemini Consulting and Capgemini (1997-2004). Between 2004 and 2007, he has launched the Transaction Integration Services practice of Ernst & Young France (within the TAS Corporate Finance), and in the CWEA Area (Italy, Spain, Belgium). As such, he was part of the TIS Global Leadership Team. Since 2007, Gilles is Partner at PMI Factory.