Managing Business Risks During a Merger or Acquisition

Getting the most value out of M&As requires proper upfront legwork.
Oct 02, 2011
Volume 35, Issue 10

In the business press, discussions of mergers and acquisitions (M&As) invariably include percentages of deals that did not create their expected value. Failure numbers, ranging from 60–80%, are surprisingly high. Many companies seem to pursue deals without a clear picture of their potential risks. A due-diligence process that's too high-level or superficial is often to blame.

For example, when a life-science company considers a merger or acquisition, the due-diligence team typically looks for 483s, Warning Letters, notified-body findings, and product recalls to find any signs of potential problems with FDA. But when a deal does not deliver value, the real causes are often strategic, cultural, or technical.

Strategy: testing the business case

Due diligence is not the same as a conducting a quality assurance compliance audit. But in the life-science industry, it's easy to confuse the two. The executives or the private-equity firm structuring the deal do not necessarily understand the companies' operations or FDA sanctions. At the same time, if a CEO or CFO is enamored with M&As as a perceived means to expand into a new business or enter a new market, the due-diligence team typically lacks the business expertise to ask the right questions or the clout to raise objections.

For example, Company A might want to buy Company B because of its superior sales force. Company A's marketing department contends that sales would double; the finance department believes that redundancy would allow Company A to reduce payroll by 10%. Both predictions are correct, but no one calculates the extra manufacturing capacity needed to produce a larger portfolio and volume of products. The expected value of the deal could be canceled out by unanticipated costs in another part of the organization.

The fundamental questions asked during due diligence should go beyond FDA compliance and tackle the business reasons for closing the deal. This approach requires having the right people (not necessarily those who happen to be available) on the due-diligence team. Technical executives might be asked about open citations, but they're rarely consulted about the likely costs of integrating factories, supply chains, or distribution centers—or whether these integrations can be done at all. But if integration costs more or takes longer than expected, customer relationships and product quality can suffer.

Culture: gauging compatibility

Often in a merger or acquisition, the personalities of the two companies are not considered relevant. But stress and tensions can build when the cultures of two organizations are incompatible. The possible triggers of a poor "culture fit" are limitless: management style, risk tolerance, flexibility, talent, technology, and geography, to name a few. Some life-science companies are risk-takers; others are conservative. Some are entrepreneurial; others are hierarchical. Some are obsessed with "zero incidents" quality; others have a "find a problem, fix a problem" management style. If the two cultures can't be blended, the cost of a significant restructuring (including recruiting and hiring new executives) needs to be included in the M&A price tag.

Technical integration

Post-M&A integration is often the cause of extra, unplanned costs. For instance, a seller often ends up supporting sold-off processes or IT systems long after the deal is done. When this happens, the buyer can end up with a poorly managed function, and the seller can end up with disgruntled clients and extended costs. The deal's stakeholders, each with different goals and agendas, need to talk to each other. External stakeholders can also be drawn into the due-diligence process to reduce such risks.

Transition services agreements (TSAs) should be drawn up carefully to protect buyers and sellers from value destruction. For the buyer, a TSA might specify that the seller's employees will be available to talk to regulatory authorities during the integration time period. For the seller, the TSA might detail roles and responsibilities for the sold business or division. A key executive or consultant should ensure that TSAs are followed and that the buyer takes over on schedule.