4 Smart Ways to Measure Mergers and Acquisitions

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Thursday, June 18, 2020

M&A activities have a high failure rate, but by keeping close track of a few vital KPIs, you can make adjustments and reduce your risk.

Article 5 Minutes

Mergers and acquisitions (M&As) are a key part of many growth strategies, but in reality, they can be incredibly costly with very little return. It's estimated that 83% of M&As fail, so clear planning is essential.

This doesn't just mean in-depth, comprehensive due diligence. In order to make any M&A a success, you need to be keeping a close eye on a variety of metrics throughout the process in order to measure where you stand and what the likelihood of success is.

Some of these should guide your decision-making about how you integrate teams and keep people engaged in what will no doubt be a very stressful time. Meanwhile, others can highlight red flags that should warn you to change direction or even consider abandoning the process completely.

There are a wide range of key performance indicators (KPIs) you can use to gauge the health of a potential M&A target and judge how well the process is going after completion. However, they can broadly be separated into four main categories, so knowing what to look for within each of these is essential. Here are a few key things to focus on:

1. Look closely at the finances

Every M&A will be primarily judged on the financials, but when you're heading into a deal, you need to know that the fundamentals are sound, and a high-level glance at your target's earnings report won't cut it. However, there are a few important KPIs that you can focus on to give you a better picture.

Earnings per share offers a better insight into a company's health than its overall profit margin figures. What's more, as it's widely accepted as part of the Generally Accepted Accounting Principles and is used for filings with the Securities and Exchange Commission, companies are required to regularly track this, allowing potential buyers valuable, accurate information.

Once an M&A has been completed, keeping track of the usual metrics such as sales, revenue and profit margin is of course vital, but it can be tricky in the early days to get an accurate picture. For instance, your figures are likely to be less positive in the early days as you'll be carrying extra costs, such as duplicated assets that you require liquidation, or even expenses like redundancy payments. Therefore, you need to know what these will be and factor them into your calculations to determine how successful your newly-merged operations are.

2. Monitor customer reactions

How customers are responding to the merger will be critical to the success of the process. While you can send out encouraging messages, explain what benefits they can expect to see as a result of new ownership, and look to respond proactively to any concerns, there are a few metrics that can really reveal what they think.

For instance, customer retention figures will be highly telling. Are you retaining clients at the same rate as before, or are you seeing more churn than expected? There's likely to be some level of disruption, so it's important to have a clear idea of what an acceptable level of loss will be.

Other customer metrics to look at include the number of unresolved support issues, any delays in paying invoices or unwillingness to sign new contracts. This can all suggest customers are uneasy about the merger.

3. Look at how employees are coping

Like customers, gauging how employees are reacting to M&A activity will be vital, and many of the KPIs for achieving this will look similar. For example, how many people are handing in their notice? While some downsizing may be inevitable, you can't afford to lose too many talented workers.

A good way to better understand the workforce post-merger is to usea staff survey to come up with a net promoter score. This shows how likely employees are to recommend the company as a good place to work. Do this regularly to see how changes made during the integration process are impacting the workforce, and you can quickly be alerted to any missteps that are causing unhappiness.

M&As can be a very stressful time for all employees, with concerns about job security often compounded by high workload volumes. It's important not to overlook mental health to avoid the risk of burnout. Keep an eye on metrics like overtime and whether people are using their vacation days, as these can give a clear indication if people are feeling overworked.

4. Update and combine processes

Once mergers are underway, one of the biggest challenges will be ensuring that both systems and processes are aligned, so keeping a close eye on the progress of these efforts is essential to measuring success.

For instance, it's usually inevitable that one - or even both - businesses will have to migrate data to new IT solutions and adopt new solutions for everyday tasks, such as accounting. Therefore, it's important to measure adoption rates and system conversion milestones to ensure everything is proceeding smoothly.

Overall productivity is another highly useful metric, as it gives you insights into a wide range of areas, such as whether the company cultures are working together and what the overall morale is. There are a number of metrics that can be used to track productivity for each department, from sales goals and product output to customer satisfaction.

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