There are four key metrics companies should follow to evaluate post-acquisition success. Of course, the most important aspect is, putting values ahead of valuations, which alone can ensure its long-term success
JEAN CHARLES THUARDJEAN CHARLES THUARD
How do you measure the success of an acquisition? The starting point is to obviously look at the objective of the acquisition, and then to look at whether the objective has been achieved, especially over a defined timeline.
Typically, the major objectives of an acquisition are:
Enhancing Market Share
Market share should be measured not just in numbers but also in terms of how much mind share the brand has gained post acquisition. To analyze the success of an acquisition, companies should ask themselves questions like; Are we able to sell better quality products? Are we able to give more value to our customers?
This metric is of course inescapable. To measure this, a company should analyse various aspects such as whether its EBITDA and PAT has improved and whether the acquisition has added economic value. These act as some fundamental tools to evaluate the success of the acquisition.
Acquisitions give companies access to a larger talent pool and the key to capitalise on this is to retain people and motivate them for the larger good. A key measurement index here would be the level of attrition. The lower the levels of attrition post acquisition, the better it is.
This is not a metric that is often used, except by progressive organizations. If employee morale and motivation is low post an acquisition, it is reflected in the quantity and quality of factory output as well as in the reduced customer satisfaction, which ultimately affects business. Acquisitions give companies access to a larger talent pool and the key to capitalise on this is to retain people and motivate them for the larger good. A key measurement index here would be the level of attrition. The lower the levels of attrition post acquisition, the better it is. In fact, if the acquisition leads to lower attrition than before, then it is certainly a step in the right direction.
The questions therefore to be asked here are: What is the value that the acquisition has been able to deliver to the people in both organizations? And, how does one go about achieving lower attrition? The first step towards a robust people management post acquisition is to give confidence to the employees of the acquired company. The idea is to reassure them that while there have been changes, there will be no discrimination. The message must go home that the success of the organisation depends on the collective ability of the employees of both organizations. It is this kind of motivation that leads to an organization achieving its goals. Also, fresh talent can be groomed for larger roles within an expanded organization.
To reiterate the point, retaining people and grooming them for higher responsibilities is an invaluable measure that companies should use for measuring an acquisition success.
Contribution to Sustainability
In today’s context, people, planet and profits is not just a fashionable slogan any longer. There is another unique tool for measuring the success of an acquisition; the contribution to sustainability. In many global organizations, contribution to sustainability is a part of the key performance indicators. While there is a huge gamut of activities that span the spectrum of sustainability, improving energy efficiency, doing more than just adhering to environmental standards and planting trees are some of the ready examples. An acquisition that adds to the triple bottom-line is obviously a successful one.
The final step
And now, the final benchmark to determine whether an acquisition has been successful or not is to ask if the acquisition stood the test of time. This is clearly the litmus test.
How can companies ensure longevity of an acquisition? Based on our experience at Legrand Group, we have identified that following the most stringent possible due diligence is a must for an acquisition. This should not only be exhaustive but also take into account special parameters. While it is normal to look at things like liabilities being assumed and as to whether there is a strategic fit, due diligence should move beyond the obvious and evaluate intangible factors.
To look at a vital factor that is not evident in any balance sheet is – to check whether the two companies have common/similar values. There is little sense in acquiring a company with which there are no shared values. So, right at the time of acquisition, a rigorous and systematic process must be followed to determine whether the two companies share the same values. Secondly, it is important to find out whether the acquired company has a track record of ethical conduct with all stakeholders—Investors, employees, customers, suppliers, regulators and society in general. The acquiring company must explain to its prospective partners what the deal means for both sides.
It is understandable that every company may encounter litigation. That is the very nature of business. What is important to know is whether these problems arose because the company hasn’t followed ethical practices or have these happened despite the best of ethics being followed by the company. If the former is true, then the right thing to do would be to walk away from the negotiations. Even if it means that the acquisition otherwise makes for an overall strategic fit.
Simply put, values come before valuations. That alone will ensure the long term success of an acquisition. That will ensure that acquisitions are not failures on the grounds of a cultural fit or mismatch in values.