Placing a value on the invisible adds value to companies in merger talks

Friday 1st June 2001

Success or failure in merger or acquisition transactions can pivot on the intangible or 'soft' factors of the deal, writes JASON BLOOM of Auckland-based advisory firm Decision Lab

Companies regularly identify intangible factors as the key reasons or "synergies" for undertaking a merger.

They are often talked about in terms of gains in technical know-how, improved market perception and knowledge management, excellent cultural alignment and "strategic fit."

However, due to a lack of available tools and integration know-how, these factors are hardly ever quantified as part of the value of the deal and they can often be overlooked after the deal is done.

Recent mergers and acquisitions (M&A) studies universally point to a failure by at least half of all acquiring companies to meet their value creation goals.

They are failing on two counts: delivering shareholder value and in meeting the buyers' initial strategic objectives. Either these companies are paying too much for the perceived benefits of the deal, or the benefits gained are outweighed by poor post-deal integration.

Why are so many merging companies falling into this trap?

A lack of understanding about the complete merger process is one possible reason.

Often the decision to undertake a merger or acquisition is very complex. External advisors and internal project teams spend months analysing deal values and tactics.

However, the work level tends to drop or cease altogether as soon as the deal has been signed.

The banking and strategy advisers leave and the senior management team is left with the toughest job of all - the integration.

Getting the deal signed is one critical task. However, actually ensuring the merger happens, as planned, is by far the largest and most important assignment.

Assimilating the two cultures (in terms of company policies and "ways of doing things"), identifying where the key knowledge lies within each company and assessing the individual competencies of the staff are issues that are frequently overlooked or viewed as secondary "tactical" items during the post-merger integration period.

Instead, effort is often spent on the "big picture" financial issues - like shaving costs by rationalising the assets of the two organisations.

The irony is that while this is going on, key employees may be walking out the door and taking the knowledge value of the organisation with them.

This can be disastrous, particularly for knowledge-based companies like IT and professional services, where virtually all their value is tied up in their intellectual knowledge and not in fixed assets.

More strategic focus should go on linking the intangible items through to the financial, rather than simply ignoring them until it's too late.

The "Merger Dynamics" approach prescribed by Decision Lab addresses the complete M&A process, from deal inception to value creation.

It covers all the standard financial valuation, negotiation and due-diligence steps but also concentrates on valuing intangibles and on planning, communicating and doing the post-merger implementation.

A complete, integrated process is essential for successfully making and implementing what is generally the most complex of all decisions organisations can face.

Historically, "soft" factors like corporate knowledge have been valued only as a premium in M&A deals.

These premiums, often expressed as a percentage addition, are often token add-ons to ensure the valuation on offer is able to compete with the other bidders at the table.

However, new tools and techniques can now enable organisations to explicitly value what has always been known but has usually been kept hidden.

Multiple objective techniques are being used extensively in the US and UK for valuing environmental and social objectives in the public sector. This qualitative valuation approach is now being combined with financial methods that corporate chief financial officers would be familiar with, such as real option valuation.

Our valuation services are designed entirely around our clients' goals.

Unlike investment banks, Decision Lab has no financial interest in structuring transactions.

We use this complete tool set to impartially help organisations to value both the tangible and intangible deal factors.

The results also act as a check to ensure the deals are implemented correctly.

There has been an increase in contestability and required consensus decision making, as a driving force behind the growing need for their merger valuation services.

It is no longer acceptable for organisations to make gut strategic decisions.

The operating environment is tougher, the pace a lot quicker, but still boards are requiring more input into the decision making process.

Stakeholders are demanding that all decisions are auditable and justifiable.

Decision makers need to ensure their M&A deals are highly transparent, especially when it comes to identifying and pricing the value of synergies.

Today, would-be acquirers must enter negotiations with a firm idea of what value the synergies represent to them - and what their initial and highest bids will be.

A more transparent decision process also helps avoid confusion about the synergies of a prospective deal - a problem recently highlighted in the media coverage of Australia's proposed BHP-Billiton merger.

Everyone acknowledges that intangible synergies have value; the key question is: how much?

The latest valuation tools and processes actually provide a framework for determining this value, enabling organisations to fully price what has historically been considered non-quantifiable.

Decision Lab can be reached at www.decisionlab.com

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