A well-known fact is that more than 85% of companies involved in M&A deals inevitably fail and end up closing the company they acquired.
Over years of experience, much to my disappointment, I was a part of this statistic. I have witnessed foreign companies purchase businesses in Israel, investing significant amounts of time, money, and resources only to end up closing the companies they bought. I saw ideas, developments, and dreams get destroyed. The critical question is:
Was there a way to prevent this from happening?
I believe the answer to that is yes!
Throughout the years as an insider who also watched from the side, I developed a methodology that significantly improves the chances of success for foreign companies’ investments in Israel.
There are many reasons for why this happens, and I will go into detail regarding a number of them:
Culture, language, rules:
When you purchase a company in a foreign country, you enter unknown territory. The language is different; the DNA is different; the culture is different; the rules are different… everything is different.
Most companies, though not all, have an integration team, and when they acquire a company in a foreign country, they often don’t recognize the differences or are not able to bridge them. They attempt to mimic the acquiring company’s rules, policies, and culture in the new company they just acquired. This is one of the biggest mistakes!
When you interact with a foreign company in a new country, you need to understand the language, business, and culture.
For that reason, when conducting business with a new country, a local partner who understands the professional and financial culture is a must. That local partner can join your existing team and will help bridge the gaps between your company’s practicalities and those of the company you just acquired while keeping your and your company’s interest. Your local partner can point out the areas that need to change and will be able to foresee problems before they arise that they can be proactively avoided and solved on time, before turning into a real issue.
Someone who can speak the local language can recognize things you wouldn’t.
A local partner can save a lot of money to a company by working with local suppliers or service providers (avoiding frauds and maintain code of conduct), thus avoiding travels, unnecessary expenses, and less prone to travel restrictions (as a result of a pandemic or other scenarios).
Working with a local partner adds to the transparency, security, and trust of the acquiring company.
Your local partner needs to be part of your team throughout the entire DD stage up until the end of integration and even afterward to make sure everything is running smoothly.
At DAY1, your local partner is more than that. Your local partner is a certified CPA, professional CFO, with hands-on experience working with US big companies and who understands the growing needs and business requirements. DAY1 Local partner can be tailored to your specific needs and has experience and liability working with local authorities.
Companies usually adopt a uniform methodology for all M&A activities they oversee. As the company strategy for each acquisition or merger is different, the integration strategy needs to be tailored and customized for each specific acquisition. Different people, different companies, different goals, different countries, and a different scope of investment.
“X” company has acquired a new start-up in the early development stages. “X” company adopted an existing methodology which was proved to be successful in the past, did everything by the book, and everyone acted as planned. What “X” company executives overlooked was that this acquisition is substantially different hence requires a different approach. Until now, “X’ company has acquired only products that are in production or production-ready. “X” company does not even have an R&D team. This is the first acquisition performed by the “X” company of a start-up that has a product under development. While the “X” company’s methodology has been successful so far, it was not flexible enough to be adopted and fit other scenarios or use cases.
The integration of the acquired company with “X” failed. “X” company has appointed an owner to the acquired company with inadequate skills, knowledge, and understanding of R&D activity, which led confusion, lack of communication, and mistrust between “X” and the acquired company. A lot of time and resources were spent trying to establish a proper relationship and working processes between the two companies, including accommodating each company’s requirements and needs.
When performing an acquisition, make sure you leverage general methodology, which is flexible and can be customized according to business requirements, environment, and company strategy.
We must remember that every acquisition differs from each other — not only in purchasing strategy but also in the integration strategy. Every integration is unique.
The acquiring company usually emphasizes its own culture, policies, and mode of operation. While these are important, the acquitting company often overlooks the same aspects of the acquired company, its management, employees, expectations, and roadblocks.
Acquiring companies need to add a local partner to join their team as a neutral, independent, and objective manager to the acquired company. This person can put into action integration from within the acquired company itself, and understand the policies of the company through an unbiassed eye. This partner’s primary focus will be the successful integration of the company, addressing all company aspects and domains – business units, finance, procurement, administration, HR, IT, and external suppliers.
Many companies that are in the DD (Due Diligence) stage do not initially involve the integration team at this stage. But in fact, bringing in the integration team at this stage is a necessity! They can evaluate in real-time whether integration with the company that was purchased is even feasible. Also, they can determine whether there are issues that, if the company were to be bought, would need to be solved. The cost of addressing these issues can be very high and should be included as part of the acquisition or integration budget plan.
As an example, assume you’ve acquired a foreign company that lacks an ERP system. At the time of consolidation, you must have access to the financial systems of the company, and you need to implement an ERP system with compatible interfaces. The cost of such a project is a significant investment.
To summarize, getting the integration team involved during the DD stage, can point to specific aspects of the acquired company that would not be able to merge into the acquiring company and, in essence, help prevent a purchase that could, in the future, turn out to be a big mistake or a failure.
DAY1 can improve your M&A success rate by being your worry-free local partner, supporting your strategy, delivering transparency, and saving you time and money.