M&A Hazard Management – Mitigating Investor Insurgency -- January 18, 2007 (Also appearing in the MBA NewsLink)
Thomas Jefferson once wrote, “It is the trade of lawyers to question everything, yield nothing, and talk by the hour.” With a cultural desire for seemingly endless litigation, we can anticipate in 2007 with a high degree of certainty that several of the high-profile M&A mortgage industry transactions will experience significant post-deal investors and shareholders dissatisfaction. Deals which are “over-stretched” or heavily leveraged may fail to measure up to the expectations and hype established as part of the announcement. Investors and shareholders will proactively litigate out of feelings of betrayal, desperation, “improper statements,” and even questionable conduct. So what can be done to lessen the impact, while recognizing the lessons learned?
This investor activism or insurgency has become far more commonplace as M&A deals become larger and more complex. For mortgage leaders and integration teams, a consciousness to address and mitigate negative events or “hazards” must be implemented. An effective method and operational tool to facilitate continuous understanding of M&A vulnerabilities resides with the adoption of “hazard maps.” These maps are incorporated into a comprehensive hazard management strategy and consistently monitored for changes or aberrations.
Whereas the use of hazard maps is best suited for graphical presentation and comprehension, there are ten fundamental areas that are included in their baseline composition. Evaluated against multi-dimensional measurements and criteria, they capture key continuums of:
- deal effect (e.g., financial, risks, markets, customers, efficiencies and valuations) against
- hazards (e.g., integration timeframes, staffing consolidations, quality and variability, responsiveness, and escalation) using time and “punishment” as yardsticks.
The ten classifications include:
- Customer Satisfaction / Contract “Run-offs”: For M&A transactions, customer defections and product satisfactions are of keen interest to management directly impacting top-line revenues and hence quarterly results.
- Failure to Meet “The Deal”: A holistic classification that often times is an aggregator of “stops-starts” for integration efforts, government actions and regulations, synergy assessment and viability, and profits and margins. It will be a key for valuation, initiative consistency, and integration of mid-course corrections.
- Defections / Competitive Response: Concentrated on key management and operational personnel, unplanned defections can signify potential problems with on-going M&A integration. Additionally, competitors can seize on perceived or real product or service weaknesses by introducing robust offerings thereby minimizing M&A anticipated benefits or revenue streams.
- Government: In our highly regulated markets dominated by sometimes overzealous regulators, the impact of M&A actions against compliance and regulatory needs cannot be underestimated. Failure to adhere to required operational and community guidelines have previously unraveled several M&A events. It’s a controllable lesson learned.
- Cultural Clashes and Mismatches: Driven by a self-preservation need, employees and contractors can place their own needs inadvertently above the organizational requirements. This controllable category often contributes to excessive rework, communication deficiencies, and in some rare cases, customer impacts.
- Profits / Margins: For investors and analysts, this is the key measurement most closely watched and the most unforgivable of “sins” which can be committed post-deal. If disappointment reoccurs in this classification, chances are dramatically escalated for post-deal investor insurgency.
- Stop-Starts / Excessive Rework: A post-deal management favorite, it tracks and mitigates “wasting” of scarce resources. If triggered, expect imminent action of realignments, reassignments, or even outsourcing of responsibilities.
- Communications: Seldom an issue for experienced M&A teams, the need for accurate and timely communications to the combined post-deal organization is a given. However, it can be materially impacted by organizational politics, cultural clashes, and even government regulations.
- Community Actions: Often a neglected area for hazard management due to urgency and pressing deadlines, a failure to appreciate community activism cannot be left to chance. With a potential for community impact (e.g., job cuts, service center closings, and reorganizations), investor scorn may arise as local actions impact the other nine categories within the hazard maps.
- Post-Deal Synergy Assessment and Viability: The reality of the deal grows with each post-deal day. As a result, the vulnerability and viability of stated M&A synergies are continually called into question. Therefore, the importance of synergies and their dependencies may shift resulting in impacts to other areas. The “punishment” valuation will be critical for synergies as they can have a cascading impact for the entire deal.
It is implied that the exact composition of each hazard map and management approach will be unique to the organizations and the deal requirements. Therefore, care must be given to carefully and actively define the precise categories, measurements, monitoring, and composition. Lastly, avoid a common misconception in thinking hazard management and maps are intuitive – they are not. Education and training will be required throughout the management cycle until the M&A integration teams complete their assigned activities on schedule and within budget.
After all, it is often quoted that many mid to large firms are dealing with an average of 18 to 20 concurrent material class-actions and discrete lawsuits. Wouldn’t it be grand if we could avoid 21? By utilizing proactive hazard maps and management approaches, post-deal investor insurgency can be mitigated allowing energy to be concentrated on integration – not litigation.
For 2008 MBA entries, click here