Research shows that the ultimate failure rate of mergers and acquisitions is more than 70%.

The overall failure rate of mergers and acquisitions is very high (Image source: University of Michigan Business School)

Let’s talk about what to do before M&A in order to improve the final success rate of M&A.

First of all, the most important prerequisite is to have a true knowledge of yourself and the company. Although this matter is easy to understand, it is not easy to do it. Most people in this world actually don’t have a complete understanding of themselves, what are their abilities, what are their marginal capabilities, their strengths and weaknesses, and the company’s true status in the industry; the next six months and the next two years Under such a competitive landscape, many people are very vague about the possible development status of the company, let alone have a very clear understanding of these points.

Many people will imagine that they are the leading company in the industry, and then use various empty reasons to prove this. For example, the so-called “first” is to divide the industry into enough detail, too finely. In the end, whoever ranks first in the industry is the biggest dishonesty to oneself.

The correct approach is to carefully analyze from a larger, directly involved industry. Is it the head of a company of similar size and development stage? There is a common problem here, that is, most people think that their company is far better than others, and then another small group of people will be too cautious in doing things. This is the result of a lack of high enough dimensions to think about.

The other major cause of failure is the mismatch between the target of the acquisition and the strategic purpose of the M&A transaction, so think about this clearly in advance. Harvard Business School’s famous paper “The New M&A Playbook” concluded that to achieve higher revenue scale, reduce overall costs and improve performance, acquisitions that can achieve these benefits are difficult to change the company’s development trajectory. These two goals want to be simultaneous Realization is not realistic.

Therefore, some thinking work must be advanced to the selection of merger targets. Harvard Business School once designed a thinking model consisting of four interdependent elements: customer value proposition (customer value proposition, which can fulfill customer needs more efficiently), profit formula (profit formula), Revenue model and cost structure), the resources needed by the company to deliver products (resources, such as employees, sales network, technology, products, and cash resources), organizational structure and processes (processes, such as manufacturing, R&D, sales, etc.) ).

Therefore, mergers and acquisitions can also be divided into two types: one is a bolt-on merger, which extracts resources from the acquired company and inserts them into the parent company’s business model, and for those unnecessary parts To be marginalized or even disbanded; the other is reshaping mergers and acquisitions, which retain the invested company as a whole and use it as a platform for transformation and growth.

From 2018 to the present, the Internet industry is no longer on top of the bottom-level dividend of rapid growth, and defense against competitors, business expansion, business model upgrades, and technology or talent introduction have become more and more important. In particular, market competition has higher requirements for enterprises’ comprehensive capabilities and talent density, so mergers and acquisitions based on technology and talent are increasing, and they are undoubtedly worthwhile.

The more essential reason for many transactions is to seize opportunities through mergers and acquisitions. Judging from the several major global M&A waves in the technology sector, almost all are driven by the vision of technological integration, and new growth opportunities also exist in the value increase generated by the merger.

So when faced with the opportunities of the macro economy and capital market, competition in the meso-level industry is intensified, and micro-level companies have limitations in their own capital resources and capabilities, mergers and acquisitions are still powerful for entrepreneurs to quickly achieve strategic upgrade and transformation arms.

The M&A process is an organism (Image source: UNIVERSITY OF CALIFORNIA, BERKELEY)

What we talked about above is to take the initiative to acquire others, and some Jingwei companies are acquired by others, such as Changting Technology acquired by Alibaba Cloud, Caiyun Technology acquired by ByteDance and so on. If you are considering whether to be acquired by others, then the core considerations will be the following three points: first, whether your own development has encountered a bottleneck that is difficult to break through; second, what is the timing of the transaction; Display potential on a large platform.

For example, why a founder who was acquired by a giant made this choice? He also faced many flexible choices at the time, such as financing or being invested by another strategy.

In the decision-making process, he is actuallyRealizing that being acquired may enable you to stand on a higher dimension, display your energy on a larger stage, and then bring your existing team to challenge higher. As long as the founder thinks through this, it is worth applauding and applauding for them.

Let’s take a look at a specific case, which reflects the thinking process of the founder. Company A is a high-tech company. It is the first domestic research team to start a certain subdivision field. The initial development is rapid and it has caught up with the popularity of the entire track. Driving, security and other big tracks have also taken a lot of good financing.

But in the end, Company A chose to be acquired by Company B. Making this decision is not easy. It requires thinking from both the industry and the company. On the industry side, Company A has indeed begun to encounter bottlenecks. It is actually difficult to make a general-purpose AI chip. It is not difficult to design the chip, but to build the entire ecosystem. Nvidia, the dominant player in this field, the biggest barrier is not the chip itself, but the ecosystem built by software, but this is almost impossible for startups.

Another industry bottleneck is that although Moore’s Law is still continuing, the cost of improvement is getting higher and higher. It turns out that the brilliance brought to the industry by Moore’s Law lies in not only the better and better performance of chips, but also the lower and lower cost of a single device of each chip. With each new generation of technology, the cost of the chip has become more and more. The lower.

But this matter has completely changed after 7nm. After 7nm, the technology is very difficult to tackle. The cost curve has started to rise rapidly, and it is impossible to move without huge funds. Therefore, some large companies have begun to choose secondary processes instead of the latest processes. This has a great negative impact on startups, because what disruptive innovation requires is that when a new product comes out, it can subvert the original high-end product with a better price/performance ratio.

But when Moore’s law fails to some extent, when new chip startups do not have enough sales, the cost is extremely high, and for existing giants, such as Nvidia, it can use sub-performance For example, start-up companies use up to 12 nanometers due to cost issues, but the giants of general-purpose chips can use 5 nanometers because of their scale advantages. This can bring innovation The generation gap is smoothed.

On the company side, the problem faced by AI chip startups is that the application cycle is very long. Downstream cooperative customers, such as car companies, have a very long entry cycle. A normal car factory’s entry cycle may be 4-5 years, and their cooperation with startup companies will be very cautious. For example, they will require seven years of stable supply and after-sales. But many startups can’t even support it for so long.

Before the merger, Company B was one of the investors of Company A. Because it did not obtain control, the two companies were still very worried about product competition and even caused an interlocking situation.

Comprehensive thisThese judgments, on the premise that the short-term bottleneck can be expected to harm the company, join a larger platform to seek coordinated development, at this time mergers and acquisitions have become a suitable choice. Don’t wait until the company really can’t do it to think of mergers and acquisitions, the situation will become tragic at that time.

For example, an autonomous driving company in the United States was acquired. It was only considered after it was really unable to continue. A company with a valuation of 3.2 billion US dollars and financing of 1 billion US dollars was eventually acquired at a price of 1 billion US dollars. , Which means that after all the equity investment funds are paid off, the founding team may not get the money at all.

The last point is to consider the water temperature of the market. 2014-2018 was the era when Internet giants represented by BAT attacked everywhere, but in the three years from 2018 to 2020, except for Tencent, which is more financially invested, the overall frequency of the giants’ shots decreased. And the giants are more thinking about giant transactions that can affect their own strategic development and industry structure, rather than repair-type transactions.

In addition, recently there is a new generation of companies, especially companies listed in the wave of IPOs that started in 2020. They gradually have the urge to achieve further growth through mergers and acquisitions.

In short, for startups, mergers and acquisitions are still a powerful weapon. At the right time, boldly do some active integration to make yourself stronger in this industry. On the other hand, if you feel that it is difficult to break through the bottleneck, you can also make the decision to break your arm, do everything possible to become a member of the leading company in your industry, be acquired by others, and then find a suitable position in the new company achive dreams.

03In mergers and acquisitions: at the most tangled moments, we must look back at the original intention of the transaction

M&A is a highly complex and artistic transaction full of human considerations. There are many people standing behind both sides of the transaction.

The management of each company, the strategic shareholders and financial shareholders behind it, even the early financial shareholders and the mid-to-late financial shareholders, will have different considerations and demands for transactions, and will have different bottom lines. At this time, they need to have Experienced teams come to directly help various stakeholders in each transaction to communicate and understand their core demands.

Many times, everyone’s appeal is not a needle-point conflict with the magnificence, but not the real nature of the transaction. For example, when negotiating a transaction, whether you are a buyer or a seller, you need to show interest and sincerity in the transaction, and at the same time, you must not be too proactive in the negotiation, because when you are like this, you may fall into the negotiation of the transaction. Downwind, when to be reserved and when to be active, this “fire control” is very particular.

Picture source: Huaxing Capital

There are many details in the transaction, including valuation pricing, payment method (equity or cash), structure design, etc. We mainly talk about the most important valuation pricing.

There is no absolute standard answer to valuation and pricing in mergers and acquisitions. It is more of a game at the transaction level, which depends on both parties’ expectations of future earnings and negotiates to reach a balance. There are mainly absolute valuation methods and relative valuation methods. The historical valuation of the acquired party can only be used as a reference.

From the perspective of pricing, more and more projects choose a fixed price, because more and more M&A transactions focus on long-term cooperation and layout, rather than how much money can be earned in the short term.

There is a “lock box mechanism” in this, that is, everyone discusses a point in time. At that point in time, what the value of the company is is fixed, and no adjustment is made during the subsequent process of the transaction. This is also considered a A fixed price. Of course, this approach puts risks and interest uncertainties on the buyer, which is a better mechanism for the seller.

Picture source: Han Kun Law Firm

If it is a merger of two companies that are not far apart, the classic paper “The Logic of Merger and Acquisition Pricing” on M&A pricing concludes that the valuation of the new company after the transaction must be independent of the pricing of both parties the way. Because only the two business systems merge to form a new company, synergy will appear, so the new company cannot be equal to the first two companiesThe sum, plus some synergy premium to define.

The input and export of valuation, the new company after the merger needs to reconsider its valuation plan (picture source: Harvard Business School)

Understanding the value of the new company after mergers and acquisitions will help us get out of limitations in specific negotiations. During the execution of a specific transaction, all parties to the transaction, even including the intermediary, may have a terrible inertia and get caught up in the negotiation of detailed terms prematurely.

At this time, we need to use a very clear cognition to remind ourselves why we are doing this transaction, what angle did we start from, and we must be clear about the core demands and what we are willing to pay. This will avoid trading for the sake of trading. .

One failed case is that in the early stage of the transaction, the two parties communicated very smoothly, and the main directions were also agreed. An agreement was signed to enter the transaction exclusivity period, but during the due diligence negotiation process, one of the parties Some new requirements have been made, hoping to take more advantage. But in the end, the new negotiation delayed the exclusivity period, and the project was snatched by another counterparty. So at the most tangled moment, it is very important to review the original intention of doing this transaction.

In the transaction, you need to keep asking yourself: What is the logic of this acquisition? What can we give to the acquired company so that it can achieve a satisfactory performance level for both parties? What can we borrow from them to help us? We continue to communicate, communicate, communicate again, and say the same thing to the acquired company, to ourselves, and to the capital market over and over again. In this way, a consensus will be formed.

04 Post-merger: money and power, you can only choose one

Jingwei companies have gone through so many merger and integration cases. If you want to refine the most important point, whether you want to be a survivor or a post-merger boss, you can only choose one of money and power.

Specifically, if it is a merger of two companies, unless the size of the two companies is more than 5 times different, the other party must also know that he has no control after the merger. As the last survivor, that is, the CEO of the new company after the merger, you have a lot of detailsTo show your ambition and height, you have to allocate enough money to others and let others give up control willingly.

How about enough? You have to feel that I have paid so much for this thing in the dead of night, and you have to feel the slight pain. Only in this way can the integration be smooth, and the teams on both sides can realize that you are a person with a mind and a pattern. I want to go with you.

If it is purely for optimizing operational data, but in the process they are not willing to pay a certain price, no matter whether it is money or power, the merger and acquisition will not be successful in the end. This is a very simple human issue.

How to integrate after merger? Every transaction has a different situation. Here we show you a real thinking process of acquiring the CEOs of 4 companies.

Company B is mainly engaged in long-term rental apartments. Although there will be frequent thunderstorms in long-term rental apartments in 2020, which has caused some harm to the industry, from a policy perspective, the industry has just ushered in its spring. New policies such as simultaneous leasing and sales, and city-specific policies are all good for this industry.

In the last two years, Company B hopes to accelerate its expansion in first- and second-tier cities and has successively acquired multiple companies in the same industry. In the post-merger integration, Company B did not substantially lay off employees, but tried to derive its own management advantages and implant its own culture. In this way, peaceful integration is achieved. As the organizational strength of the acquired company improves, the overall cost of sales has dropped significantly, and the result of the merger is successful.

Organization integration is not just started after mergers and acquisitions, it is a set of systems engineering. There is a lot of work that needs to be done before it can be successfully taken over, which is very important.

Before mergers and acquisitions, it is necessary to make a good diagnosis of the potential subject matter, mainly based on the market reputation, market share, market capacity and market growth. In order to avoid the trouble of later integration, strict legal and financial due diligence is also required in the early stage. In the financial due diligence, the report survey of internal and external accounts is generally done. The smaller the enterprise, the easier it is to have internal and external accounts, and it is necessary to restore the true operating conditions.

Financial and legal due diligence are relatively rigid and can rely on external professional institutions to do it, but the diagnosis of the organization must be done in person. Behind all business problems are management problems, and behind management problems are human problems, and human problems are also organizational problems.

After the merger, integration is roughly divided into three steps, the most important of which is cultural integration, including mission, vision, and values. Then there is the integration of the resources of the two companies, including some customer resources that have been or are being discussed.

The third is management integration. This aspect is mainly about how to integrate the organizational structure and how to merge similar items, including a new reporting mechanism, and even a new salary system.

In these three steps, some links will be very sensitive, such as merging similar items or the salary system. If you don’t do it well, you will lose talent or make the company’s minds distracted. In this regard, the most important thing is whether the founder has this consciousness? Would you likeWilling to spend time and lower your body to embrace new employees? This must be a “top-level project.” It is necessary to evaluate the history and current situation of the cultures of both sides in order to find a point of integration.

For the salary system, for example, the founder of Company B would tell each team that was acquired to compare the two salary systems first to see which one is more suitable. If it is said that the original one is more appropriate, the original system will be maintained for half a year, but the business will be the business of the new company and will be incorporated after the half-year buffer period. But if it finds that the business itself is convergent, it will ask the other party to see if it can be transferred to the B company’s system. If the founder can consider these sensitive places, the new employees will most likely eliminate their anxiety.

Next, we must focus on the strategy of cultural integration in the future. After the merger, what the future of the two companies will look like, and let everyone know where the future increments are, instead of gambling in stock.

At the same time, executives also need to monitor the corporate culture in a timely manner. After the new colleagues are integrated, one month, two months, and three months, have these people adapted? What are not suitable? Why not adapt? What we can do to make them more adaptable is a question to be pondered behind.

Only in this way can we guarantee the “three consistency” after the merger. The first is the consistency of ideas, including culture, management language, strategic consensus, and mission and vision to achieve the first consistency.

The second is the consistency of business goals. The key data of the acquired company is integrated into the entire strategic map, and information is shared to follow the big goal. This requires a dedicated team to lead the other party to dismantle the target, and to do some cross-departmental communication, and integrate it into the new organizational structure.

The last thing is the consistency of interests, so that new colleagues can get more income through performance and enjoy better promotion. After accomplishing this, a complete closed loop is formed from culture, business, organization, information, and interests. Only by paying enough attention to organizational integration, sufficiently scientific in methods, and sufficiently tolerant in attitude, can mergers and acquisitions integration be truly realized.

In short, this new era of strong supervision and anti-monopoly is actually aThe good news is that it is necessary for us to summarize our previous experience and combine the insights of professionals to provide some new insights for your reference.

M&A is a very rigorous and serious matter, and it is worth spending time for every company to think about, especially in the industry that has formed a certain head effect, has strong growth potential, and has a high degree and a mind. The founder of, should think deeply.

One of the most important points is to think clearly about how to do 1+1>2, even 8 or 10 after the merger. This requires a lot of preparatory work, as well as the founder’s understanding of human nature. Wisdom, coupled with rigor in the execution process. In mergers and acquisitions, human nature will be exposed, and even some changes will occur, so it is often necessary to put the shame on the front. This matter can only be thought of as heavier, not lighter.

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