UK: Merger and Acquisition Strategies - Adding Value and Reducing Risk

Last Updated: 14 October 2002
Article by Ian Hackett

© Rossmore Group


This paper will explore some of the key practical issues encountered in developing and implementing merger and acquisition (M&A) strategies. The critical success factors and how failure can be avoided will be examined.

In terms of achieving intended increases in shareholder value, the M&A track record is poor; a fact repeatedly highlighted by research. Key determinants of success in realising value include:

  • Achieving sufficient M&A process cohesion avoiding fragmentation and multiple hand-off
  • Using a structured targeting process a purely top-down focus may fail, especially in international situations, to take account of local knowledge, cultural issues and the need for ownership by local operating management
  • Getting the mix of specialist due diligence right in order to understand the situation-specific operational value drivers, value potential, constraints, and risks
  • Applying early a holistic perspective to integration planning and implementation that addresses both technical and people issues.


Companies are driven by shareholders (and indirectly by other investors such as banks) to increase shareholder value. The holders of an organisations equity capital seek a return to compensate them for the relatively high risks that they are taking with their money. All being well, this desired return would take the form of some combination of two components - dividends received and capital growth.

To corporately combine with another company offers a route to rapid growth. This growth will be immediately evident on the top line (sales/revenues) of the combined business, however growth in the joint bottom line (the profit available to shareholders), and thus shareholder value, can be much more illusory. Nevertheless mergers and acquisitions remain, in varying degrees over time, a very popular way of achieving growth. The principal reason being that the alternative route is the much slower, and often also perilous, organic growth.

There has been much research into the success/failure rate of M&As over many years, the results of which are not encouraging. There are of course practical limitations upon how accurate the research findings can be and the extent to which smaller deals, which may be below the line of sight in the work, are successful. Even so it is difficult to avoid the conclusion that mergers and acquisitions are inherently risky. However, in the world of investment, risk and reward are inextricably linked and the good news is that whilst always a difficult and imperfect area, there is much that can be done operationally to maximise value and minimise risk resulting from corporate transactions.

This introductory paper assumes little M&A experience and sets out to explore key critical success factors and pitfalls to help the reader enter the fray with eyes open and equipped to improve the general M&A track record. The intention is to provide a practical guide to adding shareholder value through mergers and acquisitions, rather than to create an academic treatise. After exploring some background and strategic context, the subject matter is broken down into four key areas - M&A process cohesion, targeting, due diligence, and integration planning. The depth of exploration is inevitably constrained by the time allocated to the topic and the required length of the paper. Working definitions (rather than full technical descriptions) of the terms shown in Italics are provided at the end.

In reality corporate combinations, whether described technically as a merger or an acquisition, are usually acquisitions in as much that one of the parties/cultures is eventually dominant. For brevity, and recognising this reality, the word acquisition is used throughout this paper as shorthand for either scenario. The abbreviation M&A and the terms corporate transaction¦ and corporate/business combination are also used interchangeably with the same interpretation.

Shareholder Value Analysis

Shareholder value analysis is explored briefly here in order to more fully answer the question "Why do companies merge and acquire?"

The term shareholder value is of course the current mantra in corporate performance measurement. However it is also, when appropriately applied, a very useful and practical conceptual framework for understanding and monitoring how value is, or is not, being added by a business enterprise. It is also quite often used for motivating management and incentivising them accordingly. Shareholder value analysis may be defined as:

"An approach to financial management which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of dividends."

Source: The Chartered Institute on Management Accountants (CIMA) Official Terminology

There are various interpretations of shareholder value analysis into techniques for measuring and managing corporate performance. These variants do not concern us here, however the Value Maximising Framework in Figure 1 offers a pictorial and straightforward model for understanding the main operational drivers of, and constraints upon, increasing shareholder value in practice.

Among other things, this interpretation removes various technical complications encountered in the application of shareholder value analysis. (Such as, for example, arriving at a share price for a company without a quotation on a public stock exchange, and adjusting relatively readily available accounting profit to be more meaningful in the context.) The model also serves to help explore the M&A rationale.

Figure 1

The basic premise here is that no shareholder value will be added until such time as the cash thrown off by the business (after all operating costs, charges and investments have been met) exceeds the cost of the finance being used to fund it. The high-level operational value drivers shown are the main factors that serve to drive the free cash flow up above the cost of capital and the high-level constraints indicated will tend to prevent this highly desirable outcome.

The combined effect of the drivers and constraints is to hold the free cash flow of the enterprise in a sub-optimal balance. Once improvement activity in the business has optimised the free cash flow to the extent that is practically possible in the circumstances, the company will have to look elsewhere to satisfy the appetite of shareholders for ever greater returns on their investment. Acquisitions are, arguably, the only way to achieve rapid (and potentially profitable) growth.

M&A Process Cohesion

Viewing the M&A process holistically at the outset (as it applies in the particular circumstances, rather than formulaically) is the first way to avoid many of the difficulties encountered downstream in business combinations. In practice, the process tends to be dealt with as if it were a sequential and fragmented exercise, rather than a parallel and cohesive one. There tend to be multiple hand-offs between different advisors, who can sometimes exacerbate the problem, and the variously skilled managers involved along the process steps. The problems stored up along the way tend to manifest at the later stages, by which time their impact is greater and often much more difficult to deal with.

Figure 2 contrasts the two perspectives on the M&A process.

Figure 2

The planning and integration of acquisitions involves a complex mix of technical and people issues. This should be recognised early on so that a holistic view is taken from the very beginning of the exercise, the appropriate resources are brought to bear, and sufficient team continuity and people involvement are provided for.

Importantly, learning and capturing (organisationally) the lessons from each experience must be part of the process. Even groups of companies that become serial acquirers (usually over a considerable period of time) and private equity houses (who back acquisitions for a living - via later growth-stage management buy-outs, buy-ins, etc.) admit that their track record could still be much better. Hegel¡'s observations about leaning from history may well also apply, at least in part, to companies and the world of corporate combinations:

"What experience and history teach us is this ¡V that nations and governments have never learned anything from history, or acted upon any lessons they might have drawn from it"

G W F Hegel 1842


All stages of the acquisition process tend to suffer from the application of an evolved formulaic approach that has not necessarily been adapted well to take account of specific circumstances. Targeting is certainly no exception to this tendency - for example applying an approach that has worked successfully in the UK may not be nearly so effective in international / multinational circumstances. Indeed if local knowledge, level of national economic maturity, and culture (national as well as organisational) are not adequately taken into account, the consequences can be severe.

One of the keys to getting the approach to targeting right is to develop a sound set of strategic parameters that are owned, through appropriate involvement, by the right people given the specific circumstances. Ranked strategic parameters and, importantly, the process of developing them will answer or start to answer certain vital questions. Using Rudyard Kipling¡¦s six honest serving men: What do we want? - Why do we want it/them?When do we want it? - How will we acquire and integrate it? Where will it be? Who do we need to involve? While these questions seem obvious enough, they are often not asked or answered, if at all, early enough or collectively by the right people.

As a starting point in developing and prioritising specific strategic parameters, the desired growth and financial outcomes for any merger or acquisition should be fully explored. To further stimulate the development process, other classic justifications for national and international business combinations are, at a high level:

  • Increase portfolio balance related core skills (family) or unrelated financially driven (conglomerate)
  • Build on common technology or know-how share resources in technology, equipment, product markets, distribution channels economies of scale
  • Increase market share - by acquiring a competitor
  • Capture a particular customer(s) by acquiring its supplier
  • Enter a new market platform for buy and build
  • Move up, down, or across the supply chain.

Often a purely high-level identification approach to targeting is taken. However, in many situations there is great benefit in complementing this with a tailored, structured, facilitated process that includes the development and utilisation of ranked strategic parameters. The principal benefits of such a process being that the acquisition pipeline is filled with desired targets, omissions and gaps in understanding are avoided, and integration/improvement issues are understood early-on and owned by the right people.

Identification Only Approach

This is usually a top-down approach to targeting, involving a close group of senior managers and their advisors. The industry's demand and supply evolution, in conjunction with the acquiring company's position in it, is analysed. High level strategic objectives and parameters are explored and a value creation/synergy plan created for ideas that emerge. Advisors are usually briefed to carry out a desk-research analysis and use databases/networking to opportunistically target companies for acquisition. A professional M&A transaction typically ensues, with varying degrees of involvement of the operating management who will eventually be charged with the integration of the resultant acquisition(s).

Structured Facilitated Process

This approach to targeting is less common and accommodates the identification process well but is also designed to fill the gaps in understanding that can appear when using a top-down approach. These gaps are usually around the stage of technology/market development, the interplay between corporate and operations strategy, and the involvement of people who have detailed local knowledge and will be charged with making the business combination work in practice.

The example targeting process guide in Figure 3 illustrates the structured facilitated process concept.

Figure 3

Factors that will determine the approach taken to targeting include:

  • The number and scale of acquisitions to be made
  • Whether the acquisitions are strategic or tactical in nature
  • Whether the acquisition will be national or international/multinational
  • The degree of confidentiality/ease of deduction of the acquirer's intentions
  • The degree of integration that is appropriate.

Due Diligence

Due diligence may be defined as the process of investigating and understanding the asset to be acquired. Basically this is the opportunity to build on the earlier research, that should have been done, with the objective of developing a detailed understanding of what you are actually buying.

Again this area tends to be approached in a formulaic manner. The most common types of specialist due diligence carried out in practice are legal, financial and commercial/market. What is actually included is brief-specific and varies from acquirer to acquirer as well as from deal to deal. Important as these areas clearly are, usually they do not surface the situation-specific operational value drivers and risks that exist in the target/combination. The implication of this being that the business is not always understood at the operational level, nor are integration / improvement issues and risk mitigation possibilities identified in all cases.

There are of course practical limitations to executing due diligence, such as the degree of access and time available in what may well be a competitive bid situation. However this makes it all the more important that the right work is done at this stage, and earlier, on understanding just what you are buying. Some common issues that arise post acquisition that should have been understood earlier are around the following areas:

  • Linkage of the operations strategy to the business plan
  • Operational capability, condition and state of development
  • Likelihood of successful plan implementation
  • Improvement and rationalisation potential
  • People and technical barriers.

One of the keys to success in this area is to rapidly scope the mix of due diligence that will be most effective in the particular circumstances. In practice this usually has to be done under considerable time pressure and in appropriate depth depending on whether the exercise is being carried out pre and/or post exclusivity. This becomes much easier to do if the earlier stages of the acquisition process have been executed well.

The Value Maximising Framework graphic in Figure 1 above serves well as a high-level checklist for getting the mix of due diligence right.

Integration Planning

The approach taken to integration will depend on a number of factors. Such as the nature and complexity of the business, the number of countries and sites involved, the degree of compatibility of the organisations, the business plans and corporate intentions, and whether the combination is seen as a merger or an acquisition. Depending on the specific situation, of course, a formulaic approach to integration planning is unlikely to be inappropriate.

Working with both corporate acquirers and private equity houses provides an interesting perspective on the M&A process. A key to getting the integration/improvement plan right is to take a holistic and tailored approach to the exercise and involve the right people at the right time. The approach taken should focus on:

  • Getting the best out of the combined operations
  • Maximising value and mitigating risk
  • Surfacing issues before they become problems
  • Improvement and rationalisation potential
  • People and technical barriers.

Listed below are the aspects of the plan that will need to be considered in a large and complex integration. The list can also be used to help ensure comprehensiveness in smaller and less complicated cases.

  • Programme planning
  • Leadership roles and responsibilities
  • Transition and synergy team structure
  • Resource requirements
  • Communication plan
  • Retention strategy
  • Physical integration
  • Organisation structure
  • Selection and re-recruiting
  • Cultural and human capital integration
  • Measurement and feedback
  • Project management
  • The first 100 days of the business combination will be absolutely critical, and it is of key importance that the right things are done in the right sequence. Two of the essential early activities necessary in practice are around the retention of key employees and customers. Again, getting the earlier stages of the acquisition process right will pay substantial dividends here and help very significantly in the integration and improvement of the combined business.


    By way of conclusion, below are some Dos and Don'ts in acquisitions.


    • Have a good, agreed reason to acquire
    • Plan and research carefully at all stages
    • Take a holistic, multi-party approach
    • Understand what you are buying
    • Remember the 3 times rule
    • Invest in the right resources


    • Impose a formulaic approach
    • Allow the M&A process to fragment
    • Export an un-modified UK approach elsewhere
    • Forget the impact of human/cultural issues
    • Overload or exclude operating MDs
    • Be egotistical or wing it!

    Working Definitions

    Acquisition: A business combination in which one company is acquired by another.

    Cost of capital: The blended cost of all the forms of finance used to invest in operating capital required for a business.

    Equity capital: The investment in a company by the ordinary shareholders. (It is the equity part of the financial structure of a company that is most at risk.)

    Exclusivity: The period during which a bidder for a target is granted exclusive access to carry out due diligence etc. with a view to advancing the transaction.

    Free cash flow: The operating cash flow generated by a business after all charges and investments have been met.

    Merger: A union of two or more firms in a transaction by which one absorbs the other(s), or a new firm is created utilising the assets of the absorbed firms.

    Private equity: The term generally used to describe equity investments in unquoted companies (both buy-outs and venture capital) often accompanied by the provision of loans and other forms of finance.

    Private equity house: A firm that makes private equity investments in companies and usually plays a central co-ordinating role in a deal.

    Shareholder value: The value of the investment made by shareholders in the business.

    Shareholder value analysis: An approach to financial management which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of dividends.

    Strategic acquisition: An acquisition that is of importance to the business's strategy in general.

    Tactical acquisition: An acquisition that is carried out to achieve a particular, shorter-term aim. (Such as acquiring a company to in-fill a gap in the acquirer's product or service portfolio.)

    The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

    To print this article, all you need is to be registered on

    Click to Login as an existing user or Register so you can print this article.

    In association with
    Up-coming Events Search
    Font Size:
    Mondaq on Twitter
    Register for Access and our Free Biweekly Alert for
    This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
    Email Address
    Company Name
    Confirm Password
    Mondaq Topics -- Select your Interests
     Law Performance
     Law Practice
     Media & IT
     Real Estate
     Wealth Mgt
    Asia Pacific
    European Union
    Latin America
    Middle East
    United States
    Worldwide Updates
    Check to state you have read and
    agree to our Terms and Conditions

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    If you do not want us to provide your name and email address you may opt out by clicking here .

    If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.