Business war games in M&A processes
Eyal (Allan) Weiss / 2016
Mergers and Acquisitions – the statistics
Here's a factor that makes decision makers budge in their seat: The majority of M&A procedures FAIL. Estimates range between 60-80% (a recent KPMG survey claims 85%), and the differences derive mainly from different definitions of failure. Still, estimates claim that half of these are a painful, clear failure, where a company or partnership is terminated and going out of business, whereas the rest fail to achieve the goals for which the merger was made. This incurs loss of business focus, a fall back in the competitive arena, or even legal clashes between parties.
The rhetorical question – how many executives or strategic advisors are convinced their acquisition process will succeed, is redundant. Everybody, of course. And yet, 3 out of 4 are probably mistaken. Yet, we are not discussing incompetent or inexperienced executives, either; in fact the contrary is usually the case. So how is it that seasoned, capable and knowledgeable executives, and more so – entire management bodies, strategy experts, strategic analysts and investors, fail this procedure in most cases? Understanding the reasons, and finding ways to improve the process results are more critical than ever, as ,despite the statistics, consolidation forces and the "flattening" of global markets bring more and more companies to try and find their strength, and future, in this channel of buy or be bought, merge or get assimilated.
The challenges in M&A
Anyone who bothers to really examine the operational and future risks in M&A procedures is well aware of the reasons for the above, yet these are not always taken into account. The simplest and most obvious of reasons is the challenge involved in analyzing the opportunity and understanding the realistic implications of the merger, such as the consequences on both parties (buy side and sell side) and especially on the competitive landscape. Many procedures do not go under scrutinizing examination, as they rely (unjustly) on the business and technological data provided by the sell side, or even by neutral 3rd party providing an analysis of that data. These given facts-n-figures, including additional ones collected along the analysis process, often verge with 'false pretense' – not necessarily due to ill intentions, but, more often than not, due to optimistic business foresight (characteristic to many solid growth companies) that is driven by questions like "how do we combine these resources for growth and increased revenues?", instead of critique questions like "doesn't this merger distort our strategic focus? Where might it fail?"
One such example, reported in the business press (so I can discuss it publicly), is the acquisition made by Israel based Engineering group Bateman-Litwin, which acquired control over American engineering technology firm Delta-T. At the time, Bateman-Litwin's cash reserves were generous, and green technologies, in which Delta-T had a promising technological offering, were attractive and fashionable (still are). The acquisition also provided Bateman-Litwin with a convenient, readymade jump board into the US market. Despite all the preliminary due diligence and risk analyses, made in part by professionals I personally know and appreciate, it appears no one has bothered to check the operational feasibility of Delta-T's forecasts; later on, it turned out that the impressive projects pipeline was irrelevant, as the company had no operational means to implement these orders. Within less than one year, the later was sued by its buyers on basis of false pretense, a legal process that took 18 months. During these 2 years, Bateman-Litwin's revenues, plans and reputation were seriously damaged.
Another element in the opportunity analysis is the narrow focus on the seller-buyer axis. Such a focus is blind to the competitive landscape and the broader strategic implication that need to be looked at. A merger process, which usually has to do with industry consolidation and the strengthening of a major player's competitive abilities, is bound to cause changes in the competitive landscape and inflict counter actions of other strong players, such as parallel acquisitions of others in the industry. Not attending the "day after" effect is an intelligence failure on the strategic level. This aspect will be discussed in the following section.
The second common reason to the failure of M&A procedures is the various challenges in the assimilation phase, where the smaller company has to be merged, or adapted, to the dominant company. Failed assimilation is usually related to differences in corporate identity, uniformity, and coordinated operations. Neglecting to acknowledge different organizational cultures, different management approaches, internal communications and cultural divergence in general, make all the optimistic numbers and business plans irrelevant, and worse – will cause communication crises and even loss of trust between parties.
The competitive aspect
Words like 'competition', 'competitive landscape' and their likes, cannot be stressed enough, or overly repeated. At the heart of all business, all technological advances and all commercial activity, there is competition. It is the means, the goal and the game rules, and competition – as a concept – must be embedded in every decision in the business world. Those who fail to do so will lose the game, or the war, depending on how they 'play'.
As noted, one of the critical aspects in decision making is a realistic, reliable and effective analysis of the competitive landscape: how would my main competitors react? Where am I expected to have price wars, reputation battles, regulatory barriers or even other mergers that will change the face of competition?
Where will I press on my competitors' soft belly ("red buttons") and trigger a ferocious response? Where might competitors back down and retreat, due to my strengthened position, and perhaps become a secondary merger target?
A merger also raises operational issues that indirectly relate to competition. As in Porter's five forces model, the competitive landscape isn't affected only by direct competitors, but also by suppliers, customers, substitutes and new entrants. If my company just acquired a smaller company, who will be the suppliers (mine or theirs)? Should I merge two supply channels or focus on mine alone? Will suppliers that I now abandon become an asset to competitors, when they take with them not only physical supply, but also firsthand knowledge and insights from their previous relations with me? Will the clients of the acquired company want to remain in the new framework? Do I even want them in the first place?
There are numerous examples where company A acquired company B mainly in order to gain B's client portfolio, but the lack of foresight and proper adaptation led to massive client migration away from the new merger. In 2005, for example, American telecom company Sprint acquired Nextel, mainly for its loyal and solid business client base. Within a year, Nextel's technological infrastructure reached its limits, and started to deteriorate. At this point, Sprint shifted Nextel's clients to its own system, and ditched the Nextel brand name. Nextel's previous clients realized their phones were not fully supported by Sprint's technology (mainly, not having the 'push to talk' feature that Nextel offered), and started migrating to other suppliers. By 2007, Sprint had lost 60% of its share value, and its direct competitors, AT&T and Verizon, gained that customer migration on Sprint's expense (this example was given by Dr. Gilad in his book 'Business War Games', and duplicated with permission).
Surely, a telecom giant like Sprint had some of the most experienced and talented executives in the industry, and the merger was most probably planned and accompanied by high priced analysts. The problem was in dismissing the right aspects of competitive landscape analysis, and understanding the implications of that merger on the forces laid in Porter's model; in this case – client preferences. It is most probable that a Business War Game, the most effective and valuable in this (pre-merger) stage, would have raised these scenarios in advance, and surely subvert Sprint's view of its future client base (of course, such insights would not necessarily change Sprint's plan; insights are only effective if they are acted upon, rather than just 'gained').
Business War Games – the What, When and Why
While rooted in the ancient art of war games, where clever planning, based on good intelligence, allowed small and efficient armies win over larger, stronger armies, Business War Games are not about war, and they are not entirely a game. In practice, these processes, run under a strict and proven framework, are designed to provide managers and organizations with a clear and realistic view of their competitive environment. This larger picture includes market responses to the company's moves and future plans; it allows for identification of leverage points over competitors, identify opportunities (and risks) in the market, build more effective action plans, but mainly – it allows to learn all this before plunging into massive investments, like R&D, product launches, market penetrations, Etc.
It is important to distinguish between war games that are promoted, and run, by the big consulting firms, which are based on computer programs and game theory, and the ones discussed here: The former are mainly mathematical or computational analyses of market processes, and they are based on market equilibrium models. The reality, and your competitors, do not operate on equilibrium models (according to which, once there's a balance point in the market, all opportunities have been exhausted and there's no point in changing or adding anything). In the real world, your competitors and clients are diverse, dynamic, and very fast to respond, much more in accord with Porter's market models.
The War Games discussed here are based on updated Competitive Intelligence, and a unique analysis of competitors and industries. The accompanying process allows for a surprisingly effective prediction of future responses and developments in your market. No other methodology, IMO and that of scores of executives in leading companies around the world (who have taken part in such War Games), can provide such added value to strategic and tactical planning. Moreover, in almost paradoxical manner, the computer based games are incredibly expensive (at times reaching 6 figures), and hardly ever produce bottom line insights as to "what is the best plan to pursue". On the other hand, the War Games discussed here are more effective, producing valuable and tangible insights and action plans, and cost a fraction of the above, so (fortunately) they are also applicable to SMEs.
When are such War Games relevant?
It should be made clear that this isn't a periodical process, or a replacement to your occasional "round table" day, or as form of employee entertainment seminar (although it should be noted that these processes are intentionally less formal, quite fun, and certainly not boring. Yet, your employees deserve something else for sheer entertainment…). Business War Games are a demanding and inflaming process, but are only relevant in certain times, and only to certain companies (i.e. those who are truly willing to gain better insights, and act upon them). War games are mainly meant to test 'Strategic Crossroads'; the buildup of a new strategy or its derivatives, or times of change and uncertainty in the market.
Thus, this process is most relevant in three cases; First and foremost, when a company wishes to learn how its own strategy will impact its market, its competitive landscape, its clients, Etc. The second case is when a third party (an emerging technology, a competitor, major client, regulator, or supplier) influences my business and my results. Last but not least, a War Game is a must when the wrong decisions will mean substantial losses (of money, market share, or positioning). The best example to the latter is the Pharmaceutical industry, where product development is a very long and expensive process, costing up to tens of millions of Dollars, and the wrong (or simply inadequate) decision can lead to massive losses, and a blow to even the strongest of companies.
However, the will to run a Business War Game, beyond the relevancy of these 'strategic crossroads', must be backed by a responsive management. As with any intelligence, insights and recommendations have no value if they are not employed. Some management bodies, or rather some executives, feel that "we know our market well enough, we'll make the plan work this way or the other", or "we can adjust our decisions based on market reactions". Such was the unfortunate yet very predictable case of mobile phone innovator MODU, for example. Such a management body will waste time and money on a process that will not produce real value. One of the truly fantastic advantages of this (war game) process, is that it gives executives and decision makers the tools and framework to adjust or even abandon their previous plans, without losing their peers' respect, or their strength, but the contrary; employing the newly found insights becomes readily accessible and easily accepted by the entire team. IMO, one of the biggest advantages of this process is the infiltration of insights across the organization, and gaining organizational consensus on both the strategic and tactical levels. It should be noted that these war games are not intended only for executives. On the contrary; they gain more value and better insights by including middle management, such as marketing and sales managers, team leaders, R&D managers, Marcom people, and yes, also executives, of course.
Implementing War Games in M&As
By acknowledging the challenges in M&A ventures, as well as the values that can be gained by business war games, one can realize how the later can narrow the risks and uncertainties in the process. The M&A process is roughly divided into two phases; pre-merger and post-merger. The preliminary stages deal mainly with analyzing the opportunity and understanding the added value of the merger, as well as the risks involved. In the post-merger processes, the emphasis is on corporate or business assimilation of the acquired company, organizational culture integration, supply chain optimization and so on.
In pre-merger stage, the war game can bring clear strategic insights, mainly revolving on the changes we will stir in the market, the responses to these, and how we can prepare ourselves accordingly, so as to maximize the added value of the merger, and outperform the competition. Amongst other things, the wag game methodology brings a unique analysis of one's competitors, which allows for a surprisingly accurate prediction of their responses.
This is based on exclusive intelligence analysis, and not on one's beliefs or personal experience in facing a certain competitor. Another crucial and highly effective outcome is the identification of imbalances in market demand or trends; these are the very opportunities that can be seized, and which our competitors fail to see (until they run a proper war game themselves, of course…). The clear and precise added value that a war game can add to a pre-merger process is nothing short of crucial for the success of that merger.
Likewise, in post-merger stage, the same processes can be used to understand, and prepare for the responses of our clients, competitors, suppliers, regulators and other relevant forces. Just like in a game of Chess, the planning of several moves ahead with the intention to win is not enough. We must take into account the counter moves we will meet after every move we make. Too many strategic planning models fail to incorporate the dynamic competitive aspect; those defined as 'absolute performance models' operate in a strategic vacuum, where a competitor is a static and dogmatic parameter. The best model will fall apart as soon as your competitor changes the game rules, or come up with an unpredicted move (which, of course, could have been predicted). Coming back to the military source, a wise General once said "no battle plan has ever survived the encounter with the enemy". Think on that real world wisdom, and then rethink the survivability of your strategic plan.
Whether you perceive your business surrounding as a battle field, a playground or simply a business Chess board – Business War Games are a readily available tool, bringing critical value to strategic processes in general, and M&A processes in particular.