With the rate of mergers and acquisitions on the rise across a wide range of industries, many companies are looking for ways to maximize the chances of a successful and profitable acquisition.

Deal activity is increasing sharply in 2011, with the global recovery spurring new mergers and acquisitions (M&As) across a range of industries. Integration challenges make it important for companies to have a sound approach to an M&A deal.

According to Ernst & Young last month, 36 percent of U.S. companies plan to make acquisitions within the next six months, up 22 percent since October. On a global level, the global tax advisory firm reports, one-third of companies are planning an acquisition in the next six months, 18 percent more than in October, while 44 percent expect to make an M&A in one to two years.

“New found confidence is enabling businesses to shift their focus to growth and away from defensive measures. We certainly see increased appetite for acquisitions in the next six months as businesses seize opportunities in the current environment,” Pip McCrostie, global vice-chair for transaction advisory services at Ernst & Young, said. “Many of the critical M&A foundations are in place: balance sheets are stronger, interest rates remain low and there is a greater access to capital — but that has been the case for some time.”

M&A deals have also risen dramatically within the global manufacturing sector, according to PricewaterhouseCoopers (PwC) today. In the first quarter of 2011, there were 36 manufacturing deals worth more than $50 million, totaling $16.6 billion in deal value, compared with 14 deals totaling $2.3 billion in the first quarter of 2010 — a 157 percent gain in deal volume and a 622 percent increase in deal value. Four manufacturing deals were valued at over $1 billion in Q1 2011, representing approximately 67 percent of total deal value, versus zero mega-deals in Q1 2010 and 10 in all of 2010.

“With M&A activity increasing across the globe, executives are facing talent management challenges, including organizational design, integration planning and the cultural blend between acquirer and target,” Barry Misthal, U.S. industrial manufacturing leader for PwC, said in an announcement of the findings. “Companies should consider having a disciplined approach to employee integration, which will help them achieve desired synergies, build momentum and instill confidence among stakeholders.”

To that end, McKinsey Quarterly outlines five key strategies for making a successful acquisition:

• Improve the target company’s performance. While it may seem like an obvious measure, leading firms strive to drastically reduce an acquired firm’s costs and boost its margins and cash flow, leading to a significant increase in value. For example, reducing costs by three percentage points for a firm with a 6 percent operating-profit margin could lead to a 50 percent increase in the company’s value.
• Consolidate to remove excess capacity. Maturing industries typically develop excess capacity, as production gains from existing facilities and additional capacity from new firms generate more supply than demand. Shutting plants across the larger entity produced from an acquisition can significantly reduce surplus capacity, creating substantial value for the newly merged firm.
• Accelerate market access. When a larger company acquires a smaller one, it can help the smaller firm gain access to a wider potential market for its products. Likewise, a larger company can use its acquisition to enter niche markets or gain a stronger foothold in its existing category.
• Obtain skills and technology. M&As often provide an opportunity to shore up any technology gaps or obtain missing skills in a company’s workforce, usually at a faster pace or at a lower cost than developing these areas from the ground up.
• Pick winners early. Some of the most successful acquisitions are those that are made early in the life cycle of a new industry or product line, making it important to identify good investments before competitors or the broader market see the potential value in a company. Of course, this also necessitates the skills and patience to nurture an acquired business into a mature entity.

Managers who have been involved in past M&A deals know that combining two organizations can be a daunting task with a high potential for problems. Integrating two companies in an efficient manner can be especially difficult when you consider possible differences in corporate culture, management styles or levels of expertise in a given market.

In these situations, it is crucial to establish open lines of communication, as in a forum, for integration teams from both sides of an M&A. By sharing information, teams can more easily track upcoming initiatives, organize documents and provide important insights for employees during the merger process.

“Maintaining a body of M&A knowledge, organizing it into lessons and making it easily accessible are key to developing and leveraging a company’s M&A capability,” the Wall Street Journal advises. “Without such a framework, companies can slip into applying general types of strategies developed in prior acquisitions that are inappropriate to the one at hand. Managers might also become overconfident by thinking that the mere accumulation of experience brings with it a stronger capability.”

Earlier

The State of M&As in 2011

Industrial M&As up in 2010

Resources

Mixed M&A Messages as Confidence Surges
Ernst & Young, April 12, 2011

Assembling Value: Industrial Manufacturing Merger & Acquisition Activity
PricewaterhouseCoopers, May 2011

Increase in First Quarter 2011 Deal Activity Signals Positive Outlook…
PricewaterhouseCoopers (via PRNewswire), May 19, 2011

The Five Types of Successful Acquisitions
by Marc Goedhart, Tim Koller and David Wessels
McKinsey Quarterly, July 2010

The Secrets to Successful Acquisitions
by Koen H. Heimeriks, Stephen Gates and Maurizio Zollo
The Wall Street Journal, Sept. 22, 2008