Whether you’re planning a merger or just considering the possibility of one, you may be wondering what the hallmarks of a successful merger are. Gauging merger success can be a tricky business and there’s more than one way to determine if a merger has lived up to your expectations.
At NorthStar Venture Partners, we have extensive experience representing companies in mergers and acquisitions. We understand what makes a merger successful -- and what doesn’t. Here are some things that indicate merger success.
One of the things that can doom any merger is a lack of clear leadership. It stands to reason, then, that a merger that includes clearly defined leadership roles is more likely to succeed than one that doesn’t.
Merger success is unlikely when companies attempt to combine two sets of leaders, or when leaders of the acquired company stay on when they don’t want to. It’s better to negotiate exits for leaders whose roles aren’t clearly defined than to have them stay on as functionaries.
It’s normal for there to be some growing pains after any merger, but one important way of gauging merger success is to look at the revenues of the new entity. In a.successful merger, revenue should increase as you attract new clients and cross-market products.
By contrast, a decrease in revenue -- particularly a steady decrease or a downturn that turns into the new normal -- is a sign of trouble. The increases in revenue should help the acquiring company recoup what they spent on the merger.
New Customer Acquisition
After any merger, there’s the possibility of losing clients who fear uncertainty about the merged entity’s future. However, before long, you should start to attract new clients who want to be in business with you after the merger.
You may see a “halo effect” where the reputation of one company affects other divisions and products. For that reason, you should measure new customer acquisition company-wide and in individual sectors.
Revenue per Client
Along with revenue and the number of clients, you should look at your revenue per client as another way of gauging merger success. If the merger has been well-planned and executed, it should be easy for your company to attract newer, larger clients.
On a related note, you may also find that existing clients buy more from you after a successful merger. For example, they may decide that it makes sense to switch from another vendor or provider to consolidate their relationship with you.
Any merger can be stressful for employees and it’s expected to see increased employee turnover immediately before and after a merger. However, in a successful merger, employee turnover should normalize quickly.
A common cause of heavy staff turnover is a clash in company cultures. If you don’t plan your integration properly, culture issues can drive top talent away -- and leave your merger in trouble.
Some merger success metrics are easier to measure than others. One that can be tricky to quantify is employee morale. After a merger, it’s important for employees to settle into their new roles (and the blended corporate culture) quickly. If they do, then it’s highly likely that the merger will be a successful one.
However, if employee morale is down -- people are calling in sick, there’s high turnover, and an increase in employee complaints -- it is likely a sign that your merger is in trouble. It’s not necessarily doomed, but you should take steps to boost morale.
Immediately after a merger, your cash flow might be impeded due to new or increased expenditures. A short-term cash flow issue isn’t something that should concern you.
That said, as the two merged entities achieve synergy, you should see a significant increase in cash flow as the result of increased sales and new client acquisition. There’s no threshold that works for every company, but increased cash flow is a sign of a successful merger.
Run Rate Savings
The run rate is a KPI that’s extremely useful after a merger. It uses financial results to extrapolate future income. There are some potential pitfalls with run rates, but if you’re careful to adjust when necessary (for example, not extrapolating one-time sales) then it can be a useful tool.
You should be seeing synergistic benefits after the merger as efficiencies improve. If you’re not realizing those efficiencies with two or three years of the merger, it may be a sign that the merger has not been a successful one.
The art of gauging merger success can vary from deal to deal -- and from industry to industry. That said, there are some constants, and the hallmarks of merger success we have outlined here can help you determine whether your merger is a successful one.
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