Twelve months ago, the future for mergers and acquisitions (M&A) looked bright. The previous year had seen record levels of activity, with more than 60,000 publicly disclosed deals globally, and the $5trillion value barrier crossed for the first time.
But with rapidly accelerating inflation, falling stock prices and an energy crisis fuelled by the war in Ukraine, amongst other major market disruptions, those record-low interest rates started rising.
In the professional services sector, as elsewhere, achieving the expected ROI on deals already done became that bit harder. Factor in the continued shift towards more hybrid and remote working due to Covid-19, and many firms found themselves burdened with increasingly expensive assets.
Despite the cost of acquisitions going up alongside interest rates, though, M&A is still a viable option for professional services firms. But there are a few things leaders must consider as new priorities.
What matters today in M&A
The first step is to avoid potential issues by targeting the right companies in the first place. Be confident to ignore those that aren’t a near-perfect fit. Right now, square-peg-in-round-hole deals won’t succeed.
Stress-test your decisions through due diligence that evaluates not just the target’s financials, but also its culture, values and processes. When you acquire a professional services firm, you’re not buying physical assets – you’re buying the expertise of people.
Be surgically precise in your choices. Then stress-test your decisions through deep-dive due diligence that evaluates not just the target’s financials, but also its culture, values and processes. This is the time to spot problematic mismatches.
The truth is that when you acquire a professional services firm, you are not buying machinery or any hard-edged physical assets. Instead, you’re looking to gain value by buying the expertise of people – people that don’t have to work for you if they don’t want to.
In fact, an acquisition may be the ideal moment for ambitious young professionals to decide to seek greener pastures or for senior staff to hang up their gloves – if the top three people in a small, newly-acquired firm walk away, you have a serious problem.
Clear priorities, clear communications
The average tenure of an employee in a professional services firm can be short. Looking at consulting firms like McKinsey, Boston Consulting Group, and Bain & Company, the average tenure is just over 2 years in the US and UK, and just over 3 years in the EU. Of course, this is a very particular snapshot, but it gives a sense of the rate of staff turnover, which is pretty much at an all-time high for professional services organizations worldwide.
But the rate of attrition is particularly high among acquired workers. In bought-out start-ups, as many as one-third of staff in the first year alone can decide that the new regime is not for them. And when staff leave prematurely, the cost of replacing them can be substantial.
Factor in the direct costs of recruiting and training a new employee, plus the indirect costs of lost productivity and disruption to the team, and you have a significant impact on the company’s performance reputation, as well as the bottom line.
If this expertise walks out of the door, you can be left not only with an intellectual property gap to fill, but also having to rebuild personal relationships with clients. And client retention is one of the major challenges in any M&A deal.
If this specific and collective mix of expertise walks out of the door, you can be left with not only an intellectual property gap to fill, but also having to rebuild personal relationships with existing clients. And since transferring the loyalty of clients from the old firm to the new is not easy, it’s hardly surprising that client retention is one of the major challenges in any M&A deal.
The key here is to decide upfront what’s going to happen, and communicate it very clearly and very often.
Culture is everything
While acquisitions offer opportunities, they’re also a threat to the buyer, with one of the biggest points of destabilization being cultural clash.
Unfortunately, acquiring companies are typically blinkered: they see only the business they want and they don’t look at its culture. But it’s what makes an organization what it is, and must be looked at upfront.
The integration of two companies’ cultures and values requires some hard choices. Are you determined to maintain your existing culture at all costs, or willing to find ways to assimilate that of the target company, keeping what’s best from each?
It would make little sense for a buyer to force its complex organizational structure onto a smaller company that has been acquired specifically for its agility. In that case, it might be better to maintain almost separate identities, rather than subsuming one into the other.
So, gaining an in-depth understanding of the culture of the acquired company early, and then developing a plan to integrate it quickly and effectively, is essential for maintaining employee morale and engagement – and the acquiring company must adjust their due diligence procedures accordingly. Look to understand and address the needs and fears of the employees and clients of the acquired company – when someone in your target company says some aspect of cultural change is going to be a problem, heed the warning. If the acquired company is not fully onboard, the culture will inevitably become toxic.
Make sure you have, and articulate, a strong employee value proposition that will appeal to those at all stages of their career.
Make sure you have, and articulate, a strong employee value proposition that will appeal to those at all stages of their career, while also showcasing the best of your own company culture as the acquirer. After all, you are taking on a bunch of people who are anxious to know how you intend to tackle issues including pay, work flexibility, parental rights and opportunities for career growth.
The only way staff are going to know what you’ve got planned – and the only way to engender a sense of connection and loyalty – is if you communicate your intentions clearly, frequently and transparently, so that employees, clients, vendors and other stakeholders understand the rationale behind the merger and how it will affect them. Acquiring firms must adjust their due diligence
For me, this message can only be conveyed through old-fashioned person-to-person connection. Yes, Zoom and Teams are great for everyday communication but to truly influence and convince you need to be right there in front of somebody.
Where now?
M&A is still a viable option for professional services firms looking to grow and stay ahead of the competition, but doing so requires rethinking the acquisition process, placing a much greater emphasis on achieving a cultural match.
Done correctly, M&A will give you access to the new markets, technologies and expertise you need to build an organization that has both the resilience and the agility needed to navigate the twists and turns of a business environment that is moving and changing faster than ever.
