Updated: May 11, 2021
Mergers and acquisitions are typically characterized by challenges and complexities. That’s just the nature of the game. M&As have always taken place in business, but they did not become popular until the end of the 19th century during which an intense period of M&A sometimes referred to as the M&A waves were experienced.
Because of the M&A waves, mergers and acquisitions shifted from being primarily a US phenomenon to characterize organizations across an array of sectors and continents. And despite this level of growth, M&As are still largely misunderstood. Furthermore, based on evidence, M&As rarely perform well as it has always been very difficult for organizations to successfully pull them off.
Which begs the question- why carry them out at all? The fact that businesses still welcome M&A despite the contradictory evidence present, means that there is something to be gained when a M&A is carried out successfully. Some mergers are enforced to capitalize on new geographic or demographic markets, expand product selections, boost productivity levels, facilitate the acquisition of important employees such as COO and CEOs.
In most cases, M&As take place to absorb a rival organization or fulfill long term strategies. Whatever the reason for a M&A, it is essential for the process to be measured to assess whether or not it was successful in meeting the rationale of business objectives established. That’s where KPIs or key performance indicators come in. KPIs are quantifiable, thus allowing an organization to determine if it did well or flopped.
That’s why businesses must establish a series of well-defined and established objectives before every M&A. The KPIs established will articulate the ideal performance results that are expected from the M&A process.
So what are the metrics against which M&As are measured? How can success be measured when it comes to M&A?
There is a range of ways to measure what success looks like when it comes to M&A. regardless of the approach, there are some important things that need to be figured out before success can be measured. For instance:
What metrics will your organization use to measure M&A performance?
There are ways to measure the performance of M&A. Even though there is no one size fits all approach, most businesses have been known to rely on things such as share price to measure performance. Other commonly used measures include accounting actions like sales, profit numbers, ROI, or ROA.
Over what time frame will M&A performance be assessed?
Whenever dealing with stock measures, most businesses rely on short to long term windows that can span several days or years post deal to measure success.
Whose performance should be measured, the acquiring or the selling party?
It is essential to keep in mind that whenever M&As take place, the 2 parties entering the deal do so with differing perhaps even unmatched expectations. Based on the strategic rationale that guided the transaction in the first place, the desired performance will target the 2 parties differently. This is because the acquirer’s point of view of success may not necessarily match that of the seller’s.
How will the acquisition’s performance be captured once the deal is finalized?
Once the deal is complete and the acquired business is part and parcel of the buying firm’s organization, it might be difficult to isolate the acquired firm’s operating performance within its new reporting structure. The purchasing organization must then find ways to measure the M&A performance of the acquired party post-deal. Otherwise, it will be impossible to determine what needs to be fixed or added so that performance can consequently be improved upon.
Common KPIs used commonly during M&A
As mentioned earlier, KPIs for one businesses’ merger and acquisition will differ greatly from other businesses’ M&As. Some KPIs might be more applicable to some industries than they are to others. For example, monthly active users is a common KPI for tech companies such as app developers but it may not necessarily be useful to say a manufacturing firm.
Familiarizing yourself with the right KPIs for your M&A will give you a leg up when it comes times to evaluating the success of your current venture. A few common KPIs that you should know are:
Customer acquisition cost
The cost of customer acquisition refers to the amount spent on sales and marketing to acquire a customer. Customer acquisition costs is the number that will indicate the efficiency of your marketing effort.
Customer retention rate
Most businesses need repeat customers to survive. A business that boasts a high customer retention rate implies that they have a quality product or service, as well as an effective support system that satisfies customers.
A business that has a low or shrinking profit margin should raise concerns about the businesses’ long term sustainability. A business that experiences low margins is more likely to drop in sales or have a poor market share. As such, a business must understand its profit margins versus its revenue numbers.
Examples of overhead costs include rent, insurance, utilities, and things of that nature. A company’s overhead costs will indicate how efficient the company is so it is an important KPI to measure.
Employee turnover is one of those non-financial KPIs that indicate just how well a business is being run. If an organization is considering M&A with a business that has a high turnover, it may be imperative to revamp the employee policies that are not working.
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