Too often, the value of marketing is overlooked as companies conduct due diligence for acquisitions, but forgetting the value of marketing in its many forms increases the likelihood of a deal that never lives up to its promise.
I have worked in the B2G market in various roles during the course of my career. As an employee, manager, senior manager and executive, across different companies, I have been affected by mergers and acquisitions while sitting on both sides of the table; when my employer acquired another company or was acquired.
Immediately thereafter cost-cutting activities ensued and rapid integration of the two companies began… cultures too hopefully.
During the rush to ensure ‘business as usual’ the opposite happened more often than not. Key customers deemed large enough to warrant an executive visit were often still uncomfortable, competitors pounced on perceived weaknesses in the announced M&A strategy, the sales force began updating their resumes, and marketing was viewed as an overhead expense that needed to be ‘streamlined’.
Success is Elusive
Based upon research by M. Bekier and M. Shelton, published in The McKinsey Quarterly, 2002, three years after a merger, only 12 percent of the companies grew more quickly than before the merger. A 2003 research study by C. Homburg, published in the Journal of Marketing, 2005, surveyed 232 mergers, performed within the same industry, found that market-driven performance has a much stronger impact on financial performance than cost-savings activities.
In fact, cost savings activities, in this study, had a detrimental impact on (long-term) financial performance. Another research study by L. Capron and J. Hulland, published in the Journal of Marketing, 1999, found that across 253 acquisitions, performed within the same industry, key marketing resources that were deployed, during the acquisition, had a significant influence on revenue and overall firm performance.
What Does This Mean to B2G Firms?
In 2013, and separately in 2014, because of my consulting work, I was in a position to observe two acquisition activities; one deal was closed and one was not. As I observed these M&A activities from close up, the process reminded me of the arranged marriages of yesteryear.
There were lots of doubts, even fears, but the ‘marriage will proceed’. Countless executive meetings, conference calls, lunches and dinners, operations’ presentations, and exhaustive financial analyses were conducted. Books of business and sales forecasts were dissected to the molecular level.
However, no one looked at marketing. Yes, there was consideration of the respective business development employees and use of consultants, sales pipelines, capture management staffing, proposal generation capabilities, and the reputations of the firms, but no one looked at marketing. No one identified and assessed intellectual property that was owned by the target companies and not their respective customers.
The sales forecasts were discounted heavily, up to 50 percent, to remove optimism and puffery. So what? How does the acquiring firm have a high degree of confidence that the remaining 50 percent of the opportunities in the sales forecast is still achievable? M&A-related research performed over many years shows that over 70 percent of finalized M&A deals fail to meet their strategic and financial goals.
Based upon research, my experience and conversations with small equity firms and individual investors, marketing, as a business discipline, is viewed all over the map.
Some people I spoke with seem to equate marketing with sales or consider potential market acceptance of a new product or service based upon gut feel. One person mentioned to me that they may bring in a marketing firm to perform a market survey of a start-up’s offering to bring ‘marketing expertise’ into the process.
M&A deals are essentially financial transactions; lots and lots of spreadsheet analyses of quantitative data. However, from my perspective, the financial data have finite context, meaning that they are viewed in a vacuum of sorts.
There are marketing factors that can serve as qualitative indicators of a firm’s future potential for success.
In other words, these factors collectively give insight into the viability of a firm’s go-to-market framework. The underlying question is if the firm to be acquired is not acquired, what is the degree to which they will still be able to win most of their forecasted business? How successful were they really going to be regardless of the proposed M&A deal?
Key Marketing Factors
There are about a dozen marketing factors, if assessed properly during the due diligence process, that will provide qualitative insight into the extent to which management in the firm to be acquired will be successful, i.e. they have a higher chance of reaching their long-stated goals.
Some of these factors are: knowledge cross-pollination, IDIQ contract vehicle exploitation, subject-matter-expertise market visibility, market research scope, IP identification, web site interactivity, lead generation scope, digital marketing framework, and more.
By understanding the collective impact of these factors, you can form a picture if the target firm’s management has a credible vision for growth and is “execution ready”.
Few M&A deals reach the success touted before the marriage. One reason for this all too common lack of success is failure to incorporate marketing as a key dimension of the due diligence process.
Formal consideration of specific marketing factors, during due diligence, can lessen the financial risk of the transaction and contribute to the sought after synergies of these deals.