Less than one week after we [Proudfoot] published the article “Managing Merger Mania”, two enormous M&A announcements rocked the industry: PHELPS DODGE’s planned acquisition of nickel miners INCO and FALCONBRIDGE, and MITTAL’s proposed takeover of ARCELOR SA. Ample drama ensued with the eventual acquisition of Falconbridge by XSTRATA, while CVRD acquired Inco. Several other deals are pending, with billons of dollars in play on any given day.
The shopping frenzy is understandablemining companies are flush with cash owing to the three-year run-up in metals prices, so the purchasing of rivals to gain share, increase purchasing power and enhance production is only natural. As additional incentive, development projects are long in the making and large new sources of supply are increasingly hard to find. The bidding wars for a relatively scarce set of acquisition targets are sure to continue. But what will the long-term effects be?
According to Standard and Poor’s, the significant increase in M&A activity has negatively impacted balance sheets and credit quality in the mining and metals sector. And it’s not just short-term financials at risk; a bad deal can undo decades of progress (just look at Movie Gallery or AOL/Time Warner). Below, we note several “lessons learned” that smart companies are applying in order to avoid M&A mistakes of the past.
WHAT NOT TO DO (common points of failure)
Over-valuation of acquisition target companies
Lack of planning for the post-deal asset integration period
Poor contingency planning
Under-communicating to employees on both sides
Poor integration management in the post-deal period
Failure of management trust and integrity
Value keys not fully identified and used
Failure to win hearts and minds of key employees
Not dealing with the legacy silos
Not measuring post-deal impact to employee and production efficiency
WHAT TO DO (critical success factors)
New senior management team agree pre-deal
Integration planned pre-deal; top management ownership post-deal
Integration team well resourced with right mix of skills and know-how
Speed and decisiveness at all junctures
Cultural issues identified pre-deal and tackled quickly post-deal
Clear vision and frequent communication to all stakeholders
Positive, early wins closely monitored and achieved
Guidance from in-house or externally resourced deal experts
Risks mapped, understood and managed
Success factors identified and measured well beyond deal closure
During this tumultuous market cycle, many M&A blunders will occur that may go unrecognized until commodity prices decline and companies regain a cost and efficiency focus. The wise will learn these “digestion” lessons early and apply them sooner rather than later.
(The foregoing was prepared by PROUDFOOT CONSULTING and is offered to CMJ readers as food for thought, considering all the M&A activities afflicting the mining sector over the past two years. Sometimes the basics can be overlooked. The author may be contacted at www.ProudfootMining.com.)