With an 80% failure rate in mergers and acquisitions, you must be in awe.
Text: "Chinese Entrepreneur" reporter Zhang Wenjing
Edited by Mina
Header image source: Respondents
On April 26~28, the "2024 (16th) China Business Mulan Annual Conference" hosted by China Entrepreneur magazine was held in Wuzhen, Zhejiang. In the mentor session, Hu Xiaoling, founding partner of CDH Investments, shared her thoughts on "M&A and Organizational Transformation".
Hu Xiaoling shared the core points as follows:
1. The failure rate of mergers and acquisitions is 80%, and mergers and acquisitions must be cautious, and ten "pits" need to be avoided.
2. Before mergers and acquisitions, you must recognize your organizational genes and organizational capabilities around the essence of business.
3. The first single M&A is a first-class project, which should be responsible for and operated by the leader who can use the most resources in the enterprise.
4. Before mergers and acquisitions, it is necessary to be prepared for seventy or eighty percent, but avoid seeking perfection in the implementation stage.
5. In mergers and acquisitions, altruistic thinking is needed, and the original intention of maintaining is: what is the use of "me"?
Hu Xiaoling, Founding Partner of CDH Investments Source: China Attempt Library
The following is a transcript of Hu Xiaoling's sharing (with deletions):
M&A is undoubtedly a huge and complex issue, and every time we help a company complete an M&A, it takes a year or two to prepare and operate. It is impossible to explain this matter clearly in a short period of time today, but through today's lesson, I want to convey an important concept that "mergers and acquisitions are not easy, and the failure rate of mergers and acquisitions is as high as 80%", and the failure rate of 80% refers to the failure rate after the money has been spent with real money, and does not include the "failure rate" of hoping to merge and acquire a target and not buying.
Although I don't think there are many things that you don't need to be fully prepared to do, such as things that go with the flow, and the good outcome is a high probability event, and excessive caution often makes us miss opportunities. However, in the face of the decision of M&A, which has a failure rate of up to 80%, I still recommend that enterprises should be at least seventy or eighty percent prepared in the preparation stage, and do it on the basis of a certain understanding of their own organizational genes and capabilities.
So, if there's one thing I can share with you today, it's the awe of mergers and acquisitions.
Ten "pits" of mergers and acquisitions
There are many "pitfalls" in mergers and acquisitions, and even if I list ten of the main pitfalls here, there is not enough time to unfold today, so I will pick a few points to develop moderately:
1. Insufficient awareness of the boundaries and expansibility of one's own capabilities.
Second, there are too many places left in the transaction structure for future games.
3. Underestimating the difficulty of cultural integration. After mergers and acquisitions, many enterprises will become stronger by simply adding the supply chain and sales network of the other party? Underestimating the difficulty of cultural integration and ignoring the integration of cultural differences is a common mistake made in mergers and acquisitions, and it is also a place where problems are particularly likely to occur.
Fourth, overestimate the benefits after integration.
5. Blindly trust the authority and professionalism of the partner.
6. Neighbor risk. In the past few M&A, I decided that the partners involved in the M&A might cause problems, so I chose to abandon the M&A.
Seventh, the gods fight.
8. It is easier to think that small mergers and acquisitions. In fact, the small target has the difficulty of the small target, for example, the small target may need to do the details of the operation, the big target has the ease of the big target, of course, there is also its difficulty, the core is the ability to recognize oneself and diagnose oneself.
9. Blind bidding.
10. Ignoring systemic risks in industries and financial markets.
Our team has been investing since 1995 and has gone through four cycles today. In the 13 years since 2008, the market has been relatively stable and has not experienced excessive fluctuations, which makes many people who entered the industry after 2008 really experience the cycle for the first time until 2022 and 2023. In the cycle, many companies buy when they shouldn't buy, and hesitate to make a move when they should be at a low point, and they may step on the pit or miss the opportunity.
Recognize tissue genes and tissue capabilities
For example, if a consumer enterprise has 50 consumer categories, each category is different in nature, and the connection point with consumers is also different. Conversely, the genes and key elements that require a company to succeed are different.
Enterprises need to focus on the essence of business, clearly recognize their organizational genes and capability boundaries, and know their strengths and weaknesses. For example, if Company B acquired a sports brand unsuccessfully, but the brand was later acquired by Company A, it was successful, why?
I was a director of Company B at the time, and I was involved in some of the company's M&A decisions, and this acquisition was the only one I voted against. My concerns are:
First, Company B was essentially a retail company at the time and did not have brand genes. Retail enterprises are strong operations and militarized operations, and each financial result must be strictly analyzed for the reasons for its formation, which is very different from brand companies.
Second, Company B is not ready to create a new company entirely, develop a new mechanism for the brand, give it an environment to grow independently, and separate it from its own retail culture.
Third, in terms of supply chain and R&D system, Company B does not have the ability and accumulation to be a sports brand.
Fourth, after the merger and acquisition, although there are excellent talents from sports companies, they are not strong enough to fully control the existing resources and start new businesses like starting a business, and the company does not have the corresponding organizational resources.
Based on these considerations, I believe that the failure rate of mergers and acquisitions is very high. My fears were proved to be correct, and these were the main factors that led to the unsuccessful outcome of the merger. Therefore, before mergers and acquisitions, we must recognize our organizational genes and organizational capabilities, whether there are any business or management "sharp tools" that can be exported, what capabilities need to be supplemented, what resources are combined, and it is very important to diagnose and recognize ourselves.
A first-class project
The first M&A is a first-class project. M&A should be handled by the leader who has the most resources at its disposal in the business, at least for the first time.
If the heavy responsibility of mergers and acquisitions does not fall on the shoulders of the top leader, but is handed over to the professional managers in the enterprise to handle, many problems will be encountered, such as a single merger and acquisition may involve hundreds of millions of yuan of investment, do professional managers have enough power, responsibility, and ability to make this decision?
A good organizational structure is not universal, and it cannot be separated from the judgment of key people. When mergers and acquisitions, a common mistake is to go to the market to find some people with beautiful resumes and excellent abilities to "form" a seemingly strong team, but such a team often lacks real tacit understanding and trust, which I call "fairy fights".
In order to formulate a plan and strategy for mergers and acquisitions, everyone must be in the same direction and pace, and even if a thorough plan and strategy are formulated, there will still be many problems and hurdles to be overcome in the implementation process. If you don't have a visionary and particularly strong "No. 1 position", but just a few people with bright resumes, who have not run in before, and have not yet built trust, such a team will have a probability of failure as high as 80%.
Generally speaking, finding a team to execute the M&A from the outside, if the people in the team do not have the full support of the "No. 1" or several key positions under the "No. 1 position", it is not difficult to successfully complete the M&A.
Avoid perfection
Before mergers and acquisitions, it is necessary to prepare seventy or eighty percent of resources, but avoid seeking perfection in the implementation stage. It's not easy to get it done in one step, and it can trigger cultural conflicts and management conflicts.
After the acquisition, enterprises are often faced with the task of expanding sales, reducing costs and increasing efficiency, including job transfer and layoffs, etc., and it is recommended to carry out these processes step by step. If you want to do things perfectly at the beginning, it is often easy to magnify the contradictions and detonate the thunder.
Therefore, when trading mergers and acquisitions, I suggest that the most brilliant things should be incremented first, so that all those involved can see hope and form a centripetal force. After the first step is done, the second and third steps can be done. After the merger, at least at the beginning of the fight to win a good battle, so that everyone has confidence.
I used to be a director of Midea Group for 7 years, and I will give an example of Midea, although it is not a case of mergers and acquisitions, but the principle is the same.
It is ideal for an enterprise to achieve rapid sales growth, maximize cost efficiency, and generate economies of scale. But in reality, it is unlikely, and Midea knows this very well.
Before 2011, Midea implemented the division system, and there were 3 secondary industry groups, the division was almost equivalent to a completely independent enterprise, production, supply chain, raw material market, sales were all responsible for the division itself, because at that time, Midea wanted sales and tonnage, and gave up collaboration and integration in the pursuit of tonnage.
Midea implemented the division system at the beginning of its growth, which was very smart, and all resources were allocated by the number one position of the division, and the rewards and punishments were strict. I remember that at that time, if the sales growth task of the Midea business unit could not be completed, the first and second leaders of the business department would lose more than 50% of the revenue, so everyone paid special attention to growth and tonnage.
Usually when the scale is small and the ability is not strong, it can be a paradox to talk about collaboration. Until 2012, Fang Hongbo took over as the chairman of Midea Group, carried out intra-group integration and strengthened collaboration, and remembered that there were only 2 million square meters of idle warehouses at that time. The three industrial groups were merged, the headquarters was abolished, and the management was reduced from 1,200 to two or three hundred, excluding the subsequent IT expansion.
Midea's transformation is very thorough, but the premise is that there is enough tonnage and a stable market share of more than 30%~40% in the market. From the division system to the integration into a platform-based organizational structure, I think the two steps of Midea are very beautiful, and there is indeed great wisdom.
Altruistic thinking
Every great organization has a strong and unique culture, and M&A needs to balance uniqueness and inclusiveness between organizations. In mergers and acquisitions, we need to maintain the original intention: "what's the use of "me"?
Taking the 2017 joint merger and acquisition of "Company B", a leading domestic home appliance company, CDH and a leading domestic home appliance company "Company A" as an example, the success of this merger and acquisition is largely due to the application of altruistic thinking. After the merger and acquisition, a win-win situation was achieved for both parties by optimizing the global supply chain system, accepting the high-quality management resources of the acquiree, and creating popular products.
The first is the optimization of the supply chain. 70% of the world's home appliance supply chain is in China, and Company A uses its dominant position in China's home appliance supply chain to integrate the global supply chain system, optimize a number of primary and secondary suppliers, promote the profit margin of each business line, and help Company B save 10%~20% of costs.
Secondly, in terms of organizational integration. Many entrepreneurs will think that we are the leading acquirer and controlling shareholder, and we should enforce our operation and management. However, after the merger and acquisition, the acquirer concept was not implemented in a one-size-fits-all manner, but accepted the high-quality resources of the acquiree, and selected the management of the American company, that is, the CEO of the acquiree, to manage the global business operations, and this trust and respect enabled the two parties to integrate and collaborate well.
Finally, in terms of business synergy, Company A used its own R&D technology advantages and the acquiree's brand advantages in the United States to jointly create a new product that integrates pressure cookers and air fryers, which became a hit in the United States once launched, with sales of $200 million in the first year. Before the acquisition, the annual sales of Company B's kitchen appliance business were 500 million US dollars, which means that the above one popular product alone brought it a 40% growth.
The future may enter the era of mergers and acquisitions, and I have said so much, but in the end I hope to return to what I said at the beginning: the failure rate of mergers and acquisitions is 80%, and we must be in awe.