While mergers and acquisitions (M&A) are a staple activity in global business, the success rates have tended to be low, when measured against the initial desired outcomes. For many practitioners therefore, a cursory look at the thousands of M&A activity taking place globally, may lead us think success is quite elusive and difficult to achieve, with no real formula for success. In 2007 for example, a study by Hay Group revealed that greater than 90 per cent of mergers in Europe fail to reach their financial goals. If however success is defined differently, to include goals such as driving up shareholder value, increasing market share, improved strategic positioning, enhanced brand, a stronger organisation, then the success rate can be considered as significantly north of 50 per cent.

While Jamaica is a very small market, we do have M&A activity taking place; most of the acquisitions we are aware of are the large ones such as Scotia Bank’s Acquisition of Dehring Bunting & Golding, or the recent Buyout of Lascelles by Campari, and JMMB’s acquisition of Capital and Credit. We must note also however, that smaller local businesses, not listed on any exchange are bought and sold privately, quite often in the Jamaican landscape.

One therefore has to ask for example, has the DB&G purchase worked for Scotia Bank in the way they would have wanted? Or, did they really achieve significant value added, particularly on the Jamaican dollar equity side of the business, and could they have achieved their intended strategic goals without the acquisition?

If we look at China for example, since the year 2000, both the number of and value of M&A deals have been increasing steadily, with volume moving from just over 500 in 2000 to over 4,000 in 2011, and value moving from approximately US$50 billion in 2000 to over US$200 billion in 2011. However the failure rate of deals in China is higher than in developed countries, for a variety of reasons, including the lack of legal transparency, inflated company valuations and cultural barriers. As such, having a successful M&A process in China can be quite a challenge, despite all the required variables being in place.

What lesson does this hold for us in the Jamaican Landscape? Does Jamaica have the right environment to facilitate increased M&A activity in industries where short term consolidation may be necessary? In an economy that is likely to contract over the next two years, there will be opportunities of consolidation in a number if industries. Do we have in place the legal and regulatory framework that can facilitate rapid consolidation in various industries? How well these acquisition deals get done will depend on a number of variables. I will seek to highlight a few of them here.

Success in M&A is not dissimilar from success achieved by value-style investing, or what I like to call the “Buffet” approach. Accordingly even though success in M&A is uncertain, there are key drivers that determine the success of an M&A venture, such as the structure of the M&A opportunity, and the way in which it is pursued.

Regarding the structure of the opportunity includes looking at the economics of the opportunity for the acquiring company, what strategic importance does the acquisition provide, does the acquisition improve organizational capacity, brand awareness, profitability.

Regarding the conduct in which M&A is pursued; are the partners able to work well with each other, is there a proper due diligence framework, is the deal design amiable to both parties, is there a plan for post-merger integration, is the right leadership in place, and are all the legal hurdles surmountable.

The strategy underlying the direction of a company is very important. A firm may undertake M&A activity to improve its strategic position. A firm’s strategic position can therefore drive its M&A process, as it sets out a roadmap as to how to get to the desired result, it defines what success looks like, and it makes the points of flexibility clear and visible.

Tactics are also very important, and a major tactical victory can be secured by just doing proper due diligence. The due diligence process is extremely important as companies can end up overpaying for acquired targets. Additionally if proper due diligence is not carried out, it can lead to unwanted legal issues arising post-merger. Proper due diligence also allows the acquiring company to undertake a smoother post-integration process; the more the acquirer knows, the better they will be able to implement synergies and adjust company culture.

All these points are important whether the acquisition process is taking place in a small market such as Jamaica, or in a larger market such as in the US. These in my opinion will become more important in the Jamaican landscape over the next two to three years as a contracting, low growth economy forces consolidation. Companies with strong cash flow and management capacity, will be faced with a number of opportunities, whether from business struggling to meet their financial obligations, or from those seeking to sell their business to take up opportunities in other industries. Taking heed of the guidance given above, can lead to a more successful process.

Kevin Jones is an Assistant Manager of the Wealth Division at Stocks & Securities Limited and can be contacted via kjones@sslinvest.com