The importance of soft factors in M&A

Helen Westropp on the soft factors in M&A

Understanding the value of ‘soft factors’ such as people, brand and culture is key to long-term M&A success.

Tens of millions of pounds are wasted in mergers and acquisitions (M&A) every year when acquirers fail to understand the value in the brand and culture of the business they are buying. This is particularly the case in pharmaceutical and biotechnology businesses.
Close to 90% of all M&A deals never get off the ground. And seven out of 10 fail to create long-term shareholder value, according to KPMG. This is often because there is a concentration during M&A deals on the hard factors – extensive due diligence and attention to market considerations, financial calculations, cost-saving opportunities, balance sheet and legal issues – while brand and brand strategy is often overlooked or only evaluated post M&A.

The ideal time to consider the real worth of soft factors, such as brand, culture and people is during due diligence or even better when the target has been formally selected and vetted, rather than later.

Pharma M&A in 2019

2018 has been the strongest year in a decade for pharma M&A according to the Financial Times. This is for myriad reasons – from drugs coming off patent to pharma companies’ perennial search for the next generation of market-leading medicines, from technological innovation to greater consumer centricity and a recent trend of consolidation among contract development and manufacturing organisations (CDMOs).

Cambrex is acquiring Avista Pharma solutions in a step to maintain its place as a leading CDMO, as was the case for Thermo Fischer Science’s acquisition of Patheon and Catalent of Juniper Pharmaceuticals.

2018 started with Celgene paying $9bn for Juno. This was around twice the value of its stock in the week before the announcement. In August, Novo Nordisk purchased Ziylo, a small UK biotech company spun out of the University of Bristol, in an unusual deal that both parties said could eventually be worth more than $800m if a series of milestones are met. These are striking examples of a trend that seems set to grow – namely, high-stakes partnerships between stalwart incumbents and disruptive minnows.

The market seems to be bullish about M&A deals in 2019. According to E&Y’s Geln Giovannetti: “Biotech is awash with capital right now”. Added to this is the ongoing search by pharma companies to counteract slow growth by adding clinical programmes and innovative treatments.

Several biopharmas are the subject of speculation by analysts – Clovis Oncology seems to be near the top of the list.

Most M&A in pharma and biotech is about expertise, pipeline, portfolio synergies, portfolio expansion or market share, with competitive service providers within the same fields looking to gain more market share and benefit from the synergies inherent in a partnership or merger. While large and mid-size pharmaceutical companies, on the other hand, constantly faced with the pressure to refill their drug pipeline, are continually relying on acquisitions or in-licensing from smaller biotech companies to gain access to new innovation in general, and more innovative drug candidates in particular.

But it’s worth noting that historically, a high percentage of M&A deals never get done and most that are completed do not result in long-term shareholder value. This is in part due to acquirers failing to understand the value in the brand and culture of the business they are buying.

Value of brand and culture

The approach of looking at brand and culture later in the process is flawed. While pharma and biotech companies work toward the same basic objectives – they are very different in nature. Biotechs are often smaller and more flexible than pharmaceutical companies and their most coveted assets tend to be their scientific minds and proprietary technology. Pharmaceutical companies’ contributions to partnerships are more often based on regulatory, sales and marketing expertise.

The ideal time to consider the real worth of soft factors as well, such as brand, culture and people, is during the due diligence process or ideally during the initial conversation. Waiting until the target has been formally selected and vetted will ultimately be too late.

According to KPMG research The Morning After; Driving for Post Deal Success, 92% of business executives surveyed admitted their deal would have ‘substantially benefitted’ from a better cultural understanding prior to the merger.

This means focusing on elements such as organisational structures and ways of working; the type of culture in the companies involved:
• is it fast or slow?
• does it focus on long-term sustainability versus short-term profit (one of the most common reasons for failed mergers)?
• is it top down, hierarchical and formal versus informal?
• is it ‘corporate’ versus progressive?
• how do we ensure staff won’t feel distrustful, disillusioned or disenfranchised during the M&A process?

The recently approved Takeda/ Shire deal will be an interesting case in point. The two companies have very distinctly different types of culture.

Partnership bliss

To achieve partnership ‘bliss’, before finalising the deal, each party must truly understand the other’s business, the value proposition each brings to the table, and, importantly, the subtle nuances, such as corporate culture, that can ultimately make or break a deal.

That way it will provide a better idea of the challenges that will be faced during the integration process and whether or how those differences are surmountable.

It also means focusing on answering early on the critical questions:

• ‘What are the inherent brand equities of what we are acquiring?’
• ‘When we own this asset, what are all the ways we can create value with it?’
• ‘What are the untapped growth opportunities of the acquired brand or the combined brands to provide long-term benefit?’

So often in M&As, we have seen brands that were the very reason for the acquisition weakened or destroyed because of a lack of understanding of what the brand stood for rather than just its financial worth. They end up destroying the very things the brand was bought for in the first place.

The future is bright

However, despite the current failure rate for M&As, the outlook needn’t be so grim.
Brand strategists can help decision-makers have the right conversations and ask the right questions at crucial, and often difficult, moments of the M&A process. The key is to bring the brand into business strategy discussions in advance of the deal and carry it forward well past the transaction itself, into genuine integration.

Incorporating brand at all phases of a merger, from discussions to implementation to integration, undoubtedly forces difficult discussions and decisions, but it ensures that people act in direct response to their business strategy and their unique position in the market.

Companies that are willing to spend the additional time and effort addressing organisational culture and brand and thinking about how they will integrate these prior to and during due diligence, are more likely to achieve the sort of growth and efficiencies they are seeking through mergers and acquisitions. With some forethought and planning, there are ways to avoid costly mistakes and retain the assets that made the target so attractive in the first place.

Helen Westropp is Managing Partner at Coley Porter Bell.

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