Tenets for success: trust and transparency in M&A

June 2024  |  COVER STORY | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2024 Issue

Trust is a valuable commodity in business. Without it, decisions are taken and strategies agreed with no real sense of accountability. In such an environment, business relationships cannot hope to flourish and professional and personal status is put at risk.

A key driver of trust is transparency, states Deloitte’s ‘2024 Global Human Capital Trends’ report. Its research contends that the more transparent an organisation is, the greater the workforce trust. According to Deloitte, trust is the unseen, ineffable glue that holds relationships together.

This is especially evident in an M&A context. If it is to be successful, an M&A transaction requires both trust and transparency, from initial discussions to final integration.

But for many organisations, building and sustaining the dynamics of trust and transparency between workers and organisations is an elusive goal. Many studies suggest that a substantial portion of the blame for the majority of failed M&A (between 70 and 90 percent of all deals fail, according to Harvard Business Review) is due to a lack of transparency from management teams – a flaw that undermines trust throughout the wider organisation.

Simply put, instead of providing a clear roadmap outlining changes, expectations and milestones to ensure both businesses move in a coherent direction, too many leaders fail to ease staff anxieties and address uncertainties the moment an M&A transaction is announced and thereafter.

According to Rami Cassis, chief executive of Parabellum Investments, in the private equity space, transparency and honesty are crucial throughout the entire transaction process, as this ensures general partners (GPs) can truly understand the asset they are acquiring, and vice versa. “Portfolio managers must assess many things when assessing a deal, such as the company’s financial metrics and mechanics, as well as determining whether it is the right cultural fit.

“GPs and senior leadership teams must have honest conversations with the wider team – both about the good and bad – to build trust and establish long-term relationships. An organisation must be honest about any underlying issues, underperforming divisions or changes it is looking to make. It cannot sell a false vision,” he adds.

Also important is for the acquirer to ensure the target does not lose its individuality or sense of purpose. “People can feel restricted when being integrated into a new company with new processes, rules and people to report to, and being transparent from day one can help ease this process,” notes Mr Cassis.

Priority actions

Ensuring trust and transparency throughout the M&A process is a demanding endeavour. Thus, it is crucial for the long-term success of the merged entity that parties navigate the intricacies of a transaction with clarity and consistent messaging, prioritising key issues along the way.

“We need more professional diversity if anxieties and uncertainties are to be settled,” suggests Mr Cassis. “The industry is dominated by bankers, lawyers and accountants. While these professionals have a strong understanding of the fundamentals of M&A, they often lack the softer, more interpersonal skills such as emotional intelligence.”

In its analysis, ‘Communication Challenges: Maintaining Clarity, Transparency, and Trust during M&A Processes’, Axis HR Solutions LLC puts forward three priority actions, as outlined below.

First, establish clear communication protocols. Employing consistent messaging across all channels and stakeholders is essential. This includes the timely release of information, addressing concerns proactively and ensuring everyone is on the same page.

Second, foster an environment of open dialogue. It is advantageous for parties to an M&A transaction to encourage questions, address concerns and maintain an open-door policy. This promotes transparency and reduces the chances of rumours or misinformation.

And third, involve neutral parties. Third-party consultants can provide unbiased perspectives, ensuring communication is clear, transparent and trust-building.

“GPs must meet as many people as possible in the business – before, during and after the transaction,” says Mr Cassis. “This is not easy as the seller often does not want an acquirer coming in and meeting the team, but it helps build trust and can help alleviate concerns.

“Unfortunately, we often see GPs only interview owners who are likely to leave the business in a few months,” he continues. “They fail to speak with the wider team, which would give them a more well-rounded perspective of the business. This means GPs do not fully comprehend existing issues or identify potential tripwires that may emerge down the line.”

Alignment but no silver bullet

Trust and transparency is the foundation of any good business relationship. In an M&A context this is especially so, given the often confidential nature of such transactions and the sensitivities they generally evoke.

“A greater focus on trust and transparency gives both investors and the organisations they are acquiring much stronger alignment,” contends Mr Cassis. “But it should be understood that this is not a safeguard against failed transactions on its own.

“That said, 2024 is shaping up to be a better year for M&A than the one before, particularly with inflation falling and interest rates cooling,” he adds. “More trust and transparency will certainly help strengthen this outlook, but this is by no means a silver bullet.”

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BY

Fraser Tennant