“BLUNDERS in the way people are managed explain many failures in mergers and acquisitions,” says Robert Bruner, dean of the University of Virginia’s Darden School of Business.
Bruner is well-known for his expertise on mergers and acquisitions, corporate finance and financial crises.
He is the author of several books. “Deals from Hell” addresses factors that thwart M&A deals. “Applied Mergers and Acquisitions” is a primer for practitioners and students.
“The Panic of 1907: Lessons Learned from the Market’s Perfect Storm” is perhaps his best-known book. It was co-authored with Sean D. Carr and published in 2007.
Prior to his appointment as dean in 2005, Bruner was the founding executive director of Darden’s Batten Institute, which focuses on entrepreneurship and innovation.
Darden, founded in 1954, uses case studies to immerse students in real-life business situations.
In its 2014 ranking of Executive Education programs, the Financial Times ranked the Darden’ open-enrollment programs No. 3 in the world and No. 1 for faculty and teaching.
Bruner sat down with Shanghai Daily recently to discuss the world of mergers and acquisitions.
Q: What are the major reasons behind failed M&As?
A: There are three factors: value, strategy and people. First, if you buy a target company, you must ask what this company is worth because you don’t want to overpay. The second question is what’s the strategic rationale for this deal because pure opportunism as a motive is very risky. The third is if the talents and capability of the target company are valuable or important.
Failures tend to be explained by one or more of these three factors. The buyer paid too much and wasn’t able to realize the value of the target company. Second, the buyer may have misjudged the strategic advantage of buying a target company.
The third factor is cultural. For example, talented people at the target company may get angry and leave. The culture of the two companies may clash and cause great dysfunction. There may be unexpected union problems. The failure to understand differences in work style and culture can cause people to make errors in the way they manage others.
Q: How do you define a successful M&A deal?
A: Success will be defined in terms of value created for the owners and stakeholders of the companies. The second factor is strategy. We see a host of possible benefits in the forms of greater advantages, greater brand value and the enhancement of the reputation of the company.
The acquisition might create new capability the company never had. Those are strategic benefits that help define success. The final element of people can contribute to success in terms of happiness, the ability to recruit better talent, the ability to better retain talent, and the ability to organize talent in fresh new ways.
Q: What’s your view on Chinese M&As?
A: I’m not extremely well informed, but I know M&A activity is picking up here and in the US, and starting to pick up in Europe. M&A activity follows a cycle. It’s up and down. So sooner or later, M&A activity in China will hit a peak and begin to decline. The biggest drivers of cycles are linked with economic conditions.
Rising M&A tends to coincide with low interest rates and rising stock markets. That’s not necessarily the case in China. Rising M&A also tends to occur with ebb and flow of currencies, making it easier for a domestic company to buy offshore. Changes in government policies can lead to increases in M&A. They could involve tax policies or spending decisions.
Q: What’s your advice to Chinese companies seeking overseas M&A?
A: First, don’t pay too much. Second, have a strong strategic rationale to drive research on target companies and to test the desirability of the target company. Third, pay extremely high attention to the people and how to manage people relationships after acquisition. Many cross-boarder acquisitions are motivated by a desire to gain access to new technology or intellectual property.
The big failures in cross-boarder acquisitions tend to come not from technology or strategic rationale but from the blunders in the way people were managed. When Renault tried to buy Volvo, the acquisition failed even before it was consummated. The Swedish didn’t like the French. Volvo was all about quality and engineering, and Renault was about styling.
Q: What’s the best way to handle cultural differences?
A: The most basic principle is to do everything you can to build trust. The target company employees, even under the best circumstance, will be anxious about the implication of the acquisition for them, for their jobs, for their happiness and for their working conditions.
The way you build trust is through a combination of objective things, like instantly giving employees better working conditions but also communicating very extensively, not merely by e-mail and not merely by video but also in person. For example, send company operating managers to meet employees of the acquired company to outline visions behind the acquisition and answer questions. This kind of personal contacts is crucial in building trust.
Q: What foreign investors’ major concerns about China?
A: There are concerns in any country, so I don’t want to isolate China. Any cross-border investors should look at civil stability and respect for the right of property through a fair and legal system. They should focus on other institutional strengths, such the soundness of the financial system, the capitalization of banks, and the stance of government toward business.
A favorable stance is reflected in a favorable regulatory regime, moderate or low taxes, and government willingness to actually assist in the growth of the private sector. The view of many international investors is that China has made great strides. I applaud China’s progress. The challenge will be to sustain that.
Q: Excessive investment within China has created a lot of debt. There’s rising concern about a financial crisis as debt matures this year. Earlier this year, a few companies failed to repay loans. Is a financial crisis looming?
A: I have studied financial crises in great depth. The soundness of a financial system is a big predictor of the probability of financial crisis. Viewed from the outside, China’s financial system raises questions. I know no country is perfect. Speaking as an American, I don’t pretend that our system is perfect.
What matters to investors are things like transparency, potential behavior by agents, and respect for property rights. Transparency, ideally, means that China would have a reliable system of company reporting of financial results.
Some outside investors have concerns that financial audits may not be as strong as they should be. Transparency could also refer to a free and open public press. It could refer to the availability of ratings that are objective and well-informed. Those are examples of high transparency.
The behavior of agents is the second concern. Agents of others tend to take risks because they don’t bear losses. Investors behind agents bear losses. Banks are agents for their depositors. That’s why we regulate banks so they behave prudently for their investors.
Before the financial crisis in the US and Europe, financial agents were taking big risks and assuming other people would bear risks. So they were willing to extend more loans.
They created bizarre financial instruments that were quite difficult to understand. The regulators themselves believed that the market was so perfect that it would self-correct. That didn’t happen. There are concerns in the world about the safety and soundness of the financial system here in China.
The third factor is institutional strength, meaning respect for the property of investors. I am not familiar enough with China’s legal system, but in many emerging economies, the institutions of society are not as well formed as necessary to sustain more active rates of lending. So I would say investors worldwide are cautious about the safety and soundness of the financial system here in China.
Q: How many Chinese students are enrolled in the Darden School of Business?
A: China is the most highly represented after the US in our MBA program. About a third come from 37 other countries. What I see in Chinese students is simply wonderful. The US is populated by immigrants. So as a society we have deep values for risk taking, determination, courage and exploration. I see the same qualities in Chinese students.