This article was originally posted on The Pharma Letter.
In an Expert View column, Helen Westropp, managing partner of branding agency Coley Porter Bell, describes how tens of millions of dollars are wasted in M&A deals 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 pharma and biotech 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.
So far, 2018 has been the strongest year in a decade for pharma M&A and remains on track to be 50% more by value than the previous year (source: Financial Times). This is for a myriad of reasons – from drugs coming off patent to pharma companies’ perennial search for the next generation of market leading medicines.
Celgene (Nasdaq: CELG) paid $9 billion for Juno at twice the value of its stock a week before the announcement. Novo Nordisk (NOV: N) 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 $800 million if a series of milestones are met.
High M&A failure rate.
These are striking examples of a trend that seems set to grow – namely, high-stakes partnerships between stalwart incumbents and disruptive minnows.
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.
Why is the approach of looking at brand and culture later in the process, flawed? While pharmas and biotechs 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.
So the process of due diligence, or even better during the initial consideration, rather than when the target has been formally selected and vetted, is the ideal time to consider the real worth of soft factors as well, such as brand, culture and people.
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.
Targeting partnership ‘bliss’
This means focusing on elements such as organizational 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 ….; and how do we ensure staff won’t feel distrustful, disillusioned or disenfranchised during the M&A process.
To achieve partnership ‘bliss’, before finalizing 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/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&A, we have seen brands that were the very reason for the acquisition being 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.
Bring brand into business strategy discussions.
However, despite the current failure rate for M&A, 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 organizational 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.