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Pharma: How to make mergers work

Published on 29/01/16 at 02:28pm
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Pharma is no stranger to bursts of M&A activity. However, with the value of deals taking place in just the first half of last year greater than those completed in the entirety of 2014 – and the total value of deals a record-breaking $395 billion – there’s evidence of a paradigm shift in how the industry achieves growth.

The wide range of drivers of this increased activity – from a tougher competitive landscape exerting downward pressure on margins and increasing constraints on market access, to the unsustainability of the blockbuster model and pipeline challenges – suggest 2015 wasn’t merely an anomaly but indicative of things to come.

The new normal ushered in by these long-term trends will only be further cemented by reductions in R&D budgets, prompting companies to acquire new products and harness innovation through acquisition. And the research backs this up: a global study of senior executives at life sciences companies conducted at the end of last year by law firm Reed Smith found 94% were planning an acquisition in the next year.

This new level of M&A activity requires new levels of expertise in ensuring major deals succeed. A greater number of senior board members will be required to more frequently communicate with their teams in a way that keeps them engaged and onside during the deal process; to sensitively combine different company cultures; to look beyond headline-grabbing short-term success and achieve sustainable results.

Those aren’t easy things to achieve – our Barometer on Change research showed less than a third of UK organisations (29%) undergoing M&A last year have realised the anticipated benefits of their deals.

Senior leaders will need to ensure agility in their operating models to respond to and anticipate challenges ahead. Redoubling efforts to plan and execute deals and communicate effectively across the organisation will play an important role in pharma businesses being able to realise the benefits of M&A in order to increase market share and access new markets that will generate additional value for shareholders.

Better deal making – from day one

Anyone involved in a major deal needs to be prepared to ask themselves tough questions from the outset. Even the basics – why are we doing this deal? – need to be thoroughly interrogated. Does the proposed merger demonstrably fit into long-term strategic ambitions or is it a haphazard attempt to climb aboard the M&A bandwagon? It’s also vital that key roles are understood when it comes to making formal decisions in order to avoid the deal being unpicked by multiple parties.

Once these points are agreed, buy-in must be gained from key stakeholders and the huge amount of work required, from identifying the strategic purpose to creating a clear roadmap for delivery, should be acknowledged; all too often this is forgotten in the excitement of the deal. A true end-to-end plan is vital, not simply for the first 90 days, but through to the delivery of the deal’s anticipated benefits.

Better execution  

In a pharma sector increasingly dominated by M&A activity, there can be little doubt that those companies that prepare and execute deals effectively are well placed to establish a competitive advantage. Thorough preparatory work plays a key role in the successful execution of deals. For instance, once the reason for a deal has been established and its expected benefits identified, a set of guiding principles can be devised to steer the deal in the right direction.

Agility will also be vital, with those organisations that are prepared to rapidly embrace new technologies and ways of working – led more by what works than what has been done previously.

Best practice deal execution also involves collating and applying insights gleaned during the process – data about people, perceptions and drivers – to create a smoother integration process once the deal is completed. Done properly, this can also provide a blueprint for future M&A activity.

Better people management

Excellent preparation and execution will only achieve so much in the absence of clear and honest communication across the organisation, detailing the nature of the deal, how the benefits will be realised and what the individuals affected by it can expect.

It’s vital that the example is set from the very top, with leaders playing an active role in ensuring teams are motivated and informed. This shouldn’t be left to a communications department – it requires hands-on involvement from business leaders to demonstrate to staff that they are valued and will be supported throughout the integration process.

That’s not to say that strong leadership will only be required at the top – it should exist throughout the organisation. It is also important to equip leaders so that they know what to expect and so that they are able to communicate effectively.

Intermittent communication will not suffice during the deal process. In the absence of frequent, clear information, employees will be susceptible to believing external media coverage – which won’t necessarily be positive. In other words, if there is a void of information, people will fill it. 

This is a hugely exciting time for pharma. It is those organisations that excel in the preparation, execution and communication of deals that will reap the rewards in this increasingly competitive market.

Stephen Vinall is a Partner at the business transformation consultancy Moorhouse. The new Moorhouse report on delivering value through acquisition in pharma can be downloaded here.

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