WHAT RECOVERY' GETTING BACK IN THE WATER
Steel industry consolidation, which had accelerated at a blistering pace over the past decade, has hit a brick wall. With the advent of the global economic decline and, in particular, the freezing of credit markets, demand plummeted and the availability of financing to support transactions all but disappeared.
In fact, steel companies that faced debt covenant violations had to consider share issuances and divestitures to maintain financing for their current operations. As a result, the number of completed deals fell by 25 percent a year ago and deal value dropped by more than half, to $31 billion.
Yet, despite the current cool down in consolidation, mergers and acquisitions (M&A) remains a critically important business strategy to achieve synergies, expand the customer base, and enhance competitive position. Even in today?s challenging business environment, steel companies need to master the ability to carefully evaluate potential targets and quickly execute acquisitions in order to be as well-placed when the economy regains steam.
In general, many steel company executives intend to keep M&A squarely in view to underscore the importance of developing and executing a successful acquisitions strategy. Though most executives cite the economic downturn as a significant factor in their short-term decisions regarding M&A activity, companies expect they will be making acquisitions over the next three years. Indeed, as recently as seven months ago, 69 percent of executives surveyed were currently considering an acquisition. They also anticipated the climate for M&A to become increasingly competitive in the coming years.
But while M&A continues to play a key role in steel companies? strategies going forward, many need to make progress in acquiring the key competencies required to effectively carry out an acquisition. Taking a new view of the overall processes used to evaluate an acquisition should be a top priority. That includes looking beyond financial factors and seeking a more holistic perspective of an acquisition.
Focusing heavily on financial issues in due diligence, steel companies often fail to delve deeply into cultural issues or consider the potential integration challenges in deciding whether to proceed with a deal. Strikingly, less than half of these companies conduct a detailed analysis of corporate or cross-border cultural issues when considering an acquisition, or consider that these issues are very important when deciding whether to proceed. This is despite the fact that cultural issues are extremely or very challenging when managing an acquisition, making it a critical challenge.
Steel companies have a high interest in future cross-border transactions ? only heightening the importance of cultural considerations to the completion of a successful acquisition.
Beyond integration, steel companies should have an explicit plan to identify and capture the synergies that provide the rationale for an acquisition ? and evaluate the potential non-financial obstacles that must be overcome to be successful. In general, M&A processes must expand to include more than evaluating the recent financial performance or capacity of the target asset and take a broader view of the full range of challenges ? and opportunities.
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