M&A Tactics Handbook: Advice from Corporate Development Practitioners for Each Stage of the Deal Lifecycle
1/ Biggest Challenge in M&A
Benefits and synergies fail to be captured with poor integration planning. The corporate development team (responsible for acquisitions) and the integrations team don’t plan things enough.
Top management attention span is very limited: if a transaction is below a certain size threshold, it doesn’t get enough attention, so it stops mattering if it’s successful or not.
Acquiring a company is much more fun and gives way more pleasure and boasting points than integrating it. [MK: it’s the same with cooking when pleasure is derived from preparing the food and definitely not from cleaning the dishes.] Integration work usually is on top of the day responsibilities of managers, so the enthusiasm has to be actively managed.
Using playbooks without adaptation to the unique circumstances, industries and specifics of the target may lead to missing serious business issues.
2/ Agile M&A
Focus on continuous value discovery and capture, not pre-planned cost synergies. Integrating the newly discovered capabilities with people to preserve culture and value. [MK: I wonder if there’s such a thing as “cost synergies” in modern IT?]
The logic is that since integrations almost never go according to the plan [MK: management fatigue and information asymmetry to blame, of course], why bother being inflexible?
MK: I’m at loss when I have to summarise something like “think transformation, not transaction”. I’d say something along the lines of “the goals of acquisitions should be creating value, not sustaining the company’s miserable existence by sucking the blood of acquired companies”.
MK: Acquisitions should be incorporated in a way to increase the risk for the company (along with the accompanying higher returns) instead of “playing it safe” and only incorporating the safe bits that won’t shake the company or its products.
3/ Deal Sourcing
Deals can come from anywhere, from your CEO to someone smart. They should be evaluated on their own merits, but mostly on the alignment with the overall company strategy.
M&A by itself is not a strategy; some companies use it instead of a strategy, but their mileage is far from good. A tool is just a tool, not a replacement for a strategy.
Too many targets are no better than too few. [MK: as long as there are targets at all, which is not a given.] But a good place to start is an industry association list of firms. Learning more about who’s who in the zoo (names, executives, company size, etc.) may pay off later.
Relationships do matter, they are the #1 source of targets and can be used for incoming deal inquiries, too.
When the company’s capital is not sufficient, deal sponsors come into play, and establishing good relationships with them beforehand is essential. Deal sponsors are active even after the deal closes, so there needs to be a good reporting framework with their interests in mind.
Not every deal is the right deal due to the wrong timing (too early or too late).
Once a company starts looking attractive, it’s time for an early diligence (core competencies, background, hiring processes, legal issues, etc.). Check Glassdoor and its equivalents, app reviews if they have an app, etc.
An integration lead should be engaged during the targeting phase to model the “what will happen and what can go wrong” scenarios. This helps reduce anxiety for all parties if the deal goes through.
If an integration team is involved when the Corporate Development team sends out a Letter of Intent – it may already be late, as at that stage things start accelerating rapidly.
At this stage it’s also important to establish trust (or at least attempt to) with the sellers so that they get a peace of mind regarding the future of their people and the company. This buy-in helps to get the deal done with minimum hiccups.
The CEO-to-CEO relationship is very important, and it defines the rules of the game in the joint company – with the seller’s CEO or without them. And the health of this relationship is a good predictor of the target company’s top managers’ motivation to keep the company up and running.
Thus, while it’s important for the buyer to negotiate for the benefit of themselves, the process and the terms must also be favourable to the seller’s team as they will become a part of the team.
(to state the obvious) Due diligence is the process when the specifics of integration start appearing. Thus, the integration lead must be present and involved.
It’s wrong to have only the M&A team determine the price of the acquisition among other things; the cost of integration is not obvious in the beginning.
For the integration lead the relationship with the seller and the M&A team allows identifying the integration and value creation touchpoints that may not explicitly make it into the legal documents.
Anything unusual found during due diligence may result in extra costs of remediation or integration, and it can affect the valuation and the ROI. Valuation is the output, not the input (i.e., the price should be based on the findings, not presumed based on the needs.
Valuation models need to be iterative, taking into consideration the findings from the due diligence process. Start with a high-level model and then fill it in with the details.
Planning 10+ years ahead in the valuation model is a joke; even 5 years is a stretch. The end result is usually a shorter-term forecast with a leap of faith hopefully based on the identifiable value trends.
The objective of due diligence is identifying the risks that will create unacceptable tradeoffs for a deal; most deals are a bad fit, so there’s no shame in saying “no” to most (or all) deals. Sometimes the best deal is the one that doesn’t get done.
Culture is something that can’t be put into the transaction documents. Some things like people treatment, compliance, processes, product composition are not negotiable much, and if ignored, they lead to the destruction of the target instead of the integration.
Ignoring the target company’s culture leads to the loss of talent, which is a disaster for most IT firms.
It’s not hard to kill a target company after acquisition: delaying decision making and approval processes harder via multi-layering make things longer and lose the momentum.
A common example is using the same allocations (which are common in large companies’ budgeting) for the acquired companies as the acquirer. This immediately kills the target P&L. Centralising processes (supposedly for cost synergies) can also backfire when the acquired company can deal with the acquirer’s costs. [MK: my example that killed a business case was using a $10 per customer contact number across the board when the acquired company had a cost around $3 per contact with much less frequent contacts as the “mother” company.]
Leadership assessment [MK: I suggest replacing this term with “middle top manager assessment” as it’s bad taste calling everyone a leader] should also be a part of the due diligence process; some leaders need to be retained post-acquisition, some – being let go. Keeping a disengaged leader from the acquired firm in the company until they get their payoff may be too toxic. A reasonable payment for knowledge transfer within a short period of time may be a better idea than keeping a person on an earnout for a year or so.
While it’s not possible to assess all the mid-level managers (who do most of the work) during due diligence, the buyer should create favourable conditions for them to stay and experience no worse than a little discomfort.
The CEO of the target company should actively participate in anticipating and creating a discovery plan for the new product-market fit of the combined company (if applicable). [MK: when a company is being acquired for the customer database, the process is much easier if the customer profile stays substantially the same.] This will impact the resources needed, people, skills and processes.
Acquisition is the means for inorganic growth, so if the target customers and products are not taken into consideration at the time of the due diligence, the resulting business setup will suffer from poor customer service and competing sales teams with competing messages.
Closing a deal usually leads to staff anxiety resulting in low productivity for some time or outright churn. Any change is bad unless people are convinced otherwise. Transparency goes a long way in convincing people (if this isn’t obvious already).
People need to understand what’s in it for them: pay changes, new job responsibilities, new people to contact, etc. The key contacts from the buyer need to be available to the acquired company’s staff for questions and support.
Once the celebration is over, the integration of the purchased company starts, and it’s a good idea to make the process as agile and adaptable as possible. The target can make integration as hard as they want, so it’s important to keep their dignity by listening to their concerns and suggestions to actually have the integration complete successfully.
Integration for the sake of integration is a strangling experience: both companies need to be clear why the deal happened in the first place and work towards the objective of the deal and not towards making the target a mini version of the buyer. It’s at this stage when cultures start clashing and mistrust blossoms – this can be avoided.
Understanding is the first step for collaboration, so both firms’ staff and management need to learn about the other’s products, culture and management approaches to be better prepared to achieve common targets.
It’s a very good idea to do a retrospective on the deal mid-way and at the end (or even more frequently) to learn from successes and failures and improve the process. If the company is large enough to justify having an M&A Centre of Excellence, such retrospectives are a good artefact to contribute to it and an excellent starting point for contemplating new M&A deals. This may reduce the rate of repeated mistakes, streamline integration and increase M&A ROI.
This is particularly important if M&A is a major growth driver for the company, and there’s a risk of the knowledge being embodied in people (hence the dependency) instead of the process. Formalising the knowledge requirements can improve the knowledge development and application processes in subsidiaries.