Mergers and acquisitions (M&A) is a critical component of any company’s strategic tool kit. M&A is a competency that can be learned, practiced and developed into a competitive strategic advantage for those companies where growth is a key objective. However, M&A is a complex, multi-faceted process that presents a myriad of challenges, even for experienced practitioners.
In this webinar, Dr. Ho presented a selection of best practices in Buy Side M&A that maximizes the acquirer’s probability of success. The best practices discussed in the webinar are based on Dr. Ho’s 25 years of practitioner experience and supplemented by recent practitioner research in this area. Empirical research has consistently found that M&A is at best a value-neutral event for acquirers. However, Dr. Ho emphasized that sustainable and replicable success is possible in M&A, but only through hard work, an appreciation of the complexity of M&A and a disciplined, formal approach to the M&A process.
M&A best practices can be organized into six major areas that roughly correspond to the stages that a typical M&A transaction follows: strategy, preparation, due diligence, process, deal structure and post-merger integration (“PMI”). How M&A fits into and supports corporate strategy is the bedrock upon which all successful M&A activity is based.
A company’s strategy must first be articulated within the broader context of the dynamics that shape the industry and the relative merits and demerits of organic versus inorganic growth strategies. From this foundational understanding, the key value drivers for M&A and the company will focus and define the primary objectives for the company’s acquisition strategy. In summary, “strategy drives M&A, not the other way around”.
An M&A transaction is unique unto itself. It is an organic entity, taking on a life of its own. It is unpredictable and only marginally controllable. Consequently, the only point in the process that the acquirer is actually in control is before the process begins. Being prepared includes assembling the right people – both internal staff and external subject matter experts, and having an explicit, detailed investment strategy – including a deal filter describing key target characteristics. If the acquirer is not fully prepared before embarking upon the transaction, then disaster inevitably follows: in simple words, “Fail to prepare… Prepare to fail”.
One activity that is present during all phases of a transaction is the discovery process, or due diligence. Best in class due diligence occurs throughout the M&A process, initiating during the preparation phase and continuing post-closing. It is an iterative process and fully cross-functional in scope. While the average and poor acquirers view due diligence as a confirmatory process, driven by long checklists of data requests, the most successful acquirers employ a strategic due diligence process, that moves beyond simplistic confirmation of historical facts to a critical success factors analysis and an evaluation of the entire value chain of the target company, from a purely risk mitigation focus to an identification of the value creation drivers.
This strategic due diligence process finds its quantitative expression in the valuation analysis, where the best acquirers implement rigorous and robust techniques and methodologies designed to provide not just a range of possible transaction prices, but insight into the transaction’s value drivers and feedback for the due diligence process. Synergies identification and quantification are an important part of the valuation and due diligence process. However, best practices in synergies analysis require specific amounts, timeframe and key milestones as inputs into the evaluation of such synergies. In addition, savvy acquirers are realistic acquirers – they include both positive and negative synergies as part of the valuation process. Due diligence is no longer just about “getting the deal done”, but rather about “getting the deal done right”.
M&A practitioners and pundits have long espoused the mysterious and esoteric nature of successful M&A, claiming that, to outsiders of M&A, true success is all about the “art of the deal”, when, in reality, the “art of the deal” is nothing more than “rigorous process, impeccably executed.” In other words, the manner in which the transaction process is managed and the choices that are made with regards to timing, sequencing and key milestones find their full effect in the ultimate transaction, since M&A is a process, not a single event or outcome.
Therefore, a smart and disciplined acquirer understand that he must be willing to step away from the discussions at any point, avoiding the trap of the excitement of the deal. In addition, if M&A has a long term role in the strategic toolkit of the acquirer, that acquirer will always remember that each potential transaction process established a deal reputation that impacts the price, terms and integration challenges of future deals. Finally, M&A deal dynamics dictate that between price, speed and certainty of closure, the acquirer has only two degrees of freedom: only two of these factors can be chosen, the third will be out of the acquirer’s control.
Contrary to common belief, price is not the only, or even the most important element of an M&A transaction. Rather, there are many other variables that must be addressed in the structure of the deal, in addition to price. For example, form of consideration, timing of payment, legal and tax implications of the transaction, risk allocation, and cultural issues all have a bearing on the probability of transaction success, and, most importantly on the transaction price. Best practice in M&A acknowledges that the deal is a multivariate, simultaneous optimization problem: “The Deal is a System”.
Finally, the acquirers that have created the most value through acquisitions explicitly recognize that the deal does not end when the documents are signed and monies have changed hands. Rather, real value creation begins on T+1, the day after the deal closes. Poor post-merger integration is the single most significant contributor to failed M&A transactions. The best in class acquirers begin the PMI planning process concurrent with the transaction due diligence process, using dedicated integration teams whose sole focus is developing a plan that addresses the critical path concerns of all stakeholders (e.g., employees, customers, suppliers, community).
This plan is detailed and specific, with the communications strategy as a central component of the plan and is driven by the principal that speed matters in M&A PMI. After the rush of the transaction closing and the implementation of the 100-day PMI plan, the best acquirers regularly revisit the transaction via post-investment audits that assess actual outcomes, relative to the expectations at the time of the transaction. These audits are based upon defined measures of success, codify the acquirer’s experiences into an M&A “playbook”, and create a feedback loop for the next acquisition.
While M&A is complex and rife with risk to the casual acquirer, mergers and acquisitions expertise is a competency that can be learned, developed and refined into a competitive advantage. The best in class companies in the world have done so… learning and applying their best practices can start you on the path to M&A success.