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Sausage Making: Best Practices in M&A - Identifying Good Targets and Executing the Acquisition

Doba Parushev . June 15, 2016

M&As have become a rite of passage, and most companies will go through a transaction at some point, be it as an acquirer or an acquiree. At the same time, M&A transactions are far from straightforward, with reported success rates hovering around an uninspiring 50%. At last-week’s Edison CEO summit at West Point, the topic was addressed point-blank with a number of insights that may be relevant to anyone who is interested in inorganic growth. In no specific order, here are the top five things our CEOs wish they knew before doing their first acquisition:

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1. Start thinking about M&A as early as possible

Acquisitions are a ‘time and attention-consuming’ exercise that can distract a company to the point of destabilizing it. And, having a vision and a process set out around them can help avoid many of the early pitfalls.

Some of the most effective ways a company can build discipline around M&A is by:

  • Putting in place routine evaluations of the competition and the potential acquirers.
  • Continuously mapping the landscape makes it easier to both identify good counterparts and select the right time to jump into a transaction.
  • Understanding the industry also enables the company to start building relationships early – be it with strategic partners, service providers or potential acquirers.

This kind of optionality can prove invaluable down the road.

Tactical advice: Our CEOs agreed that there will always be some mistakes made during a company’s first couple of transactions. It may be a good idea to start small and go through the process with a small target before trying to integrate a similar-scale competitor.

2. Choose your targets carefully

It is often too easy to get dragged into the excitement of a M&A. Maybe you really like the team, or you see the product as a vital complement to your own, or the industry is undergoing a roll-up stage and all of your competitors are doing it.

Keeping a cool head is not easy once the M&A process picks up pace, and two questions need to be continuously assessed:

  1. Is it a good target?
  2. Is it the right target?

The former is much more quantitative and has to do with the fundamentals of the acquiree (their product, economics, business model, and team). The latter presents a more challenging, strategic dilemma:

What role does the acquisition play into the development of your company?
  • Is it simply a core fortification, playing into the current value proposition and expanding the client base?
  • Is it a move towards adjacent markets that your company is not addressing right now?
  • Is it a daring jump ahead of a shifting market?

There will be pros and cons about each transaction, but being able to maintain clarity about its purpose makes the evaluation much more straightforward.

Tactical advice: Edison CEOs suggested that no matter what the final goal of the transaction is, if you are bringing in a new product it needs to be able to hit the market on Day 1. Plans that involve integrating it slowly into the existing customer base tend to be complex and prone to fail.

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3. Figure out what kind of support you need, and get it early on

The topic of when, how, and if to rely on bankers during a transaction provoked some heated discussion. On one hand, relying on bankers to identify opportunities and run the process often puts you in the middle of an overcrowded market and leads to overpaying. At the same time, they can be a valuable source of information and provide some much needed backup in the middle of a long and stressful transaction.

One thing that both sides agreed on, however, is that building relationships early is key.

Approaching bankers even before you are set on a transaction allows you to better understand the value they provide and their true allegiances. Getting introductions or assessments before there is any monetary interest in play can provide a strong gauge of how reliable they are as a long-term partner. A deal typically dies 3 times before it goes through, and having someone you can count on throughout the process becomes of critical importance.   

Tactical advice: It is the CEO’s role to manage advisors. As a reference, consider them a line level salesperson – make sure they have the expertise and tools to perform, and don’t just pick someone you like.

4. Plan the integration meticulously and implement it swiftly

McKinsey (whose data I am usually careful of using, lest people accuse me of personal bias) estimates that more than 70% of M&As fail to reach their expected synergy potential. If this is not enough, there are plenty of examples of integrations gone horribly wrong to set a cautionary tale (remember eBay and Skype).

While many specific challenges and solutions were brought up during the discussion at the CEO Summit, one core principle remained fundamental:

In order to maximize the value of any transaction, you need to have a thought-out, clear, and decisive plan for integration.

Jonathan Bulkeley, CEO of RealMatch, summarized the two options available to CEOs:

  1. Operate the newly acquired company in a separate, independent manner.
  2. Integrate it completely into the existing organization.

jonBulk_Sausage_MA.pngAny in-between solutions or lack of clarity usually go downhill fast.

The decision should be taken well before the transaction materializes, and the remainder of the time should be spent on building the integration playbook – the how, what and where of the first few days and months. While it is impossible to run the entire integration plan on Day 1, you should be open and honest to your employees about how you plan to proceed.

The first weeks after an acquisition are hectic and disorienting, and the lack of transparency can easily sow rumors and destroy trust. Gordon Rapkin, CEO of Archive System, shared that he always makes sure that on the first day post acquisition, every employee knows the answer to four key questions:

  • What is my job?
  • Who do I work for?
  • How do I get compensated?
  • What do I need to do in order to succeed?

Tactical advice: The key challenge integrating a company is making sure that everyone feels like a part of the same team. Small details that may seem trivial are actually a critical part of this. Make sure that on Day 1 the signage has been updated, everyone has new business cards, stationery, and a company phone extension. Integrating fast may be met with some resistance, but remember that there will always be people for whom this is not the right fit – and it is better for both sides if they left early.

5. Think like a target

While the advice so far has focused mostly doing acquisitions (rather than being acquired), do remember that people are looking at you the same way you are looking at others. Seeing the transaction from the other side is helpful in gauging the preparedness of your acquisition targets, as well as being prepared for the time when you, yourself decide to exit. Just as with acquisitions, being proactive pays off . Doing self-diligence to understand your reputation in the marketplace  will help you greatly on either side of a transaction (are you cutthroat, innovative, a pushover?).

Tactical advice: Build a data room early and update it methodically, even if you are not looking at a transaction. It is a great tool to stay disciplined with reporting and hit the ground running when people come knocking on the door. You already have most of the relevant documents as management reports, and keeping cap tables (one actual and one fully diluted) up-to-date is always easier than building them up from scratch.

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