What is left to look at on the front end? As I stated previously I will and talk about things I have seen organizations overlook or completely ignore. So, the questions I raised towards the end of my last blog were:
- Who should I involve internally/externally and when in a deal?
- How do I really know if my company is ready for a deal?
- When is enough information enough and how do I keep track of it?
- Where do lawyers and accountants fit in?
- What final goals should we set for this deal at this point?
- What do I do if I find out something I do not like when I’m not even to due diligence?
At this point you should have two key pieces of information, a SWOT which tells you if you are ready to take on a deal and key things you need to pay attention to as you move forward, or a decision you are not ready yet. Second, an Acquisition Profile (no more than two pages, one is better) that guides the hunt and everything after the deal is signed.
I got long winded in my last blog and left my final words on a Profile until now. Although you can have as much detailed information as you need for the Profile you should be able to condense the essence of it into no more than two pages under the following headers. When you hand it to someone, they should be able to understand very quickly what you are looking for. The categories are:
One, Acquisition Profile. Two, Strategic leverage you want to gain from the deal which is different from competitive advantage. Three, Specific goals to be achieved with the acquisition.
Let’s look at the questions I raised earlier. Remember I am focusing my talk about things I have seen organizations overlook or completely ignore they are many more items that I won’t cover.
First, how do I know if I am ready for a deal?
Who should I involve internally and when in the process?
Your SWOT should have given you a readiness answer. An unrealistic SWOT leads to many bad decisions and actions.
Who to involve? There is no correct answer. Lawyers, accountants, and internal people will evolve throughout the process. For internal people think about how deep in your organization you will need help during integration. Key people deep in the company will be critical during integration planning and execution and can provide feedback on your profile and SWOT if they were not part of the process in the first place. Integration problems don’t occur just in the management ranks or with line personnel but often as not they occur throughout the entire organization. This is a difficult decision that relies heavily on what you find out in your SWOT. During integration planning and management, I will talk further about who and how deep to go with people involvement. In the development phase you should think about all the key people needed from the front end to integration management for a deal to be successful and then you can bring them into the process at the appropriate time.
Where do lawyers and accountants fit into the process? By this time, you have had some preliminary conversations with them but as you start to look for or at a deal their involvement will invariably ebb and flow depending on where you are at. When looking for potential deals their networks are valuable sources as well as business representative companies. I might upset some attorney and accountant friends (yes, Gladys I do have friends who are attorney’s) but be careful you do not let them drive the process. First, they do not know your organization like you do and their M&A experience is probably piecemeal. By this I mean they probably have not lived with a deal from day one until 24 months after the deal is signed and they will not be on yours. They are a key member but not the driver, you are.
Should I keep my acquisition strategy a secret?
If you think you can keep your acquisition strategy quiet think again. Also, why keep it quiet you will be surprised by who approaches you to be acquired. Most acquisitions are companies whose leaders you have known for some time on a personal basis.
When is enough information and how to keep track?
As you go through the entire process you will generate 10x times the information you ever imagined. At this point it should not be the issue it will be during due diligence and integration planning and execution. However, now is the time to figure out how, who, and where information will happen. One person should be responsible for keeping and distribution of information. Not being able to share and access key information quickly has led to many a problem. Concise information is always better, but it must be the ‘right’ information also.
What final goals should we set for this deal?
You should have specific goals addressed in your profile for a target. You will do some minor modification but be wary of diminishing goals. Don’t diminish the goals to fit the target, bad idea.
What do I do if I find out something I do not like?
I brought this up at this point for one VERY important reason: DON’T EVER FALL IN LOVE WITH A DEAL!!! I too often see where the decision-making team or leader discounts their strategy ‘front end’ work when something does not fit during due diligence and say, “that’s not that important or we can overcome that”. Or when they are reviewing the outcome of the SWOT and the result is the organization isn’t ready for a deal and the same refrain is used.
Now is when you must be very clear with everyone from this point forward that when this thought comes to the brain, call a time out. More on this topic during talk on due diligence/negotiations.
What is the potential financial cost of a deal or how much can we afford?
Focusing only on the acquisition price is a recipe for disaster. This really is a two-part question: what is the cost of acquisition and the cost of integration? The answer at this point is somewhat a best guess but it will provide you a preliminary decision point, ‘does it make financial sense to even proceed with this acquisition discussion?
The answer needs to be more than an educated guess. In M&A lore there is a term called ‘Racoon Math’; comparing a targeted company’s value to a sugar cube that a raccoon instinctively brings it to a stream to wash it only to find the sugar cube dissolving in its grasp. Not understanding the total financial cost of an acquisition will ruin the deal before anything else. A key mistake is not considering the cost of integration. At this stage it is preliminary estimation. Cisco utilizes a metric for their ROI cost of integration: ‘within three years they want to generate in additional revenue what they paid for the company’. So, a preliminary total cost estimate = acquisition price + integration costs.
NEVER fall into the trap of ‘we can cut costs in the acquired company by 10% or some magic number, WRONG focus. I will discuss integration costs in more detail when I discuss the Due Diligence phase. This will provide a better understanding of how to guesstimate integration costs during Development. In the preliminary shorting of targets you can evaluate if you could meet the 3 revenue target and a ‘guesstimate’ of integration costs. A story before I leave you. This is the story of a ‘Friendly Merger”. This term ‘friendly merger’ is a misnomer; I have NEVER heard an employee refer positively to a merger as Friendly even when that is what leadership was trying to sell. As I heard the story, in this ‘friendly’ merger soon after the deal was signed the two respective CEO sat down with their respective list of senior managers to fill in the new senior/executive organization chart. CEO one stated: “since this was my idea I will go first, and Shirley will fill this box”. CEO number two then filled in a box and so on back and forth until all the boxes on the chart were filled. Then CEO one stated that they both had “good, loyal” people left on their individual lists, so they begin to make up job titles for these individuals until they found ‘jobs’ for everyone. When I arrived on the scene the individuals with made up jobs knew their job was made of thin air, and so did everyone else in the company. Each of them was miserable. Eventually every one of these people received severance packages and when I talked with them later, they all said the same basic thing: “I was embarrassed and miserable the entire time here. Why didn’t they do this right away?” I will talk about this more during the planning/integration phase, but the main point is leaders are slow to make personnel changes i.e., terminations because they have good intentions to do the right thing for people in a difficult situation and really end up doing the wrong thing for people and the company.