A word of advice before I start talking about the ‘Front End’, NEVER, NEVER use a M&A to ‘fix’ a significant business problem. What you will end up doing is making the problem worse. Also, however small an M&A, or how ‘friendly’ it is, M&As are very disruptive. Whether the decision is to go looking for an M&A as part of a company’s growth strategy or an opportunity ‘passes by your front door’ (a drive by), the same overall process and these questions need to be asked and answered. Be very cautious of a ‘drive by’ they can be extremely dangerous because there is a greater sense of urgency to get it done quickly and not do the necessary work to make it a ‘good deal’.
Where do I start and How?
Successful M&A are accomplished with an effective PROCESS not following a checklist. The ‘Front End’ (the development phase) starts when you start thinking about becoming involved in a Merger or Acquisition. Even if you are somewhere into the process of having merging or acquiring something, if you are experiencing problems you need to go back and ‘start at the beginning’ in trying to straighten out the deal.
“But we are different”! “How can one process fit everyone, who does M&A’s well and why? Why is the development phase important”?
Good questions let us see what the answers are. The development phase is like creating the plan and blueprints for constructing a building. Some say it’s the hardest aspect because it is not action oriented work, it requires introspection about your company and several other things. This can drive some action-oriented people crazy.
The big Question; Why do you want to do a deal?
The first question you need to ask yourself is, and it requires a concise answer: why do you want to do a deal? As I previously stated most of my M&A work has been after the deal has been signed and within a short period of time problems start appearing. “Why did you do this deal”? This is the first question I ask a CEO at our first meeting regarding their frustration with their deal. The most startling answer I ever received was: “I got tired of listening to my buddies at the country club talk about the deals they were doing”. I did not know whether to laugh or walk out of his office.
Why should I Do a SWOT? Do I need a SWOT analysis if I know my company well?
What will the SWOT do for us?
What’s an Acquisition Profile?
A SWOT is critical and it must be a ‘realistic’ analysis. You cannot answer questions throughout the process effectively without doing one first. I emphasize realistic because a company leader is like a mother with their first born, ‘their child doesn’t have any major failing’. Too frequently an analysis of the management team is left out of this analysis, including the top executive. The best analysis includes a SWOT of all the management team, this includes you, even first line supervisors. These are the people that need to lead integration and frequently lead in the wrong direction. Also, If the top executive thinks they can lead this on their own they are ‘committing suicide’ if they only have one other person to rely on it is just a ‘lover leap’.
Upon completion of a SWOT, you need to go back and ask yourself and your senior managers these critical questions:
- Why do we want to do a deal (how will it help) and more importantly what specific goals do we think we can accomplish with it, short and long term?
- Is the company as a whole capable at this time of being successful with a deal and Why?
- Is the management team capable? Who will lead?
- How does our analysis fit with our competitive environment? (more on this on discussion of Cisco Systems)
How is an Acquisition Profile different from a SWOT?
How do I know if it will be a good ‘marriage at first sight’?
Now as you move forward you start to construct your Acquisition Profile. The first question I referenced above, Why do you want to do a deal, but stated a little differently that you should ask is: what is the advantage(s) we seek through this potential deal? Sounds straight forward and easy to answer. NOW be specific and goal oriented in your answer, “to grow is not specific”. Specificity is critical as you will see when I talk in depth about due diligence and integration. Effective evaluation of potential candidates ‘fit’ during due diligence and improved integration planning are directly related to your answers. In my experience ‘most’ integration problems occur because of the lack of specificity to critical questions on the front end i.e., an effective Profile.
Here are some examples of areas with some questions and goals for starting to create an Acquisition Profile:
- Gain market access (which): segments, geographic, customers? How does this increase our competitiveness? Example: Move into the Midwest markets with their distribution network for our existing product set and capture 5% of the market within 3 years.
- Acquire products or services: new, complementary? How do these fit with our current offerings? Example: Replace X product lines revenue in year 2 and grow it by 3% every year after.
- Capital access: leverage, new? How would we use this? Example: Leverage their international banking facilities and distribution to enter the EU marketplace in one year.
- Economies of scale: similar or redundant?
- Diversification: different industries, markets, risk profile?
- Technology: new or differentiation?
The information acquired in answering these questions can be synthesized into an acquisition or target profile. This short and I emphasize short, profile should give any reader all the characteristics you are looking for in an M&A i.e., revenue size, product lines, markets, management team and other key characteristics, customer base, etc. Be specific but be concise. This profile is the template you hold all early candidates up to for first evaluation. After you get to a short list of candidates (which isn’t usually the case) or the candidate, you should go back to the profile and refine the detail in it, be more precise with measurable outcomes to achieve and or accomplish with the M&A. In other words, you have seen what the field has to offer, now become even more descriptive/precise in what you want to achieve. If the field doesn’t meet your initial expectations look some more or shelve your plan for a while. Don’t take the worst of the worstest. The SWOT analysis and profile will help start your due diligence on a drive by and or help yourself or others identify early good potential targets. Success on the front end is directly proportional to the time taken. As the saying goes: ‘if I know specifically what I am looking for my chances of finding it increases’.
So, who is the best at doing M&A’s and why?
How do they price a deal?
I hear these questions frequently and its appropriate to introduce it at this time because I will refer to it frequently. Cisco Systems is an under the radar 36-year-old technology company with 2019 revenues of $51.9 B. Early in their history, leaders completed a SWOT. What they realized was ‘Moore’s Law’: every 18 months momentous change in technology occurs in their competitive environment. This created a roadblock for their growth goals. Their conclusion: their strategy of organic growth did not fit their growth strategy in their competitive marketplace. So first they changed their growth strategy to: ‘become a market leader with a new product within six months or buy their way in with an acquisition’. This still does not answer the question: why are they so good at M&A’s? After a couple of difficult initial acquisitions Cisco stepped back and asked: In the acquisition we have completed, what has worked well, what has not, and what should we do going forward?
A key takeaway from their analysis was this basic premise: pre acquisition or front-end actions (development, due diligence, and integration planning) are 60% of success. Post-acquisition actions (integration) contain the remaining 40% and if you do not do the right things well in pre-acquisition (the front end), success in post-acquisition diminishes dramatically. In further blogs I will integrate their process/learning and mine into the discussion. I will do this because Cisco was my early training ground in how to effectively execute a deal. Prior to Cisco I was with a company where I learned HOW NOT TO execute a deal effectively.
In my next blog I will cover the remaining key questions that should be asked/answered in the development phase:
- Who should I involve internally 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?
- What do I do if I find out something I do not like?
- What is the ‘right’ price for a deal?
A leadership story to close with. I had the pleasure to work with a CEO and COO who were two of the best leaders I have ever worked with in a very difficult situation. The company had been put together through several acquisitions/mergers (like six or seven) and they came on board a couple of months before I started working with them. The CEO almost immediately took his senior management team through a SWOT analysis and developed a priorities list. The number one priority/problem was customer loss and potential loss. The next day he held a staff meeting and said the following: “in the packet before you are two things, the list of key customers you are responsible for and your plane tickets to visit each one of them. You will visit face to face with them until you are comfortable with their commitment to stay with us for one year as we straighten out this company. You leave tomorrow”. They did not lose one key customer they had identified on their SWOT analysis.