So You Want to Do A Merger/Acquisition?

A Strategy For Growth???

A McKinsey white paper stated: ‘65-85% of M&A’s fail to recover the cost of capital invested’. This statistic always amuses me as I have never sat in a board meeting listening to the CEO pitch why the merger or acquisition makes good business sense and then finishes by stating: “but we have a 65-85% of screwing it up”. SMB companies face the same difficulties as large companies in completing a successful deal. The major difference in a SMB is that it has a shorter runway to ‘make it work’.

Or a Recipe for Disaster???

Most of my M&A’s work with companies has been 12 to 18 months after they sign the deal, and they are wondering why it is not working. Company size or industry made no difference they all exhibited similar problems. So, the question is: why is it so difficult to execute a ‘successful deal’? Good question, here are some general observations of how I have seen companies get into trouble with M&A’s that i will address:

• “The front end of a deal is like falling in love for the first time, it has an energy all of its own, and at times it fogs common sense”. (Business owner statement).
• Deal focus is on ‘getting the right price’. Leaders do not calculate a ‘total cost of the deal’. Everyone focuses on, ‘the acquisition price’.
• Leaders think once the deal is signed all the ‘hard work is done’. The front end of the process is the falling in love part and integration is the ‘real’ hard work. Also, the absence of a ‘back end’ process leads leadership to think they have completed the hard work.
• Little or no institutional experience in doing M&A’s. Leaders and management are truly knowledgeable about Finance, Sales and Marketing, Operations, etc. however in most cases none have M&A experience.
• ‘Wing it’ rather than utilize a comprehensive process. If you do not have the exposure or experience to a successful M&A process, then you ‘figure it out as you go along’. You need a good roadmap to follow, or you are ‘winging it’ whether you think you are. A checklist is not a process.
• Too heavy reliance on attorneys and accountants. Their expertise has it place in the process but again they are ‘front end’ experts and poorly executed integration ‘puts a knife in the heart of the deal’.
• Leaders make public statement after the deal is signed: “nothing will change”. It is a given that things will change, every employee knows that and leader’s loose creditability when they say this.
• Slow integration of acquisition or merger. Successful integration is about two overarching goals: speed and focus. Tough to do without a process at the start.
• Management identifies ‘cultural differences’ or ‘people don’t like change’ as the issue for difficulties that occur after the deal is signed. What people do not like is indecision and the absence of a well communicated ‘go forward’ plan. If they do not hear one the ‘rumor’ mill will fill in the blanks.
• Slow decision making on personnel changes. Again, people know there will be changes and they abhor a void when it comes to their job. Here is where employees YOU do not want to leave will.
• No plan for managing customers, suppliers, and competitors. Everyone knows how unsettling an M&A is on an organization. Competitors will go after key suppliers and customers without an aggressive strategy to stop them.
• Leader lacks a sufficient financial model for pricing the deal. Deal cost should include ‘the cost of integration or back-end costs. You cannot make a good decision on ‘purchase price’ unless you have a good idea of the ‘total cost of the deal’.
• Not being able to disengage from a bad ‘deal’. “We have to much invested to back out of the deal now!”. I have heard this more than once, that is why I used the previous statement of “an M&A process on the front end is like falling in love”. You disregard disturbing information before the deal is signed because you ‘feel’ you have to much invested at that point to ‘kill’ it. Or worse yet you cannot recognize things that should disturb you.
• Leaders think buying something small, i.e., product line, ‘friendly merger’, etc. won’t be that difficult. When even a ‘little’ acquisition goes South and they do, the costs multiply well beyond the purchase price.   
• Don’t understand the dangers of a ‘drive by’.

So, given these statistics is it a good business decision to do an acquisition? Absolutely, as with most things thought only if done well. In my next blog I will begin to discuss these issues and how to overcome them. The next blog will introduce the first phase (the front end) of a M&A process. I will provide examples of where companies have gotten into trouble because of things they overlooked or questions they did not ask on the front end. Here are a few examples of questions that may seem like a ‘no brainer’ but are often overlooked or not even asked early on.

• Why do we want to do a ‘deal’ or this deal? What are we trying to accomplish? What are the short- and long-term business goals?
• Who will lead and how many people do I involve?
• Can our company handle it?
• How much money do we need?
• Do I need a SWOT analysis if I know my company well?
• What is the best way to find a good deal?
• Who is good at M&A and what can I learn from them, I am different?

Let me be very clear about one thing. Accountants and Attorneys have M&A to do checklist, there are multiple books and articles on the topic and although I haven’t looked, I would guess YouTube videos on the subject. I am not trying to replicate them, my objective is to identify key issues, process, etc. that I knows work or the absence of cause problems and overlooked questions. Although much of my work in the M&A space has been ‘fixing problems’, there is much I have experience that works across companies. I am not trying to be all encompassing, just what I think are some critical points to be aware of.