I was tempted to write an article about why M&A deals fail, but thought a more positive title may be more appealing.
But the reality is that M&A, like many complex endeavours, is an art of avoiding mistakes. Take sailing for example: The perfect race is 75% achieved by avoiding the 100 most common mistakes. The rest is down to strategic thinking… and some luck too. But that is for another article.
So here it is, my non-exhaustive list of the top 5 keys for unlocking M&A success:
1. Know what you want.
It is very important that the selling party is very clear on the strategic intent. In particular, unity amongst the shareholders and a clear mandate from the board is critical. A major factor in M&A failure is divisions amongst owners or diverging interests.
Key questions the selling shareholders should ask themselves could include:
- Do we want to sell everything or only part of the business?
- What is really the minimum valuation we will accept?
- Are we comfortable with earn-outs and for how long?
- For those who are shareholders-managers, how long are we willing to stay on with the new controlling shareholders?
From a bidder perspective, a clear strategy and internal alignment are also critical:
- Do we really need to own this business or are we opportunistically fishing for opportunities?
- What is the maximum price we are willing to pay?
- If we are only opportunistic, is there a low price that would get us excited about this business or is it simply not a matter of price?
- What is the strategic fit? How can we make a difference to this business and create value where no other owner can?
2. Do not get distracted from running the business
I have met too many CEOs who were bitten by the “deal-bug”. They get so focused on the fund raising or the next big M&A deal that they get their eyes off the ball. They forget that their strength and what made their business so valuable is their operational expertise, their marketing flair, their industry relationships, etc…. and instead turn into wannabe investment bankers or lawyers.
This is very value destructive. M&A processes can be very lengthy and energy consuming. Having a CEO or even the CFO distracted from the day to day business for 6 months or more can have very negative impact on the business results.
The solution? Delegate to specialized advisors, be they financial, legal or technical. Consider the cost of these advisors in the context of how valuable your time is and how much off your bottom line you could lose if you get distracted from operations.
Myself and my company are such financial advisors and we follow our own advice: We make diligent use of other advisors such as legal, regulatory, marketing, technical etc. so we can fully focus on our own business, which is delivering specialized (M&A) advice to those who need it.
3. Understand where the value really lies
We have written a lot about valuations of companies. Beyond the very important technical exercise of valuing a business based on market and revenue methodologies, buyers and sellers need to understand the real value that lies in the transaction itself.
Consider the following questions:
- From a seller’s perspective, think about the value that the buyer can add to the business. Or perhaps there is a cost for that buyer to acquire the business, for example if they feel they need to hire more people or increase the cost base. The value creation –or disconnect- could lie in this understanding.
- From a buyer’s perspective, consider the questions above. But also consider how much growth you could add to the business thanks to your expertise, relationships or other inputs you bring to the table. Do not be hostage to one valuation method or the other. This business may have a unique value for you which neither the seller nor other bidders could capture. Do not let them know that you have this additional value-creation edge! But also do not miss the deal because you forgot to take into account your own value-add!
- Consider earn-outs as ways of bridging valuation gaps. Some earn-out packages can look extremely attractive to exiting shareholders and help close the deal. But from the buyer perspective, they could be only giving away value above certain return targets. Earn-outs can be easy win-win solutions if well structured.
4. Be honest, transparent and straight forward
In many ways, an M&A transaction is like a marriage. There is exactly zero upside at hiding anything from the other party.
This is blatantly obvious from the perspective of a seller as due diligence (DD) done by the buyers will uncover all that needs to be known, and anything else will be captured through reps and warranties. Sellers gain great credibility by being upfront in disclosing sensitive matters before the due diligence starts. And the downside is very serious. A trivial matter, if uncovered during DD rather than in an upfront disclosure could become a deal-killer in the later stages.
But this is also true for buyers, in the particular case where they are retaining management or becoming partners with the existing shareholders. There is no upside at misleading these future business partners. Anything gained in the short term would be quickly lost as disappointed managers leave or disgruntled shareholders become enemies in the boardroom.
5. Run a proper process
Last but not least, and this is probably worth a separate article, M&A is all about the process. Do not underestimate the importance of running a logical, realistic and transparent process.
This is both a matter of efficiency and credibility for all parties. Time and time again we get invited on behalf of our investing clients, into processes which have run well beyond their official time lines. This not only destroys the credibility of the sellers but also leads to further delays and inefficiencies as the buyers are under no pressure to proceed.
We have also been faced with a sell-side advisor who gave 3 consecutive deadlines for offers, deal closing, process launch, etc. and failed on each single one of them. In the end, this clumsy approach destroyed the credibility of the sellers, so the buyers pulled back from an opportunity which otherwise could have been quite attractive if considered within a well managed process.
In summary, successful M&A is as much about technical expertise, valuation and due diligence skills as it is about good human interactions. These need to be professional, tactful and well thought-through.
M&A processes are long and tedious so getting off on the right base is extremely important. And M&A deals which close still need to be successful over time, and this success will be based on well managed expectations and key people working well together over the long term.