Deciding to embark on a merger or acquisition (M&A) is one of the biggest transformations during the lifecycle of any business. Thinking in terms of resources alone, your money, time, and credibility are all on the line here. To land a successful M&A deal, you’ve got to be on top of your game.
If you focus too hard on all that’s at stake, though, you may not be in a position to make the best deal. In other words, don’t miss the forest for the trees—go in with your eyes wide open. Although it can be nerve-wracking to jump into an M&A deal, keeping the below 5 key points in mind should help you get through the process with your nerves firmly intact.
But first…let’s consider what not to do
Pushing through a successful M&A deal like acquiring a competitor or joining forces with a powerful peer is invigorating. But what’s invigorating on the day you sign on the dotted line can quickly deteriorate into something akin to buyers’ remorse if you haven’t thought things through.
Here are just a handful of the mistakes we’ve seen get in the way of a successful M&A deal:
- Companies WAY overpaying for what they’re buying
- Leaders forgetting that cultural fit between companies matters just as much (if not more) than securing cutting edge technology or getting a contract
- Too little too late: companies being slow to consider market shifts and jumping in too late to address their gaps with M&A
- Not considering the bigger corporate story—big, expensive “surprises” that don’t obviously fit are a tough sell and put you on the defensive with investors, customers, etc.
- Failing to communicate with all shareholders. Remember, those little shops can band together to become an activist consortium
To avoid adding to this list, consider engaging a team who can lead you through any necessary course corrections. At Audacia Strategies, our core competencies revolve around helping clients consider their bigger corporate story and communicating with shareholders when making big, bold moves like this. You can also make sure everyone checks her ego a the door, by considering the following:
5 Keys to a Successful M&A Deal
1. Deal Fever Is Real.
You and your team have spent late nights, long weekends, blood, sweat, and tears pursuing this deal. You have done all that great valuation work to come up with a fair acquisition price. And now, you’re at the negotiating table (you can almost hear “Eye of the Tiger” playing in the background). And, you’re bidding against other firms… and the price is going up, and up, and up. It’s very easy to get caught up thinking, “I’ll show them. We’re going to win this thing at all costs.” It happens All.The.Time.
The reality is while it’s good practice to come to the negotiating table with a valuation range that you’re willing to pay, it doesn’t pay to start warping your analysis just to “win.” This is how companies end up with massive write-downs a few years after a deal when they can’t achieve the value they needed to make the price they overpaid work.
It may be obvious, but even large companies are susceptible to deal fever. Want an example? See also:
Why does this happen and how can you control for it? Well, the short story is: all business deals are closed by human beings and the decisions human beings make are often influenced by emotional and psychological factors. Executives on both the buy side and the sell side can get caught up in their perception of the company and the management, for example. So, if you feel tensions running high and fear that you or your team are losing touch with your real goals, don’t be afraid to step back from the negotiating table to catch your breath or even walk away from the deal entirely.
- What are the stories we’re telling ourselves?
- How can we challenge these stories to get to the real story?
And remember Dan Doran’s advice: “Value is analyzed. Price is negotiated.” It’s crucial that you build your own valuation model, one that you’re completely comfortable with and can explain to stakeholders if (or when) challenges arise. One of the worst things you can do is rely on a target’s (very pretty, but very likely) biased projections. Do your own research. Do the work.
2. Due Diligence Is A Lot Like Going To The Dentist.
It is not glamorous, but it is necessary. Due diligence can be the difference between a successful M&A deal and one that feels like getting a root canal. To make this work for you, go beyond the financials (after making sure they work and are coherent, of course!) to really understand the logic behind the deal on every level. You need to consider carefully the reality of your team’s ability to create (or “unlock”) value in bringing two (or more) firms together.
3. Customers Matter.
Once you have your head wrapped around the business valuation and the inner workings of this new mash-up of a business being born, you’ve got to think about relationships external to the organization. Get into the weeds about how strong the current customer relationships are and how they affect the bottom line.
Ask these questions:
- How much of current revenue depends on repeat customers vs acquiring new customers?
- What is the cost of acquiring a new customer?
- How strong is the current business pipeline?
4. Get Real About Your Competition.
You definitely want to take a look at where your target stands when it comes to market share, revenues, and profit, but also dig more deeply. Keep in mind, you are proposing a potential shake-up of the market here. Even if they’re tough to predict, consider all the ways in which this bombshell of a deal is going to have significant ripple effects outward.
Ask these questions:
- Where in the value chain is your target excelling? Failing?
- What changes can you realistically make to capitalize on strengths or cut the dead weight?
- How do they stack up against their peers?
- How do you expect competitors to react to a combined firm?
- Will you have the wherewithal to combat a price war for example?
5. The Problem With “Synergies.”
I can’t really remember if Professor Mariann Jelinek shared this pearl of wisdom with us on the first day of my strategy class at The College of William and Mary, but she definitely shared it early and often: “When someone says ‘synergy,’ hold onto your wallet.” Throughout my MBA program and even to this day, I think no truer words have ever been spoken.
As a buzzword, synergy is overused and honestly, a red flag in most cases. Like pretty wallpaper covering an ugly stain, “these teams have a lot of synergy” is a pretty-sounding way of saying very little. As easy as it is for deal participants to get caught up in the possibilities and truly, badly, deeply underestimate the time it will take to achieve whatever they’re dreaming of, it’s equally as easy to overestimate the value of both cost and revenue synergies.
In the rush to eliminate redundancies and expand market share, a lot of details can get overlooked about what the new procedure will look like. Slow down and think things through at each stage.
- How are we going to make more money by putting two firms together?
- Do we have a crackerjack post-acquisition integration team ready to put our plan into action?
- Do we have a good sense of what might go wrong in this integration? What’s our worst-case scenario?
Yes, there is a lot at stake when you’re spearheading what could easily be the biggest deal in your company’s history. But you can handle it. You’ve done the work and now you’ve got these 5 keys in your pocket. So you’re ready to seal that successful M&A deal.
Have questions? Want to talk through your deal with an experienced team? Audacia Strategies is here for you. We’ve helped businesses successfully navigate M&A deals and other big transformations. And we’re fun to work with! Contact us at firstname.lastname@example.org or give us a call at 202-521-7917 to schedule a consultation.
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