Historically companies only did a few large deals a year and focused more on synergies and cost cutting. Now many companies are looking at several smaller acquisitions that, when pulled together, grow much faster and generate more value than individual deals would. Private equity has employed this “buy and build” strategy for some time now to much success, and corporations are now taking the same approach. This increased deal flow, however, is taxing corporate acquirers as most have not made a sufficient investment in the resources to get deals done properly. Even companies with established deal processes have had to adjust their playbook to succeed in this new investment strategy. While there is no one-size-fits-all approach, there are several fundamental principles that when followed can make the process easier and more rewarding.
All Eyes On Strategy
At the outset of any potential acquisition, it is critical to determine the strategic value drivers of the deal. Oftentimes, acquirers are focused on one component of a company they are acquiring – tech, customers, geography – but they do not consider all of the other attributes that come with buying the entire organization. The people, processes, tech, culture – all these things are what make a company succeed, and you cannot extract one piece and expect it to perform the same way. It is like taking a dolphin and sticking it into the Jungle because you want to tap the ocean market – it just does not work that easily.
To set the team up for success, it is imperative that every deal is linked explicitly to the internal strategy it supports. More specific, tangible goals encourage companies to be truly proactive in sourcing deals and help to establish the scale, urgency, and valuation approach.
Bring The A-Team
The biggest challenge in pursuing a larger volume of deals is not only having the right people involved but having the right number of people involved. Many companies have formal corporate development departments that are charged with M&A. However, many companies do not – especially mid-market or lower-mid-market companies. Those responsibilities usually fall to the CFO on top of his/her day-to-day operational responsibilities. M&A is not something to be done “in spare time.” It requires full dedication from a team of people across many company disciplines. Not having adequate resources evaluating and integrating deals causes leaders to make unclear decisions, act reactively, buy the wrong assets, or miss out on the right opportunities entirely. An ambitious M&A program requires a tremendous amount of work that demands capabilities and resources on the same scale as any other corporate function. Without sufficient and effective resources, individual deals are doomed to fail.
Trust but Verify
Due diligence is usually outsourced to third party advisors. Those organizations, however, are not close enough to your business to assess a target strategically. They will execute a robust checklist of common financial, legal, and risk management data points and provide you with their findings, but it is up to the senior leaders to digest that and truly apply the information to the specifics of the organization. Unless specifically engaged to do so, these third-party advisors do not assess organizational fit or plan for post-close integration. The Day +1 planning falls to management, as the bankers and advisors tend to leave at closing. IT, HR, and Operational due diligence, in addition to the finance/risk/legal areas normally focused upon, is critical to mitigate issues post-close.
People, People, People
People are a company’s greatest assets. However, Human Resources (“HR”) tends to be the most over-looked area in M&A integration. And not just the tactical work of identifying redundancies and adds but assessing cultural fit – the things that drive the culture: compensation plans, succession planning, hiring/firing processes, equity programs, roles/responsibilities, decision autonomy, collaboration, and so on. Any change is disruptive, and not accounting for the people across both organizations will cause anxiety and culture clash. This can lead to attrition and potential sabotage of the success of the integration.
Because due diligence often excludes people and operations, integration strategy and planning are inherently off to a poor start. It is important to have a cross-functional team of people assembled to integrate the two organizations, led by a project-manager experienced in organizational change. The deal strategy (the “why” of the deal) should kickstart the “how” of putting the companies together. This would have been flushed out during due diligence, and now can be tactically implemented. There is no one-size-fits all integration approach – every deal is different. The approach for a cost-savings deal is much different than a deal meant to drive sales growth. As such, the strategy needs to be different to achieve the intended results.
The biggest failure we see in post-close integration is the lack of communication to ALL employees. Employees need to know about the deal, but then they need to be kept informed on the integration efforts as well as seeing/hearing of the “wins” achieved due to the partnership (i.e. announce a big new customer, a new service geography, a new management training program, etc.). Employees need to SEE why this deal was important and that the ROI is real. Without it, they will not support it, and many may even sabotage it. Without direct communication, it will leave employees to come to their own conclusions over the water cooler (or virtual water cooler these days).
During the integration process, it is important to measure and compare the metrics that were key assumptions during the deal sourcing process to the actual results post-close. This will inform your team how “good” they are at identifying strategic acquisitions and turning them into ROI. This will inform how you run and integrate all future deals – and the only way you learn is by measuring and evaluating performance at the key milestones. Your deal process should improve each time, as you learn more with each one. However, it will be hard to act on any learnings if you do not measure what was successful and what failed.
Achieving an aggressive, growth-orientated M&A strategy is a large undertaking but can reap meaningful benefits in the long-term. Companies who have committed adequate attention, strategy, and resources to the deal process will be most successful. Starting with a defined strategy for each transaction will dictate how it is integrated and how it will support the company’s overall goals and strategic plan going forward. With record levels of capital and liquidity available in today’s markets, there are plenty of M&A opportunities available, and those with a well-tuned M&A deal process will be the first to take advantage.