M&A Takeaways for Mid-Size Companies

Just because a company is smaller than an M&A-eating behemoth the size of Procter & Gamble doesn’t mean it can’t pick up a few morsels of wisdom from its experience.

That’s the word from Mitchell L. Marks, professor of business at San Francisco State University, and an M&A consultant on the side. The same lessons apply, whether the deal steals headlines or not. “Many CEOs of midsize and smaller businesses deny or think they are immune to the perils of M&A difficulties,” says Marks, author of Joining Forces—Making One Plus One Equal Three in Mergers and Acquisitions. “They’re not, and in some cases there’s more to be concerned about.”

He explains that small and midsize company “lack the luxury of a large corporation’s corporate staff and the ‘bench strength’ of up-and-coming, high-potential junior executives to manage the merger while keeping the business running.” In such cases, “the acquiring entity can be overwhelmed by the rigors and requirements of M&A integration,” Marks says. “Don’t delude yourself that doing the deal is the hardest part of a transaction. It isn’t. As one of my CEO clients said, buying a company is fun; integrating it is hell.”

What’s the secret then in adding up two companies’ strengths and synergies and not ending up with a negative number? “A CEO of a midsize company needs to understand first the synergies and cost savings represented by the deal, and then not overpay for this value,” says Michael Burdi, portfolio consultant at corporate performance advisory firm Applied Finance Group. “If you pay a great price and have great synergies, you will likely succeed at adding value. If you pay a fair price and have great synergies you will likely get an average return. Valuation is the closest thing to the law of gravity that we have in finance. It is the primary determinant of longterm returns.”

Practice makes perfect, Marks chimes in. “The best and smartest players in the M&A game have done multiple deals—they learn from their mistakes, and know what they can do on their own and what they need from external consultants,” he says. “The CEOs of large companies with great M&A track records also leave their egos at the door, knowing they can’t possibly bat 1,000 in this game, given the challenges of integration. That doesn’t stop them from trying, however.”

Read: 4 Secrets of Great Deal Makers: Making the Most of M&Amp;A Deals.