Considerations for a Successful M&A Transaction
Mergers and acquisitions (M&A) can be powerful value drivers for businesses, but such transactions can also be disruptive, or even destructive, if done incorrectly. While there are general benefits of M&A – for scale, growth, capability gains, additional resources, broadening a client or customer base, and developing products or services, among others – there are also risks, be they integration, financial, operational, or market. So, to determine what is best for you and your business, there are key elements that should factor into your decision on whether or not to pursue a merger or acquisition:
- Why are you pursuing M&A? What is your deal strategy in the context of your overarching business strategy?
- How do the Targets align with your overarching business and deal strategy?
- Have you conducted comprehensive due diligence and developed a post-merger integration (PMI) plan?
- How will you re-evaluate the Target based on the diligence findings, to update your post-merger integration plan and refine the initial deal and value creation theses?
DEVELOP A DEAL STRATEGY & ALIGN TARGETS
The decision to merge or acquire another company is a big one. Developing a proper deal strategy at the initial stage is crucial. To do this, you must understand the overarching business objectives for M&A, and the ideal Target characteristics, alongside potential deal structures. Then it comes time to conduct a comprehensive screen. It is critical to understand the potential Target landscape in order to assess and prioritize your outreach activities. For each potential Target, you should develop a mini-thesis that can test its alignment with your business and deal strategy. For each high-priority Target, enhance the mini-thesis and more comprehensively assess it against the criteria outlined in the deal strategy, to assist with outreach messaging and deal evaluation.
CONDUCT OUTREACH AND COMPREHENSIVE DUE DILIGENCE; DEVELOP A PMI PLAN
Develop a tailored outreach strategy that properly articulates your value proposition; then identify and contact the right person at each prioritized Target. To note, you often only receive one or two opportunities to convince a Target as to why you are an ideal suitor or partner for their business, so it’s imperative you’re prepared with a proposed plan and strong value creation rationale.
Once a Target has expressed interest and you have signed confidentiality agreements to begin sharing information, have a phased diligence plan to ensure a proper assessment of the Target. Before submitting a Letter of Intent (LOI) to create the framework for a potential transaction, leverage your ongoing engagement with the Target to test your initial deal thesis. From there, you can validate potential synergies, competitive positioning, market attractiveness, key risk areas, and projected financial performance.
Once the LOI is executed and you have access to more of the Target’s information, look beyond the standard financial and tax diligence to encompass sales, HR, IT / digital, operations, and other potentially relevant areas of the business which will help further validate your deal thesis and direct the key integration activities. Not only will this help with deal negotiations and closing, it will also optimize the post-close deal success.
An often-overlooked area is post-merger integration (PMI). Most deals fail due to unforeseen difficulties integrating the acquired asset into the business. So while developing a post-merger plan is important for executing the initial deal thesis, it will also be helpful to integrate diligence findings and prepare the Buyer for activities outside of their business as usual. This should be done pre-close. Doing so helps the stakeholders understand what’s ahead and considers any potential issues or questions before they arise. This lessens the instances of uncertainty or confusion among your employees, vendors, customers, and other influential stakeholders. Remember: Day 1 post-close should not be “special” – it should be a normal day without surprises because everyone has been properly prepared for the change.
RE-EVALUATE AND REFINE, POST-CLOSE
Refining your PMI plan based on the diligence findings is not only okay, but also common. A post-merger integration plan should always be updated based on new insights and deal developments. It should reflect any changes needed to execute the vision and reality for the new company from post-close Day 1 to Day 100, and beyond.
A key element in the PMI plan is to ensure that the organization is appropriately resourced to execute. This work is distinct and different from “business as usual,” so be sure to have the proper integration and execution team in place. This could be existing staff, new / temporary staff, or external advisors. Finally, once the plan is finalized, be sure to update the overarching corporate strategy, growth, and business plans to reflect any material changes. These would be the original plans envisioned prior to the deal. Post-close, given the learnings gained from the deal process, owners or executives must update these to reflect the newly combined business.
Any transaction can transform a business for the better – but only when done properly and with the right partner. To ensure success, you must understand the role the deal will play within your corporate strategy and properly prepare for the company’s post-close realities; so focus is key. A dedicated team of external advisors can help you every step of the way. From strategy to deal execution and throughout post-merger integration, the right professionals will help you formalize the right plan to achieve goals and objectives for your business and for its future.