“You can't blame integration for everything. It's really the linkage between how you plan integration and how you price the deal.”
Three dials of a deal
This episode of M&A Science is a session from the M&A Science Holiday Summit last year. The interview featured Carlos Cesta, Vice President of Corp Dev at Presidio discussed the best practices to capture value from initial deal prospecting to integration.
One of the primary topics discussed is the idea of three dials of a deal, the three dials being: valuation, risk management, and integration.
Carlos remarks that every time you turn one dial, it affects the other 2. If you pay cash upfront, there would be no risk management and you will have to integrate the business fully.
If you want to use an earnout, the initial payment will be smaller, but you cannot integrate the business and you need to keep that entity separate. If you want to integrate the business within a certain period of time, you cannot hold 5 year earnouts, which will also affect how much you pay upfront.
Additionally, Kison and Carlos talk about the diligence process and the importance of bringing your synergy thesis upfront in that process and constantly testing if your synergy thesis is realistic.
If it’s constantly coming back as negative and you are not going to get the value you initially thought, you might have to reconsider the price of the purchase or the entire deal itself.