How to Have a Successful M&A Transaction
M&A refers to the combining of two companies - the buy-side, or the acquirer, and the sell-side, or the target. More specifically, a merger is combining the buy-side and the sell-side into one company, while an acquisition is the acquirer buying, or “taking over,” the target. Common reasons for both mergers and acquisitions include diversification, growth, synergies, and reactions to the market and other M&A transactions.
While no two deals are exactly alike or take the same amount of time to complete (which is why playbooks are not the panacea they are purported to be), all deals flow through the same basic stages. Becoming familiar with these stages and expert practitioner’s advice is invaluable to ensuring successful deals.
Steps for Ensuring Deal Success
1. Creating an acquisition strategy:
Buyers must begin by determining what they are hoping to gain from their acquisition; possibilities include growth, exposure to new markets, competition elimination, and lowering costs by tapping into synergies.
2. Building a database of targets:
With a clear acquisition strategy in place, the next critical step is to build a database. To begin, the buy-side must pick an industry it is targeting and purchase an industry association list, as they are the best places to start. Additional resources for generating a database are social media sites, such as LinkedIn, where valuable data can be gathered for free (Google also yields free and worthy information, but takes a bit more time-consuming investigative work).
3. Refining target criteria and evaluating potential target companies:
Once the acquirer has its initial list, it will want to refine the list by establishing criteria for target companies. Here, corporate development teams will want to consider both deal size and type. As they identify their pillars of criteria, teams should build lists of “A” deals and “C” deals. An “A” deal would be ideal in terms of both size and strategic fit, as well as being a strong M&A target. The notion behind creating lists of “A” deals and “C” deals is to help the buy-side from getting overly aggressive or paying too much for an acquisition. Finally, they must take their databases and A and C lists and input them into a data room or project management platform where they can be stored safely, easily organized, and shared.
4. Making contact with target and moving past the gatekeeper:
Now, corporate development teams must begin to work the list by calling companies and planting seeds that can grow into fruitful relationships. The most difficult part of this stage of mergers and acquisitions is getting past what corporate development experts call “the gatekeepers.” Examples of “gatekeepers” can range from administrative assistants, to managers, to even CFOs and COOs. Here, one must be cognizant of the fact that these gatekeepers could be reprimanded or even at risk of losing their jobs if they let a call through. Corporate development’s task here is to ease the anxiety. When speaking with a CFO or COO, it is essential to begin with something a bit less scary than acquisition by discussing partnership and growth opportunities. With administrative assistants, one can lead with his/her background, title, and position to assure the gatekeeper he/she is not a cold caller, but rather calling to speak to his/her seller or owner in regards to a strategic matter. For more on how to move past gatekeepers and advantageous deal sourcing.
5. Evaluating target:
When the buy-side connects with the seller, a large portion of the task is to listen in order to gather as much information on the potential sell-side as possible. After the call, a thorough review of current financial statements, revenue numbers, and KPIs is necessary. If the acquirer does not have enough data to fully evaluate the target, the next step would be to send the sell-side an initial data request. The acquirer can utilize this information to see if moving forward in the M&A process steps would not only be a strong strategic fit, but also a financial one as well.
6. Negotiating purchase price/offer:
Once a full valuation analysis has been completed and the buy-side has decided to more forward, it will want to put together an offer. A general rule of thumb is to do this in a timely manner in order to be seen as a legitimate contender, while at the same time being thoughtful with the offer so it will ideally not need to be restructured.
7. Conducting due diligence:
After the sell-side accepts the buy-side’s offer, a comprehensive examination of the target’s assets, operations (including its employees, customers, intellectual property, and financial records) and legal matters begins. This deep-dive into the target is known as due diligence. Historically, it is categorized as somewhat overwhelming and exhausting as there are many stages of due diligence. Recently, two movements in the M&A world have been leveraged to ease the pain of diligence by increasing efficiency and breaking out of work silos.
First, secure virtual data rooms (VDRs) and project management platforms allow for information to be safely stored and easily shared between stakeholders. Many traditional virtual data room providers strictly offer secure data storage, however, there are now more modern platforms that also offer features that help improve workflow and transparency, while also reducing redundant tasks.. For example, DealRoom is a commonly used software for successful M&A processes that helps with due diligence, pipeline management, integration, and overall, project management. Second, Agile principles can be of great assistance with establishing governance and a cadence of meetings, as well as with prioritizing tasks. It should be noted that before diligence begins the buyer will often have to sign a confidentiality agreement put forth by the seller.
8. Finalizing purchase and sale contracts:
Next in the stages of M&A, barring any surprise findings during diligence, the final contract for the sale will be developed.
9. Closing the deal:
As the deal closes, integration picks up steam. The buy-side and the sell-side work together to integrate the two entities.
10. Integrating the companies:
Post-closing there is a still a great deal of work to be done. Post-merger integration (PMI) is the process of bringing two or more companies together with the aim of maximizing synergies to ensure the deal lives up to its predicted value. Post-merger integration problems are often the Achilles heal of M&A as they tend to cause deals to fail, or, at the very least, result in the inability to extract true value from deals. Consequently, integration practices are now being more closely examined and valued by both buyers and sellers.
Expert practitioners agree that PMI: post merger integration process steps must begin at the beginning of the deal; namely, integral team members such as top executives and other stakeholders (bankers and lawyers) should begin discussing integration details at the start of the M&A process. Another vital piece of a smooth integration is being sure members of the diligence team become members of the integration team - for both the sake of clear communication and efficiency. There are even VDR software providers that are now including post-merger integration software features to help with this. Finally, the people aspect of integration is key since people make companies great and are a vital part of leveraging synergies.
Clearly, human resources should be a player in the integration process; ideally, a change management expert should also be included. These individuals help address employee concerns, learn about the target company’s culture, focus on retaining key employees, and identify roadblocks related to culture and change management.
Learn more about change management.
While working through the stages of mergers and acquisitions, it is essential to keep the ultimate goal at the forefront - a profitable deal that looks good not only on paper, but also in practice. Additionally, after the completion of a deal, companies should consider an eleventh step: a retrospective or “lessons learned” step that includes feedback from all leadership teams as well as from a wide variety of employees on both sides of the deal. Similar to how information on target companies is kept in virtual data rooms or project management platforms, the information from the retrospective should be organized and stored in a similar manner so it is easily accessible when it is time to begin the M&A process again.