January 29, 2019
Mergers and Acquisitions (M&A) can be exhilarating. Acquiring another company is a big, important event, and some deals can build so much momentum, they take on a life of their own. Everybody involved in the deal–from the management team to the investment bankers–are motivated and excited (deal fever is a thing). In fact, it’s this high level of motivation and excitement that can sometimes lead to rationalization that ensures the deal goes through. Even after extensive due diligence reveals questionable findings, it can be a challenge to get the team running the deal to take a step back and decide to kill the deal. Why? While a negative outcome will certainly disappoint those involved on the buying side, it can also result in significant fallout, including impacting personal careers, future deals, the reputation of the buying company, and the relationship with the company no longer being acquired.
If you’re approaching an M&A activity, or you’ve already done your due diligence, here are some behaviors you should be aware of–and avoid:
1) Inflating synergies to justify deal value
Assessing both deal value and deal synergies (e.g. operations or manufacturing consolidation, revenue and cost, call center efficiencies, leveraging sales infrastructure, etc.) are paramount to successful deal economics. That said, an artificially inflated deal value fueled by deal fever is by far the biggest and most common problem I see. To justify the inflated value, the M&A team looks for every possible synergy. Synergy estimates can quickly become inflated and often include some synergies that simply do not exist or will be very difficult to achieve post-acquisition
There are two steps you can take to get a better outcome. First, have the discipline to decide on a maximum deal multiple before you start. That way you know when you’ve exceeded your valuation threshold. The second is to take a haircut on the synergies to account for the risk that the synergies won’t play out or turn out too expensive to achieve. Or better yet, hire an experienced individual or a team to come in and pressure test the synergies to make sure they align with what internal stakeholders see.
2) Ignoring obvious cultural mismatches
If you’re a global conglomerate acquiring a small, entrepreneurial company and think a culture clash isn’t likely, think again. Some buying companies may be aware of a cultural mismatch but are overconfident about their ability to work around it. On the other hand, M&A teams can sometimes be myopic, focusing solely on numbers and strategy, especially if it’s a good deal. And while, intellectually, they may know cultural integration matters, they can be adept at ignoring it during the assessment phase or be willing to take the risk even if a mismatch is evident.
Many times, cultural incongruencies can be effectively dealt with. But it depends on how much the acquiring company is willing to change. If you expect the company being acquired to change its culture to conform with that of the acquirer, then you should be prepared for any fallout. Glossing over cultural differences or playing them down can be an enormous misstep. When it comes to managing cultural integration, perhaps the most important question that an acquiror needs to ask is, how much are we willing to change our culture to make this work.
3) Discovering disconfirming information
Surprises, in general, about the details of a business being acquired should raise flags. However, uncovering a business’ skeleton/s in the closet (think: illegal activity or litigation issue) warrants pulling the pin immediately and should be intuitive.
It can be harder to do so when it’s another, less scandalous sort of disconfirming event that counters the original deal intention, such as discovering details that don’t match up with the original deal thesis. For example, as the M&A team digs deeper, they can discover a business model or business strategy mismatch or business limits or disadvantages. This tends to happen when there is not a lot of public information available. When the team unexpectedly uncovers this kind of information–not necessarily negative things like skeletons–if they are meaningful and impact intent/strategy/deal economics, you must go back and ask, is this deal still compelling?
The downside of killing a deal is evident. However, the upside is avoiding failure of a larger magnitude. The sizes of these acquisitions are enormous, and M&A activities are already risky. But, if you go into them with a blind eye to diligence findings, you will end up paying the piper sooner or later. Issues don’t go away, they simply get worse.
You can read more about diagnostics in Pre-Merger Planning in this HighPoint blog post.
Alex Nesbitt is a Senior Advisor at HighPoint Associates, a strategy consulting firm headquartered in El Segundo, CA. Alex has 30+ years of management consulting experience and a strong track record of partnering with CEOs to tackle issues related to strategy, organization, senior team management, operational effectiveness, and performance improvement.