Connecting the Dots – Part 2

Connecting the Dots – Part 2

Successful M&A secrets; mergers and acquisitions


This is a series of articles by BTD Founding and Managing Partner Carlos Keener

Study after study still puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. Some however have managed to turn acquisition and integration into a true competitive differentiator. What makes these firms consistently successful at M&A, and what can the occasional acquirer learn from them?

A connected approach to M&A: beginning with the end in mind.

Ability to buy does not guarantee readiness to own: never has it been more important to ensure before the deal is closed that integration can deliver the goods, and do so quickly without disrupting or burdening the wider business.

The majority of deal advisors may understand the principles; however their collective mind set, capability and experience will tend to relegate anything beyond the deal to the side-lines.

That may be obvious but in our experience it’s more often understood in principle than realised in practice. In our work with organisations across sizes and sectors, this disconnect remains the single biggest reason why M&A fails to deliver.

What prevents firms from bridging theory and practice? Part is pure emotion: doing a deal is for many simply more exciting than worrying about life after Day 1. Part is driven by the structure of the M&A industry itself: the majority of deal advisors (brokers, banks, corporate finance houses) are incentivised to get the deal done as quickly as possible. Even with the highest levels of ethics and professionalism, their interest in making sure the benefits can be delivered post-close is academic and commercially immaterial. As individuals they may understand the principles; as organisations, their collective mind set, capability and experience will tend to relegate anything beyond the deal to the side-lines. This can equally apply to in-house Strategy and M&A groups, who often see everything post-close as ‘the job of operations’, intellectually and materially distinct from M&A itself.

Successful acquirers see and deliver acquisition and integration as a single initiative involving the same goals, information and people. Remarkably, this represents a genuine paradigm shift for many businesses, especially larger organisations where there may be a structural, process or even cultural separation between a corporate centre responsible for doing the deals, and operating units responsible for managing the business post-close.

Large or small, those who connect the dots between acquisition and integration hardwire this approach into their pre-close process. Steps include:

  • Translating acquisition goals into measurable post-close objectives and initiatives up-front. We recognise the difficulty in developing an accurate picture at early stages of the deal, but it is possible to develop a ‘rough sketch’, the results of which are then used to drive the pre-deal process, and improved along the way.
  • Beginning post-deal business design and integration planning early, and using both to drive assessment and due diligence. Successful acquirers see post-close integration/improvement as a unified, cohesive initiative that establishes the business’ new operating model, in turn delivering deal objectives. Working on these two items up-front lets you conduct a target assessment and due diligence process that tests the future ability of the combined business to deliver deal benefits, not merely the past performance of the stand-alone target.
  • Using this detailed view of post-close to inform deal valuation. The right acquisition value is one based on a picture of the combined, improved business performance, not on a view of ‘stand-alone-plus’. Alongside synergy size, valuation also needs to consider the potential timing and likelihood of key post-close objectives, and the exercise should involve those responsible for delivering them. Why? Because synergy assumptions set pre-close become post-close operational expectations. It is this very lack of ‘post-close’ thinking that causes problems time and again: costs unexpectedly rising post-close, frustrated management, and ‘corporate knee-jerk integration’ when things start drifting.
  • Ensuring a structured process to avoid deal momentum or deal phobia. First and foremost, successful acquirers invariably have, share and follow a wider strategy against which to formally screen opportunities. Moreover, they insist on ‘moderating’ mechanisms along their pre-close process:

Balancing enthusiastic deal sponsors with cautious detail-observers across the table; taking a measured pace with formal stage-gates;

Ensuring post-close challenges and risks are formally considered at every step along the way[1].

Above all – and perhaps counter-intuitively – they ensure external advisors stay within their role of advice and support, and do not become surrogate decision-makers on behalf of the business.

Ultimately, it is the involvement and commitment of the right people within the business that makes any of these practices work.

This involvement will also build commitment to the real work to follow. Their own approach to this exercise (especially development of the associated post-close business targets) will speak volumes about their level of belief and engagement in the deal rationale and give insight into their own ability and willingness to deliver it.

Carlos Keener, December 3, 2012

The full article Connecting the Dots can be downloaded as a pdf by clicking here.

[1] More on this topic can be found in Getting M&A on the Right Track, BTD LLP, 2011