Walking Away from a Deal. Easier Said than Done?

Knowing when you should is very different from knowing that you can. 

There’s a very good article from the 2004 archives of Harvard Business Review titled, “When to Walk Away from a Deal”. I recall reading it then and finding the recommendations on how to improve your due diligence process insightful and right on the money. The specific DD areas to explore will help you focus on confirming whether you can generate value from the deal post-close, rather than simply confirming the current status of the target. Using Due Diligence to test the feasibility of the future combined organisation rather than validate the past of the stand-alone business resonated strongly with our own thinking and approach – and it still does. BTD’s own approach to due diligence can be traced back to this article. 

Rereading the paper recently, I was struck by how accurate and relevant the paper remains – too many organisations still pursue a more traditional approach to due diligence, generating findings that aren’t shared across the teams, don’t validate your post-close plans, and are often forgotten on Day 1.  

But what also struck me – 20 years and over 100 clients later – is that, as good as the recommendations are, simply applying them as suggested doesn’t, and won’t, work.  

The challenge is that incomplete due diligence is almost always a symptom, not the root cause, of a larger issue. Unless you address these, adding a few section to your DD checklist will possibly help you know when you should walk away from a deal, but it’s unlikely to actually give you the organisational ability to do so. 

Many companies experience ‘M&A gluttony followed by post-close indigestion’, consistently buying (and often overpaying for) businesses, failing to integrate them fully or effectively, and eventually driving their own business into trouble. The most extreme case we’ve encountered involves a firm struggling to manage 160 partly-integrated entities, with more deals piling on top each year. Once you pass a certain point, the tangled knot of businesses literally became too difficult for the company to restructure: letting their 31-wheeled car with 17 steering wheels lurch along the road was easier to live with than to fix. What inevitably happens in these cases is a demand – usually by the Board – to simply stop buying and making the problem worse. The next step is almost always a divestment of large chunks of the business, usually selling for far less than they were bought for.  

Would a better due diligence checklist have stopped or constrained this behaviour? Perhaps, but more fundamental are the leadership, governance and cultural issues driving due diligence and other M&A activities. The 160-acquisition Head of M&A was only doing his job, one which he had been specifically instructed to do, and for which he was well-rewarded; in fact, he did what was asked of him, “just keep buying”, very well. Those responsible for integration (and there were many) had no visibility, influence or authority on the deal. The Board was conspicuously absent from its role of oversight and moderation. Everyone – corporate executives, functional heads, divisional leaders – believed it was someone else’s problem to solve. Based on the increasingly-confused organisational structures, they were in some sense right. 

Knowing when to walk away from a deal is easy. Being able to do so is much harder. Here are a few additional recommendations we’d add to those provided in the 2004 HBR paper: 

1. Incentivise your M&A people on the long-term performance of the acquisition, and ensure they are rewarded for the deals they don’t complete as well as those they do. Yes, easier said than done, but very possible.

2. Ensure that the ultimate business owner of the acquired entity has real accountability for every step of the pre-deal process. Using your M&A team as a service provider, they should be required to approve deal progress at each stage-gate, approve due diligence reports, approve integration plans. If they say ‘I don’t like this’ at any point, they must have the ability to stop the music.

3. Assign a single point of accountability for delivery of post-deal goals: Designate one business owner responsible for integration and achieving deal objectives, with clear, cascaded goals for their team (i.e. to her heads of sales, delivery etc.). The natural tension between this individual and functional groups (e.g. IT) may still exist, but at least it will align with the way your organisation already works. And if accountabilities between business units and functional groups is an endemic issue, fix this first – conducting an integration on top of badly-defined or confused organisational accountabilities will (you’ll never guess) only make things worse.

4. Use your integration plan to shape deal assessment and moderate ‘deal momentum’. Your entire pre-deal process – initial target profiling, due diligence, valuation, negotiations – should be infused with the only question that matters: can we make this acquisition work after completion? Yes, this can be reflected in due diligence questions and valuation in a tangible way as described in the 2004 HBR paper, but it’s also a leadership mindset. Is the deal team constantly asking this question and insisting on the right information to provide robust answers? Are the executive team challenging everyone to consider what that new finding might mean ‘beyond the deal’?

5. Help the board play their role as effective deal moderators. Some boards feel powerless to prevent bad deals from proceeding in the face of an over-enthusiastic executive. Others go too far the other direction in exercising caution, refusing (as one client board member once said) “to approve this deal unless you can prove it will present zero risk to the business.” Board chairs must work hard to balance risk, extend thinking and challenge conventional wisdom; they must also work to ensure that collectively the board does the same. A board that always says ‘no’ is just as unhelpful as one that always says ‘yes’.

6. Maintain the ability to walk away from the deal at any point up to deal completion; and ensure the deal team (and the target) are aware of this. Contrary to many conventional M&A processes, this must include the period after due diligence. In every case we’ve seen or studied in which too many of the wrong acquisitions made it through to completion, all of these firms had reached formal agreement to do the deal before due diligence. The principle is simple: Once a decision, formal or informal, to acquire has been made and communicated to your team, it’s very difficult to walk away from the deal – regardless of what your DD process may uncover. Decisions to proceed with deal assessment should be just that – approval to take the next step only, not to complete. This decision is only made at the end.
 

Good acquirers – especially serial acquirers – have crystal clear accountabilities within the business for deal and integration initiatives; that accountability does not rest within an M&A department. The best acquirers also have active boards that moderate their M&A and integration activity by helping the business reject bad deals early, accelerate value capture for good ones and insist on a pause when the business is at risk of over-eating before it happens. If you’d like to know more about how to help your board and executive teams strengthen your M&A performance, we’d love to hear from you*.  

 BTD will be hosting a free virtual round table covering this topic on Wednesday, December 4th, you can register your interest to join us through this link.

*You can also find more on this subject in our paper Inconvenient Truths, or in Leading the Deal.