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Penny-Wise & Pound-Foolish:

I’ve been on both sides of M&A deals, and by no means is there such a thing as a “perfect” transaction.  The “merger” is really a dying concept.  You are either acquiring or you get acquired, that’s the game nowadays.  If you never do either of those things, it’s because you went bankrupt or because you didn’t do any proper exit planning and mismanaged the eventual liquidation of your business.

I am amazed at how much attention is placed on the actual transaction and/or “sales value” vs. the work that comes after the money has changed hands.  I have four children, and I have been through the Lamaze classes, birthplanning, etc. I think by the time you get to the fourth child, you have done so many “acquisitions” you see that those things have some importance.  But, they lack the stature they are given as opposed to actually raising the child.  Personally, I believe this is due mainly to the anxiety, naivety, etc. of new parents and their willingness to spend money accordingly.  There is a market for existing parents, yes, but there is certainly a great market out there for any capitalist that wants to benefit from the “pregnancy” industry.

This seems to be much like the M&A industry.  It’s all about the “deal”.  That’s how people are made into millionaires, that’s how brokers get paid, and then after the “birth” of the deal, everyone lives happily ever after, right?  Sometimes.  Most often times, not.  But, the “deal” happened.

Experienced business people know that the “deal” gets way too much attention.  That’s not to say it should not get attention, because the negotiation and terms that go into the “deal” are crucial.  But, there needs to be more time and money invested in the preparation of a transaction, and then there needs to be A LOT more attention to detail after the transaction has occurred.

There are a lot of ways to drain value from an M&A deal.  M&A activity is on the rise.  We just went through a very large scattering of business value, and now it is starting to contract again.  Think of it like a wave in the ocean.  It spreads out all over the beach, and then eventually, it pulls back violently out to sea.

That being said, here are some of the oversights that make me cringe the most:

  1. Poor due diligence processes. This one is really mind boggling to me, but maybe it shouldn’t be.  It is hard to measure the payoff, because if it is done right, it avoids so many mistakes and/or bad deals.  Often times, hindsight is 20/20. “How did we miss that in due diligence?” is a question often asked.  Bottom line, SUPRISES ARE BAD.  And, the number of surprises is directly related to the quality of due diligence performed. So, yes, of course you should be mindful of time and money spent in the process.  But, a systematic due diligence can also quickly disqualify a deal, which saves everyone a lot of time and money.  Would you buy a house without having a home inspection?  Would you buy a piece of land without making sure it doesn’t have radioactive material underneath it?  Use good common sense and judgment here.  
  1. Misunderstanding of true value. Now, admittedly, this does relate to the “deal”, which I just said is getting too much emphasis.  However, if you’re on the selling side, you HAVE TO KNOW THE VALUE OF WHAT YOU ARE SELLING.  Again, this is so often misunderstood and glazed over.  More often than not, the seller tends to overvalue what they are selling, which can cause issues.  The bigger mistake is to undervalue.  For instance, let’s say the market is showing that, on average, the company in question is in an industry selling at 4 times earnings.  So, the buyer offers 3 times.  The seller counters at 5, and then they settle on 4.5.  The seller’s arm is getting tired patting themselves on the back.  However, the buyer had a key, strategic value to buying the company.  They might be ridding of their competition, or getting something of key strategic value.  They may be willing to pay 12 times earnings.  So you just totally botched the deal!  You absolutely, positively, need to have a clear, realistic, understanding of value.  And, this goes for both sides…buyers AND sellers.  This is a gray area and there can be wild swings in value based on certain key factors.  Spend time to understand it and understand it well. 
  1. Poor Communication to people affected by the deal:
    1. Your transaction should be highly confidential. Everyone should be on a need-to-know basis until you can properly communicate and roll it out.  Rumors, misconceptions, turnover, etc. can kill a deal or the value of a deal before it can even be closed.
    2. When you communicate the deal to all affected parties, your communication should be simple, honest, and straight-forward. If people are being let go, say that.  If people are being retained, say that.  The worst thing you can do is let people think up the details themselves and start rumors.  Be clear, honest, and forthright.  Rally the key decision-makers and “influencers” and make sure they feel excited about the deal and have their anxieties and concerns addressed.  
  1. Leadership deficiencies. The key leaders of the businesses involved are very often focused on “the deal”, while the business loses their attention.   The key leaders in the business have to keep their heads out of the clouds and focus on the business and the new strategic initiatives in place as a result of the transaction.  Again, the “deal” is important, but there is a tomorrow.  Executives and leaders that are unfocused can quickly undermine the health of the business. 
  1. Lack of attention to culture. Personally, I am a huge believer in the importance of company culture.  A culture should be disciplined, purposeful, focused, trusting of each other, honest, etc.  The list goes on and on.  I really feel as though this factor can cause huge impacts on the financial success of a business as well as its value.  STUDY THE CULTURE.  KNOW HOW THE TRANSACTION WILL EFFECT IT.  If you don’t have a good understanding of how the culture is driving value, and how the transaction will change it, then you are taking a huge risk.  You might end up in a business book about failed M&A deals and the importance of company culture as such.

I know there are more factors than this that can make an M&A deal go south.  From what I have seen, these are five factors that if done very well the probability of a successful transaction, both short-term and long-term, is substantially higher.  I don’t believe that this is rocket science.  It’s about being thorough, thoughtful, and paying close attention to people.  The people will make all the difference, so make sure you turn on your Dale Carnegie skills and keep them dialed up high each day.

Dan Lucas
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