First let’s challenge the assumption – do we need to get better?
- Every piece of research ever done by PWC, Cass Business School or any scholarly research house points to failure. Most journalists summarize the research by saying that 80% of deals are a failure as measured by the acquirer.
- PWC research in 2013 concluded out of 106 executives in Fortune 1000 companies leading acquisitions, less than 40% regarded the deal an operational success.
I think we could be better!
Does the research help us find a better way? – well partly. The following research I’ve reviewed gives the best indicator – Moeller, Scott. “The Good, the Bad, and the Ugly: A Guide to M&As in Distressed Times”. Cass Business School – research covered 12,339 deals 1984 to 2008 – Success determined by? Post-acquisition integration. That’s it. So the secret of our process we’ve developed over 20 years and validated by the research is to build a model around pushing “Integration” to the top of the agenda. Read our Playbook, but here’s the 5 minute version.
A Better Way
- Strategy first, acquisitions second. Buy what you want to buy not what’s up for sale.
- Understand your culture, your DNA as a company. That means prioritizing acquisition targets not just because they fit the strategy box but they appear to fit the cultural box. This is what we mean by placing “Integration” to the top of the agenda.
- As you approach a preferred target you should have assessed how it will fit into your group. I mean a draft integration strategy involving the profit champions. Involve the people that will be called upon to make a success of it.
- Think about the psychology of this approach. It means that every meeting you have with the target, you are constantly looking down the lens of the integrator. You are worrying about the right stuff. Compatibility of customers, systems, products and of course people.
- It means that as you gather facts and data, you are pushing their significance into one strategic and financial model. We call that model, the post acquisition integration model.
- As you align your teams efforts whether internal or external resources, you are converging your efforts around what happens when you own this business. You are constantly mimicking the type of integration that might work. Patent, legal, accounting, marketing, sales, IT, HR, compensation inquiries all have a common purpose – determining the impact this business will have under your ownership. It’s like imagining the whole family living their lives for 2 years in the new house in the new town in incredible detail.
- As your assessment of the target with this approach progresses, you will naturally arrive at the point of determining value and deal structure. Or in so many cases, it should reveal that this acquisition is a bad idea. If you think buying the wrong house is painful, try buying a substantial company that doesn’t work out! By taking a post acquisition integration approach it is much easier to determine the value to your group of owning this target. Equally by studying possible integration strategies, it will become clear that an earn-out structure, or clean total cash at completion structure makes more sense. Fully integrating a target from Day 1 and offering a two year earn-out deal are not compatible.
- Of course even if a commercial deal is negotiated, there is still an essential due diligence and legal contract stage. Again with an integration mindset, you are going to structure the many aspects of due diligence with the right game plan. Instead of it being a fact checking, almost academic exercise, you transform due diligence into a validation of the complete integration plan. Think of all those operational, financial, people and legal assumptions that need to be checked. Is the sales manager of the target really up for the role you have in mind? Does the factory integration plan really make sense? Are you comfortable you understand the reaction the target’s customers will have to the deal? Are you sure there are no ongoing legal complexities that would ruin your plan? There are literally hundreds of key assumptions we make in constructing an integration plan. But they are often assumptions. they need validated as best you can. Don’t let due diligence be a wasted opportunity.
- Finally even after the deal completes, the research is shouting some advice. Heimeriks, Koen H., Stephen Gates & Maurizo Zollo. “The Secrets of Successful Acquisitions.” WSJ Sept 2008 – concluded that post-mortems are a key ingredient to building acquisition expertise. As they said, and I’m paraphrasing, be careful not to confuse experience with knowledge. The number of deals you complete is less important than what you learn from each deal. Building M&A capability is about conducting in-depth post-mortems and always be learning.
Acquisitions are a great tool to achieve success but they present some of the most difficult operational challenges you will ever face.
TPP offers operational expertise to scale your business organically or by acquisition. We continue to transform visions into remarkable businesses.
Perhaps consider an in-house workshop as a gentle way to review your current process.