The WSJ recently published a great summary of the worst deals in history titled, “How Bayer-Monsanto became One of the Worst Corporate Deals – in 12 Charts” (Aug 28, 2019).
In April 2015, before the acquisition of Monsanto, Bayer was the most valuable German company at a value of $128 billion. The $63 billion Monsanto deal closed in June 2018. Today Bayer’s market capitalization is now close to $70 billion. Were they alone in failing to deliver acquisition value? Nope. One year after the following acquisitions, the acquirer’s share price dropped dramatically. Bank of America acquired Countrywide, a 45% share price drop. Alcatel acquired Lucent, a 39% share price drop. AOL acquired Time-Warner, 37% share price drop. Sprint acquired Nextel, 29% share price drop.
The acquisition of another company continues to be a graveyard of failed dreams, disappointments, and of course some bad luck.
Did these acquirers follow a rigorous process to mitigate risk? I don’t know. But it is shocking how many acquirers enter the M&A arena ill-prepared for successful acquisitions. Acquisitions are often risky capital investments but risks can be mitigated with the right playbook.
Secret Sauce Rules
This rule book will give you a quick health check on your process:
Strategy
- The deal must make strategic sense. They are a tool to execute your strategy. They are NOT a strategy.
In real life we observe – deals are ego-driven, a prize being chased by an over-exuberant chairman executed in a frothy market where everyone seems to be doing deals. - Don’t acquire businesses that are for sale ……..unless they make strategic sense.
- Remember who you are. Understand your DNA. Don’t buy businesses you don’t understand.
Laidlaw Buses acquires an ambulance business (that’s a healthcare business, not a bus business).
Search
- It is imperative you establish a shopping list of the type companies that make sense – the Acquisition Profile.
In real life, acquirers often take a passive approach to target identification. Hoping investment banks and brokers will bring them relevant deals (which of course are up for sale). - Define search criteria that are not too broad and not too narrow. In real life, the search criteria are often flawed. There’s a parallel here with acquiring talent. Often the search criteria are way too broad resulting in 1000s of irrelevant results or too narrow resulting in zero targets.
- Align your profile with your strategy. Often we see a disconnect between the well thought-through strategy and the search criteria.
- Post-acquisition integration planning starts several months before the close of the deal. It forms part of your valuation model. How can you value a business without knowing how you will integrate it. Often, the degree of integration difficulty is never considered at this early stage. Therefore overseas small targets appear on the list, without considering the investment of time and money required to execute the post-acquisition strategy in France, Japan, Ireland, New Zealand, etc.
- Building an Acquisition Profile which highlights on one page the essential elements of the potential targets is key. The nature of the business, sectors, size, location and yes even the ideal cultural values are worth trapping. A practiced acquirer can often tell, from a deep dive into a target’s website prior to any meetings, that there could be integration challenges!
Target Assessment
- First impressions are crucial. Overprepare for first-time meetings.
Often the acquirer demonstrates weak empathy for entrepreneurs resulting in poor first impressions. - Public companies be careful not to believe your own publicity.
Public companies often display arrogance to the smaller private company owners. - When you are buying you are selling. You are selling the sizzle, the excitement of enhancing people’s careers. It a chance to confirm the need for the target’s talent to stay and build a new future. These meetings are not just about acquiring information but about assessing the fit. The cultural fit, the strategic fit and the potential for a successful financial outcome for everyone. Each buyer stands in a unique set of shoes, their own!
Pricing & Negotiation
- Valuing a business needs to build in the post-acquisition integration strategy. Often because the post-acquisition strategy has not been considered up to this stage, the value of acquiring the target is not fully understood resulting in bad pricing.
- Clear integration thinking drives smart deal structures. Equally a lack of rigorous integration thinking results in the wrong deal structure e.g. the acquirer intends to fully integrate all departments into their organization making an earn-out deal structure linked to profits performance impractical.
- Build experienced negotiation skills into your team. Often we observe, the negotiation skills of the acquirer are weak, partly from a lack of practice. The seller, on the other hand, has spent the last 10 years negotiating in the weeds to win attractive customer contracts.
- Acquirers are defined by the questions they ask. Often the acquirer lacks the curiosity to question a seller’s position on an issue, leading to misunderstanding and a lack of trust.
- The final stages of negotiating private company acquisitions are all about building on a foundation of trust and knowledge from previous meetings and analysis. Practiced acquirers are always calm, polite and in control. These can be tense meetings where the sellers are discussing a lifetimes work. These meetings take care and skill. They often involve using questions to understand positions and an empathy level most acquirers don’t possess.
Due Diligence
- Use it to validate your post-acquisition integration strategy. These are often missed opportunities where the priority seems to be to validate financial performance. Of course, all forms of due diligence have a data validation element but they a golden opportunity to validate your post-acquisition plan. Will your post-acquisition IT, sales, finance, production plans really work?
- Interview senior key people. Understand how they act and think in a social setting. How they’ve solved problems encountered in the past. Often It’s a missed opportunity to assess the senior leadership team you’re acquiring.
- Be open with the seller as you uncover critical flaws. Talk them through. We find critical issues uncovered are not flagged up and discussed with the seller because trust is weak. Instead, due diligence issues are used as weapons to bring the price down.
- Successful due diligence teams clarify up-front with sellers what the scope of the investigation will cover. The team clarifies the important issues they are basing the deal on. Not just financial but strategic, people, customer and cultural reasons. This gives the seller some warning of the acquirer’s priorities. This is always appreciated by sellers and continues the open, transparent platform that has been built.
Post-Acquisition – FAILURE TO EXECUTE CORRECTLY IS THE MAIN REASON FOR ACQUISITION FAILURE
- Appoint an Integration Director to project manage the integration phase (180 to 365 days).
- Over-communicate, from the town hall welcome to the weekly departmental workstream meetings.
- Build task lists by department that work towards a stated future state.
- Onboard acquired staff with care.
- Form departmental teams with a buddy system involving a department leader from the acquirer and the appropriate manager from the seller.
- Learn from every deal. A post-mortem is often not conducted resulting in a lost opportunity to get better at acquisitions after every single deal.
- Define deal objectives and success criteria and measure it!
Our rule book demands that post-acquisition planning is built into the early stages of the acquisition process and revisited continuously up to and beyond closing. We believe you need to approach acquisitions like buying a house assuming the family in the house are coming with the deal! Acquisitions are for operators. Really good acquirers are also really good at running businesses.
Our Acquirer’s Playbook sets out our process map packed full of operator tips. Of course, you can read as many books as you like on golf, but it doesn’t make you Tiger Woods:)
Contact Ian at Ian@TPPBoston to discuss our workshops, our engagement philosophy or just to arrange a chat.
