How M&A Deals Are Like Marriages and What To Do About Failed Expectations

 

This month, the Principals of Revitalization Partners assisted by a Partner of a Private Equity firm, an operational restructuring manager and an Investment Banker, presented a panel discussion at the Seattle meeting of the Association for Corporate Growth with the title listed above.

The concept came from a study by Grant Thornton entitled “Defining What Is Vital For Deal Success.”

 

TRULY STAGGERING DATA …

Some of the data presented in the study is truly staggering when you consider the amount of money available for M&A transactions and the valuation multiple that are found in the market today.

From strategy to implementation, there is a significant opportunity to capture greater value from M&A transactions.

The survey supporting this study showed that only 14%of survey respondents found that their deals exceeded their initial expectations for income or rate of return.

Only 36.8% agreed that efficient M&A execution was a well understood core competency of their company.

 

DESPITE RECORD HIGH VALUATIONS …

Despite valuations being at an all time high, competition for deals continues to increase.

As a result, it’s more important to understand the due diligence process and realize that in addition to understanding the strategy behind the deal, understanding the impact of the financial, operational and most importantly, cultural compatibilities are critical to a successful transaction.

The survey showed that companies can attain much greater clarity at the beginning of the process. Only 38.2% of respondents indicated that they were very clear on precisely what acquisition targets they should pursue and only 32.5% were clear on what they should be paying.

As a result, M&A transactions often fail to add shareholder value.

 

STEPS TO AVOID FAILURE …

When evaluating a deal, there are several steps to take to attempt to head off a failure:

1. Ask hard questions and test your team’s financial assumptions
2. Scrutinize deal protection terms and, in hostile situations, defensive measures
3. Learn why management seeks to pursue (or oppose) a transaction.
4. Carefully review any analysis prepared by management or financial advisors and verify Key assumptions.

 

WHEN ASKED TO RATE SUCCESS …

When asked to rate their success at identifying specific risks, survey respondents confirmed that a handful of issues were overlooked.

  • Overall, 39,7% rated themselves strong at customer retention;
  • 42.7% rated themselves high on employee retention and
  • 39.7% thought they were good at financial reporting compatibility.

 

 

MAJOR REASON EXPECTATIONS NOT MET …

Finally, we get to the major reason that most M&A transactions end up not meeting expectations; that of cultural issues.

There are a few tenets that are required for successful cultural integration.

1.  Never ignore or understate cultural issues. According to Peter Drucker, “Culture eats strategy for breakfast.”
2.  Address the cultural compatibility early in the process and develop a strategy for addressing problems.
3.  Conduct cultural due diligence; Look at multiple cultural dynamics and organizational beliefs.
4.  Understand why you are buying the target company and value those reasons and their culture.
5.  Reinforce commonalities and focus on things that you both share and value.
6.  Address differences, openly discuss issues and integrate where possible.
7.  Look beyond the obvious. You may have similar missions and values, but differences in degrees of hierarchy and attitude can derail the process.

 

ALL DOWNSTREAM REACTIONS …

All these downstream reactions to a merger can have a negative impact on both top and bottom lines which can undermine the initial deal valuation.

The challenge after the close isn’t always making 1 plus 1 equal 3; it’s sometimes insuring 1 plus 1 still equals 2.

And lastly, if you are considering or involved in an acquisition or merger and have concerns about the issues, look for help.

Members of Revitalization Partners have supported transactions on behalf of companies and private equity groups on both the buy and sell sides and are currently involved in a buy side transaction.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at:
https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.