Is Your Business Looking at M&A? Consider These Questions First
With M&A activity at an all-time high in several industries, you may be considering whether a merger or acquisition makes sense for your business right now.
October 2016 was a record month for making deals, with close to $500 billion of mergers and acquisitions announced globally, according to an article from Bloomberg. Since January, 32 mega deals valued at more than $10 billion each have been struck nationally.
While merging can be an effective way to grow your company, it will be most successful if approached properly. It can take months or even years of careful and strategic planning to form the right deal. Before making any decisions, it’s important to analyze the deal through the lens of your short and long-term business strategy, perform adequate due diligence, and plan for business integration.
Consider the following questions if your company is looking into a merger or an acquisition opportunity.
Does M&A align with your company’s strategic plan and vision?
Your company’s strategic objectives should be at the center of planning a potential move. What are your long-term goals for the business? Will an M&A deal enable you to achieve your operational and/or financial goals?
Once these questions are answered, a list of all potential targets should be developed so the entire acquisitive universe is studied. The management team should methodically review this list selecting which targets will help the company achieve its strategy. This selection is based on requirements ranging from firm culture to geographic presence to product offering(s) to transaction price. If any targets are selected, the acquisitive company should approach the selected target company (or companies) to discuss the opportunity and begin the due diligence process.
Have you conducted adequate due diligence?
Due diligence helps you to identify risks and understand whether the deal is likely to meet expectations for success. Analyzing the assets and liabilities of your target, understanding how cash is generated, and looking at financial and non-financial performance measurements can provide you with a better view of the overall financial picture.
There are quite a few business and legal due diligences to consider performing before making a deal, specifically any financial, operational, IT or tax due diligences. These are tedious but it’s better to know what you are acquiring and thus solidifying and justifying your purchase price before it’s too late.
Financial due diligence addresses the historical information and review of management and systems to analyze any underlying profit. Operational due diligence is primarily concerned with the effects the acquisition may have on the combined company’s future earnings before interest, tax, depreciation, and amortization (EBITDA) and margins. It evaluates potential synergies, costs-to-achieve, and integration risks.
IT due diligence determines the specific complexities, costs, and timings to integrate the IT acquirer and target infrastructures. Tax due diligence will identify the benefits from structuring the deal certain ways (e.g., net operating loss preservation or tax free combinations).
Do you have a post-deal integration plan?
While performing the due diligence is crucial, it’s just as important to have a roadmap explaining what to do after the documents are signed. Integration planning should begin during the due diligence period, in order to create a seamless integration that is intended to achieve the deal’s proposed value.
Mergers tend to fail for one of two reasons: 1) paid too much or 2) failed to achieve the intended benefits / synergies. The second reason is typically more common because businesses often fail to create an effective post-deal integration plan. Poorly planned integration strategies can have negative results, such as loss in customers, declines in productivity, employee turnover, and leadership attrition.
Ultimately, an executable integration roadmap is created at the department level broken down by specific activities with accountable parties and completion deadlines. This will take considerable planning, but the benefits of planning outweigh the costs of not maximizing the integration. When a merger results in a botched integration, the common integration errors include the following:
- Inadequate integration planning
- Loss of focus on everyday operations
- Lack of program leadership
- Lack of a formal and fast decision-making process
- Lack of executive alignment on merger rationale
- Too much time spent on organization politics
- Merger synergies not achieved quickly enough
- Customers and stakeholders forgotten
Although it may take significant time and patience, an M&A deal can bring many positive changes for a company, including adding new service lines, deepening existing expertise, expanding geographic reach, and developing new customer relationships. But it’s necessary to be prepared to handle these changes and the effects they may have at all levels of your organization.
Companies considering an M&A move should speak to a business consultant who can assist throughout all stages of the transaction. Together, you can create a comprehensive M&A strategy that aligns with your corporate goals while accounting for industry and market changes.
