Setting up for successful M&A
By Vincent Dajani
No one goes into a merger or acquisition planning for it to fail, but there’s no guarantee that any M&A transaction will succeed. A successful merger or acquisition doesn’t necessarily raise the company’s production or increase its revenue. Sometimes the success of a merger comes from the ease of the transition, the combination of two cultures and even unforeseen benefits that many CEOs may not have thought of. Setting up for success relies heavily on the knowledge acquired and preparation done beforehand.
Setting up for success
Anyone thinking about a merger or acquisition knows the extensive amount of planning that goes into it. Knowing what to expect during the first year of a merger can easily help put your company in the right direction. Each M&A transaction is different, but they all require the proper amount of planning, says Sean Dineen, director of corporate development at Quaker Chemical Corporation. “Each situation is unique,” Dineen says. “The acquisition of a company with a strong management team that is critical to the future success of the business may require a different approach than a more technology-driven opportunity.”
That’s a lot to plan for. But unforeseen problems arise even with the most elaborate planning. Patrick Stewart, partner at Momentum Advisors, takes CEOs through the process of a merger or acquisition step by step. He knows firsthand how the problems can seem to pile up. “What surprises most acquiring companies are the hundreds of unexpected decisions that pop up all at once,” Stewart says. “Their biggest challenge is to prioritize those issues and make informed decisions.”
When it comes to thinking about an M&A transaction, the first thing to consider is leadership. After the dust settles, a solid leadership team is what will lead the company to success. “If you are merging but buying out the existing leadership, you want them to stay on in a transition to help you integrate all of the employees and the services you’re providing,” says Brian MacMillan, managing director at Baltimore-Washington Financial Advisors.
Bringing in outside help can often ease the leadership transition after a merger or acquisition, but at the end of the day, there can only be one leader. Howard Rosen, president of Rosen, Sapperstein & Friedlander, an Owings Mills, MD-based advisory company, understands the pressure placed on a CEO after a merger or acquisition. “When you take two leaders and put them together, there has to be, at the end, one leader, one person reporting to the board of directors as the CEO,” Rosen says. “It’s his responsibility to set the goals and objectives of the company.”
The keys to smooth M&A are planning and due diligence, according to Mario Conde, partner at CondeBoyce, LLP. “If you handle the problems before the deal, it makes the operations that much easier,” he says.
Being bigger isn’t enough
Be wary from the beginning: Growing your company is not always enough of a reason to merge with or acquire another business. Smaller companies may say they want to sell, but those opportunities may not be the best for a company looking to expand. “We always advise CEOs to be proactive,” MacMillan says. “Don’t just take an opportunity that comes to you. Look at it and try to understand: Is it the best solution or are there other opportunities you should be looking at?”
“Everybody believes there’s great synergy in being larger,” Rosen says. “But a large enterprise [brings] large challenges.” Expanding just for the sake of growing a business often leads to unaccomplished goals or unsuccessful acquisitions. “You should have clear and sound objectives and understand ‘Why did we go into this merger?’ and, ‘Are we meeting these goals?’” he says.
“Us” versus “them”
One of the biggest challenges after a merger or acquisition is creating a complementary corporate culture. Failing to integrate a new culture into a business’ pre-existing one can cause a rift within the work environment. Matt Clyne, president of Direct Connect notes how the “us” versus “them” mentality can stop a business in its tracks. “You’re bringing two different organizations together,” Clyne says. “If they’re not aligned, it can have a negative impact on the company that’s doing the acquisition.
Clyne has seen acquisitions where acquired entrepreneurs continue to use the phrase ‘”You guys do it this way.” He tells them, “You are ‘us guys.’ You’re part of the decisions. If we’re making bad decisions, we can change the rules together. We don’t have to keep doing it this way.”
Merging is really about trying to bring two companies together, not just forcing one company to become like another. Best practices from both sides should be combined to make the new business run as smoothly and efficiently as it can.
“I’ve seen how it’s helped companies when they listened to the guys that we’ve bought,” Clyne says. “They’re sort of accusing me of how we’ve done something wrong, and I think I surprise them when I say, ‘Okay, well, there’s no reason we can’t start doing it your way. Let’s listen to why you are doing it your way.’ It’s really valuable to get a third party or an independent perspective.”
Larger companies sometimes find it hard to listen to smaller, acquired businesses. “It’s harder for well-run companies to take advice from an outsider because when you’re doing things well, you feel good about what you’re doing,” Clyne says. “If someone comes in and says, ‘This is a bad way to do it,’ a lot of the time they’re right. A really-well run company can learn a lot from the company they’re acquiring, and it can change both organizations in a good way.”
Profitability without direct revenue
Even after all that planning, many businesses still report revenue losses within the first few years after a merger. With the statistics and stories of unsuccessful and failing M&As, post-merger revenue losses and M&A nightmares, how can companies still succeed? Sometimes the bottom line doesn’t mean direct revenue. Businesses can achieve successful M&As through a variety of ways other than profitability, such as trade secrets and entrances into key markets.
Other times, you may hit the jackpot with a hidden asset that you didn’t even know existed, or at least get an interesting anecdote out of the deal. “There was a company that purchased a wallpaper manufacturer. They bought the company thinking there [were] going to be all of these neat customer relationships, all of this increased sales volume,” Stewart says. “But what they did have was a tremendous amount of copper rolls that they used to make wallpaper on, and the copper rolls themselves paid for the acquisition.”
Not every deal can be as lucky as finding copper piping, but that’s all part of the gamble.
Jan Monster, senior director of corporate development at Teleflex Incorporated, believes in his strategy of going through multiple M&As to increase experience and the likelihood that you will be successful. “You always have some [deals] that work out better than others,” Monster says. “On average, you’ll be successful.”
The first year after an M&A is critical, believes Edward Hackert, partner of assurance services at Marcum. “The one-year period immediately following a merger is the timeframe in which the indicators of longer-term success or failure will typically emerge,” Hackert says. “This is [when] the ‘deal theory’ is put to the test and [it becomes clear] whether the value drivers contemplated in the merger plan are realistically attainable.”
With proper planning, goals and objectives, and a leadership team that takes charge to create a positive experience for both the employees and the customers, there’s no reason a merger or acquisition can’t succeed. The reward, whether financial or otherwise, could be worth the risk if you approach M&A with the right strategy.
The expert advice sounds great in theory, but how does it translate to your real-world experiences with M&A? We asked local leaders to share their experiences with M&A and reflect on what would have made the process run more smoothly.
“After all mergers and acquisitions, there is a ‘growing pains’ period during which you must confirm that all teammates are operating from the same values platform. At Optimal, our core values are: tell the truth, do the right thing, everyone benefits. Although we did our due diligence in assessing corporate culture, we had to spend some unexpected time fully integrating the new Optimal teammates into ‘the way of O.’ There is no substitute for due diligence. You must vigorously test your assumptions and spend as much time within the organizational structure as you do with the numbers.”
“My advice is talk to your team. I brought in my two business partners very early on, knowing we wanted to be successful. [The merger] exceeded my expectations. We’ve had strong collaboration among our groups. We’ve put very aggressive task forces together in building our presence when working with clients. We’ve increased our size to 20 or 30, and by the end of the year we’ll probably double that. It was a very expedient process. We had all the due diligence and paperwork put together and it was just a matter of getting the announcement out. You want your clients to be as excited about it as you are. They were all wishing us well, and that was what we wanted.”
“Do [a lot of] pre-merger relationship building and due diligence on the key people being merged to be sure you know what you are getting. If you find out there is a bad egg or two in the batch once the merger is consummated, act swiftly to remove them or it will be increasingly damaging as time moves on. We found that a couple of senior-level people who we brought in with the merger were in some cases less capable as leaders and business strategists than we thought, and some just could not accept not being the top dog.”
“During due diligence, ask as many questions about personal philosophies, family, and future goals and aspirations as you do about accounting. Buying a printing press is easy; keeping the person who knows how to operate it is where the value lies. If that person is not going to be comfortable in the new environment — or worse, could be toxic to your existing environment — the deal is not worth [it]. In the end, the numbers are a way of quantifying fairness, nothing more. If either side goes into it just for the money, they also better go in with an exit plan if you’re acquired, or expect to lose people if you are the acquirer.” CEO