Formulate a Clear M&A Strategy

Mergers and acquisitions are a strategic choice. Favorable regulatory environments, economic expansion, the emergence of new technologies, high stock prices, and liquidity in credit markets have all contributed to creating “waves” of M&A characterized by periods of high and low transaction volumes. M&A is a high-risk growth strategy, with ample evidence demonstrating that buyers struggle to capture value from their transactions. Yet, the Oxford M&A Insights Project found that almost two-thirds (64%) of respondents indicated that their company is “very likely” or “likely” to conduct future transactions. This chapter provides an overview of the strategic options for M&A and how firms develop their M&A strategies. The tools, templates, best practices, potential pitfalls, and a case example of how to go about setting a clear M&A strategy are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Introduction

While mergers and acquisitions are a multistaged and cross-functional process, too often corporate leaders view M&A as a financial exercise to expedite their growth strategy. This approach increases the likelihood that results-destroying implementation problems will arise in the subsequent post-transaction stages. Combining M&A experience with a systemized and documented M&A process has been found to improve success. Despite evidence that a systematized M&A process improves deal success, other research has found that almost two-thirds (60%) of surveyed executives indicated their firms do not have a comprehensive end-to-end M&A process model. Therefore, this chapter presents a management-oriented “Deal Flow Model” providing an integrated and actionable end-to-end view of the M&A process, consisting of ten stages across three phases.

Integrate to Achieve Accelerated Synergy Capture

A study of 1,000 corporate and private equity executives found that post-deal integration was the number one factor in realizing deal success. While the term “post-merger integration” (PMI) is commonly used, it is very much a misnomer, as PMI should begin early in the deal process, prior to deal close. This chapter covers three main PMI phases, ten key PMI work streams, agile integration management, and how to accelerate synergy capture during integration. The tools, templates, best practices, potential pitfalls, and a case example of how to conduct effective M&A integration are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Consummate to Reach Transaction Close

The period from signing a negotiated and agreed sale and purchase agreement (SPA) to actual deal close is full of hurdles, including satisfying regulatory requirements, gaining third-party approvals, and securing shareholder consent for the transaction. This chapter provides an overview of the key elements of consummating a transaction, from “signing to closing,” and covers the SPA; regulatory requirements and reviews in the United States, United Kingdom, and European Union; national security regulatory reviews; public versus private transactions; asset versus stock sales; closing and post-closing requirements; determining a final transaction price; methods of funding; break fees; earn-out provisions; and the impact of activist investors on M&A. The tools, templates, best practices, potential pitfalls, and a case example of how to move a deal from signing to closing are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Evaluate to Measure and Report Deal Success

Throughout the ten-stage Deal Flow Model presented in this book there are numerous aspects of the M&A process that when measured are more readily managed. M&A measurement can take the form of process as well as outcome measures. Moreover, M&A assessment is not just to inform. Effective M&A measurement should also support the agile nature of pre- and post-deal activities by prompting both corrective and celebratory actions. Well-defined measures also provide the foundation for rewarding and recognizing people who help achieve desired goals. This chapter covers the benefits of M&A measurement, various types and categories of M&A measurement, and using multiple M&A measures to tell a more complete story. The tools, templates, best practices, potential pitfalls, and a case example of how to effectively measure M&A progress and success are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Innovate for Revenue Growth

For deals with the strategic aims of acquiring new content and technologies, accessing new customers and developing new capabilities, revenue growth is at the center of the value proposition. Consequently, innovation for revenue growth becomes the mantra for the combined firm. Transactions can help or hinder the combined company’s ability to innovate. This chapter presents practical approaches to innovation for revenue growth during M&A, including a clear definition of innovation, innovation beyond R&D, and actions to promote innovation across the combined organization. The tools, templates, best practices, potential pitfalls, and a case example of how to effectively address innovation during M&A are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Motivate for Maximum Workforce Productivity

A survey of 124 executives and mid-level managers from 21 different industries discovered that 3 core issues dominate the “human side” of M&A as being most important to deal success: communication (90%), retention and “re-recruitment” of key talent (86%), and cultural comparison and integration (81%). However, the Oxford M&A Insights Project found that activities to address these aspects account for just 15%of the activities respondents feel their firms do well: communication (6%), talent management and retention (5%), and cultural analysis and integration (4%). This chapter presents proven pragmatic approaches to M&A communications, retention and “re-recruitment” of key talent, and organizational cultural comparison and integration. The tools, templates, best practices, potential pitfalls, and a case example of how to effectively address the “human side” of M&A are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Negotiate Clearly Defined Deal Terms

M&A negotiations are a process rather than an event and encompass much more than just price. Common negotiation areas beyond price include management decision-making and control, earn-out provisions, positions and roles, severance, organization structure, compensation and benefits, location, perks, and many others. This chapter covers common M&A negotiating terminology, integrative versus distributive negotiations, long- and short-form letters of intent (LOI), term sheets, key steps in M&A negotiations, and hostile takeovers. The tools, templates, best practices, potential pitfalls, and a case example of how to go about effective M&A negotiations are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Locate Targets That Fit Your M&A Strategy

Deal sourcing involves creating leads and managing relationships to bring about a potential M&A transaction. A firm’s approach to deal sourcing depends partially on market conditions. As M&A waves gain strength there is often an abundance of capital pursuing too few deals. Conversely, in down M&A cycles deals are easier to source. In either circumstance, it is important that any prospective acquirer has a clear deal sourcing approach in order to maximize the chances of accomplishing their M&A strategy. This chapter covers three main categories of deal sourcing, the differences between financial and strategic buyers, and the M&A auction process, and differentiates between the strategic and organizational fit of M&A targets. Tools, templates, best practices, potential pitfalls, and a case example of how to go about deal sourcing are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.

Valuate to Determine a Realistic Price

When valuing target companies, carefully scrutinizing the assumptions that go into creating valuation models is equally as important as, if not more important than, “crunching the numbers.” While valuation is about numbers, because of the tendency for management to overpay for companies they buy, this chapter focuses on behaviors more than numbers, while providing an overview of commonly used valuation techniques. This chapter addresses why buyers overpay, the damaged caused by overpayment, key predictors of overpayment, enterprise versus equity value, accretive versus dilutive acquisitions, and fairness opinions. The tools, templates, best practices, potential pitfalls, and a case example of how to produce a realistic valuation are also addressed, along with the main participants, core activities, buyer’s and seller’s perspectives, and key cross-border considerations.