Six Golden Rules of M&A

We've guided many large and small organizations through transactions ranging from mergers, divestitures, turn-arounds, and joint ventures. On reflection of those experiences, one thing has always resonated with me; there is a fine line that separates success and failure. Some of that obfuscation comes from the definition of what success will look likeor how the transition is managed, but there could be many other reasons why things go sideways.

Here, we share six of our golden rules for approaching M&A transactions with the hope that you might avoid some of the pain we've seen some clients experience.

No matter the deal size, the same bases need to be covered for every transaction

There is a misconception that the size of a transaction predicates the level of risk, amount of work, and synergy benefits for an organization. People often believe that smaller transactions require 'less' work to execute. In fact, we've found that it is the smaller deals that pose the greatest risks and disproportionate workload when compared to deal value and synergy targets. Regardless of a deal's size, type, expected benefits, or complexity, the same pragmatic approach needs to be applied on all deals to ensure that the organization's objectives and value targets are achieved.

Deal structure and integration approach defines the outcome not the transaction's value

The transaction's structure and integration strategy has a closer correlation to 'level of work', risk, and benefits realization rather than deal value or asset level. A transaction's structure and implementation approach defined and designed by the deal team, absent a full understanding of the operational, technology, client, and staff implications leads to increased inherent work while simultaneously raising execution risk. Non-operational groups should not be permitted to define the integration approach in isolation. Solicitation from all departments will better position the organization for a quick and efficient transition. And, all else being equal, pick the transaction structure and approach that is most efficient for your organization.

Speed is your friend - the faster a deal can be done, the more value can be achieved

Once the decision to move forward with a transaction is made, a clearly defined approach and speed of negotiations are important factors in ensuring a successful deal. A prolonged bidding/negotiation process risks the anticipated value of the transaction. In general, we have found an inverse relationship between the duration of the bidding and negotiation process vs. deal value and advantageous terms. Obtaining early 'sign-off' on the bidding approach and operating assumptions up-front often helps to avoid a protracted or indeterminate process. The longer the bidding process continues, the higher the risk of resource flight, press leaks, and mixed messages to the counterparty. The faster a deal is consummated, the greater the likelihood of achieving planned objectives and targeted returns.

Understanding the 'true' impact determines how the transaction performs

Understanding the 'true' financial and operational impacts of a transaction will drive how the transaction is structured and define the blueprint for the overall consolidation. An analysis from an operational and financial accounting perspective helps to determine how the new organization will be fit together. Organizations need to identify the desired accounting methods and treatment prior to the deal (e.g. goodwill) and vet all expected financial impacts or benefits across the business. Another consideration is creating a framework to ensure assets, clients, or key resources are not shed unnecessarily during the transaction or transition period (before closing).

Establishing 'rules of the road' sets overall expectations and pace of the program

The old adage, "Wars are won or lost before they are fought" really holds true. Establish rules of the road and a program framework early in the pre-deal phase for data exchange, communication protocols, analysis, and project organization. This ensures everyone is on the same page. In the integration stage of a transaction, rules of the road help set the overall pace of the program, defines roles and responsibilities, and focuses the organization on prioritized objectives (the minimum requirements for Day 1).

Expect the unexpected

Expect the unexpected from the counterparty (and sometimes your key stakeholders) in the bidding phase, document all communications, and insist on periodic sign-off processes on approach and deliverables. As the transaction progresses, expect the integration risks and challenges to compound. There are always unexpected surprises in negotiating and implementing M&A deals. The key is to plan for these contingencies and have a program framework that can minimize the impact and overcome any unexpected challenges in the transaction lifecycle.

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M&A transactions are high pressure, high stakes, events. Many people are involved and there is a lot on the line. From pulling all-nighters to tracking down stake-holders in Hong Kong (during Chinese New Year!), things can get crazy. But, with the right toolkit and a balance of structure, planning, pace, and leadership, many of the common challenges can be mitigated.