In my last blog, I pointed out the value of certainty in M&A. As increasing levels of scrutiny are applied to deal success by stakeholders, there is a requirement that growth by acquisitions become more of a core competency for active buyers just like other competitive advantages within the company. There is great value in the certainty that an acquisition will be successful. But, most are not.
Certainty can only come by the ways in which we consistently prepare for and execute a combination. For many companies it’s again, time to rethink what we are trying to achieve at certain phases of the acquisition (Strategy and Readiness, Due Diligence, Pre-Announce, Pre-close, Post-close, Optimization). For example: Who determines the strategy and readiness of the organization? Who is involved in the diligence? Who is involved in the preparation to announce? Who plans for the integration? When? And then there is the big question: “When will the value be realized?”
Key learning: In M&A, the intended value of a merger or acquisition comes long after close and seldom is value created near-term. In most cases, simply breaking even is difficult when considering the deal premium, acquisition costs and the things that erode value from the day the deal is announced.
Take a look at the chart below:
In our Art of M&A workshops, the Leadership Council is quick to point out that Value Preservation can be a worthwhile goal into itself, until well past close unless well executed practices are employed early in the process.
Today’s Nuance Practice: A Value Preservation Strategy should be agreed to between the management, deal team, diligence team and integration leaders before the LOI and announcement.
Far too often the management and deal team becomes too enchanted with the Value Creation end of the story. “What we are going to be when we grow up.” They forget that in order to create value, you have to stabilize the combination and preserve the value you are acquiring before thinking about creating new value.
A couple of years ago we had the opportunity to coach a large company in the energy business prior to announcing a potentially controversial acquisition. We had provided the management team with insights to a clear preservation strategy beyond the announcement and the best practices for key employee and client retention, etc., etc. So when we were presented with a draft copy of the CEO’s public announcement of the deal, we were surprised the primary messages were typical, “a vision for the future”, “how good this deal will be for the Stakeholders” and the “positive impact on the environment”. They had even admitted that a 10% hit to the stock price was anticipated. But nowhere did it talk about a value preservation strategy for the integration. When asked that we make modifications to the draft document, we quickly added three critical pages that focused on the actions that would be taken to stabilize the business going forward. These pages focused on the expertise and experience of the organization and their advisors. They reassured the investment community that the company knew the importance of integration, the challenges ahead and what actions would be taken to mitigate risks. The announcement went from chanting how great this will be for everybody to a well thought-out reality…… and the market loved it. The stock closed up 15%. One investment banker called the announcement honest and refreshing.
Today we see more and more companies who close deals concurrent or within days of the announcement. It’s hard to believe after decades of study and validation of best practices, that there are acquisitions being made today just as they were in the 1970’s and 1980’s:
- Silence until close
- No Pre-planning
- Over-the-wall
- No playbooks
- No training and no experience
- Resource constraints
Unless an acquirer has trained full-time integrators with well documented playbooks, who are brought in early with the deal and due diligence teams, the thought of a simultaneous, announce and close will make it very difficult to preserve the value of the deal, not to mention increase the value.
Photo: the icebergfestival.ca
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About the Author: Jim Jeffries is the founder and Chief Executive at M&A Partners. He has held C Level positions in multiple consulting companies and industry. Mr. Jeffries’ background includes P&L responsibility at various size organizations during multiple stages of growth. He is also a CEO coach and advisor in global leadership development. His particular strength is in creating organizational vision to stimulate revenue growth while optimizing returns on invested capital. He has been quoted extensively in USA Today and in recent releases of The Art of M&A book series published by McGraw Hill.