How to Get Started in M&A

 

Leadership Principles for Executing Your First Acquisition
By Mark Herndon, Chairman of the M&A Leadership Council 

Along with the surge in overall M&A activity during Q3 2020, another critical M&A trend has emerged – a surge in first-time acquirers. (See related Chairman’s Message article). 

In the last 60 days, we have met with over a dozen of such executive teams ranging from roughly $100M to well over $3B in annual revenues that are just now venturing out to buy their first-ever company – or in some cases, their first acquisition in recent history.

It’s a daunting challenge, with far more decisions, risks, and diverse subject matter domains than can easily be assimilated by even the most talented executive teams. Frankly, every skilled M&A executive is the product of great mentors and deep M&A experience. These seven leadership principles for first-time acquirers are based on advice from several of my mentors. They encapsulate a framework that can help any leadership team embarking on their first  M&A journey.

  • The side with the best advisors wins. Ideally, M&A is not a “winner-take-all” conquest. It is a team sport, requiring depth at many different positions. Especially during your first few deals, you will be highly dependent on the right team of advisors. Not just lawyers and accountants – be sure to include an overall strategic advisor and process manager and support for critical functions such as IT and HR. Get your team on the field early and align all parties to the process you will be following instead of being pulled in slightly differing advisor-specific approaches. Work to eliminate unnecessary overlap among advisors by insisting on solid scope management.
  • M&A is a process, not a one-off transaction. I’ve heard well-intentioned executives say that “buying companies is fun, but integrating them is not.” In my view, that reflects the old school and less-than-effective way to think about deals as a one-off transaction. Instead, M&A is a strategic process for growth. Just like any process, your leadership team and those responsible for executing it must understand and align on the phases, decisions, risks, events, and key milestones throughout the entire M&A lifecycle. It is still true that deals can and do fail at every phase of the process. Aligning your leadership team in advance on the key risks, critical priorities, and lessons learned at every phase of the lifecycle will enable them to lead through and across each phase more effectively and with less unanticipated value-erosion.
  • Resourcing is key to deal-thesis attainment, so build in appropriate costs to the deal’s financial model. Over the last ten years, the M&A Leadership Council and its partner organizations have trained over 4,500 executives from more than 700 companies in nearly every industry sector. During that time, the single greatest lament we repeatedly hear from executives is the dearth of resources allocated and available to execute the required revenue growth, cost-synergy take-out, or the sheer magnitude of integration requirements to achieve unified operations. Resourcing, as we are referring to, includes both the CapEx and working capital to execute integration objectives and the talent resources – both internal and external staffing needed. Typically we advise organizations to think about the resource challenge as a multi-layered wedding cake, with a few solely dedicated resources at the top and other key leaders and SMEs partially allocated to M&A in a “National Guard” call-up fashion for periods of the transaction and integration. Finally, the remaining layers are primarily completing M&A tasks in addition to their day-to-day roles. However, a caution is in order – without the dedicated resources at the top of the program, no matter how large your army of part-time soldiers is, your plan will likely struggle to attain the desired business results.
  • Disciplined acquirers are the best acquirers. One mentor often told me, “deals are like a city bus…another one will come along in 15 minutes.” Another was fond of saying, “never shop while hungry.” However, you want to say it; their counsel is essential. Know what you are looking for. Don’t buy opportunistically even if the investment banker’s pitch deck is compelling unless the deal meets a specific strategic objective better than any other alternative. Finally, remember that the best deals are your proprietary deals, meaning you know, have worked with, or have directly sourced the target company internally. One serial acquirer that has been trained by the M&A Leadership Council maintains a sector-specific list of potential targets with several hundred potential acquisitions, each ranked by disciplined search and sort criteria. The key leaders maintain periodic updates and strategic discussions to ensure they are not buying “green bananas.”
  • A fast “no” beats a long “maybe.” During due diligence, get the “knock-out” questions on the table as fast as possible. Use a Diligence Management Office to orchestrate and coordinate the process to achieve higher quality results in a more compressed time frame by freeing the deal team to concentrate on working on the issues vs. herding the multiple internal and external diligence team members. Use a prioritized diligence process and checklist to prevent “boiling the ocean” and prevent overwhelming the target company with data requests not yet needed. Finally, since you will be dependent on multiple advisors during your first few deals, be sure to carefully manage the scope carefully, roles, and processes each firm will attempt to impose on you. Often, 40% of a typical “standard generic” due diligence list may be duplicative among various advisors. While some background due diligence context is essential, managing scope and advisor roles carefully will ensure more effective and timely counsel.
  • Redefine integration. If your organization’s view of integration sounds more like connecting wires and hooking up the plumbing – watch out – you are heading for a disaster. The best definition of integration I have ever heard doesn’t even mention integration per se. Here it is, “Integration is the process of accelerating the delivery of value expected from an acquisition by leveraging the assets (people, core capabilities, processes, IP, systems, and cultures) of the buyer and the acquired company.” Integration begins in due diligence. The integration strategy framework should be architected before the initial announcement and validated with an additional and detailed understanding of and comparing the buyer’s operating model and the target company’s operating model during a comprehensive integration discovery process. Value-driver initiatives should be established as critical “super-priorities” and placed above the functional or cross-functional integration milestones to focus and enable leaders and team members. Like all aspects of M&A, integration is perhaps the ultimate “experience-driven” capability set. Invest in a skilled integration leader and program manager. Perhaps most important of all, remember that an ounce of change and communications is worth a pound of financial modeling when it comes to integration. Invest in highly experienced change management, communications, and culture resources and focus as much executive time on these core change-levers as you do on the operations and functional decisions.
  • M&A’s must be led, not managed. A study led by M&A Partners and the M&A Leadership Council (The State of M&A Integration Effectiveness) found that among 40 specific M&A integration best practices, executives’ ability to make timely, effective decisions was one of the top five best practices most highly correlated with the organization’s ability to achieve desired revenue synergies. This inherently makes sense, but in the line of fire and confronted with the myriad of urgent, important decisions, even highly talented executive teams can freeze and delay at the very moment most in need of bold, effective decisions and strategic clarity. The right governance approach can help with clear rules of escalation, decision authorities, and a defined decision process that enables executives to manage critical decisions and dependencies when and where needed.

Finally, keep learning. The best acquirers are the best learners. No mere mortal can truly master all the skills, experience, and wisdom needed for every M&A challenge or every new deal you will encounter. These principles, along with the core skills and capabilities from the right internal and external leaders at your side, will enable you to avoid the land-mines and accelerate your organization’s growth and build future capabilities that will ensure even more success the next time around.