Michael’s M&A Playbook: Why M&A Transactions Fail
Independent of the type of M&A transactions, most of the M&A deals don't add value. You can read many different statistics for different industries and countries that show it. M&A can be difficult, but by following the right approach, you can add tremendous value. The focus of my M&A Playbook is to guide you through the big topics and best practices to make M&A transactions successful; however, it is also worthwhile to discuss what can go wrong. Here are the most significant issues I found in my deals and the lessons learned. They will help you in your next transaction.
The 5 Biggest Issues in M&A
Overvaluation of the target company - Number one of my Top 10 M&A rules is not to fall in love with the target. I have often seen companies pay too much for the target company because the decision was not data-driven. The lesson learned: Develop a data-driven approach to how you can add value to your company. This is the value capture approach (also called investment thesis). Ensure you have benchmarks from other deals in the same or similar industry and get input from investment banks/advisors. Include risk adjustments in the business case and compare synergy capture (i.e., cost savings) assumptions with your historical achievements.
The due diligence didn't find significant issues - Digging through all of the details in a data room is a challenge, and you can get easily lost in the details. Especially with smaller firms, I have seen that they want to save money and work on the due diligence themselves. Lesson learned: Due diligence differs from the regular analysis of a business's monthly results. There are experts in accounting firms who have more experience finding issues in the numbers and determining was is missing (but should be included). The Quality of Earnings (QoE) reports from accounting firms are an excellent tool for analyzing the financial performance of a target company. The ideal situation is to combine your in-house knowledge with external expertise. I always found that this combination is the best way to understand the target company better.
The integration failed - The integration of another company touches every aspect of the business, from marketing and product development to sales, operations, customer services, and administrative functions. Many companies underestimate the complexity and start developing an integration plan too late. The result can be confusion about policies, processes, and responsibilities. Another reason for problems is that the pre-closing and post-closing teams (in bigger companies) don't work together during the pre-closing phase. Lesson learned: Start early in the M&A process with ideas about the integration and fill the gaps step-by-step during the pre-closing period. At the time of the closing, you need to have a fully developed integration plan with priorities. Don't try to solve everything on day 1. Another success factor is the project manager: The more experienced the project manager of the integration is, the better the results. Read more about best practices in change management in my other article.
Key people left the target company - People and talent management is the most crucial element. Sometimes, key people in the target company leave at closing and shortly afterward. I have seen cases where this has affected sales and operations significantly. Lesson learned: During the due diligence phase, define who are the target company's key employees and prepare incentive programs for them to remain in the company (e.g., a stay bonus). The right people in the right role can make anything work. From a legal perspective, ensure you have non-solicitation clauses in the purchase agreement. Also, focus throughout the M&A process on relationship building. This is important for the negotiations and later during the integration.
A divestiture was not on the table - Despite following all M&A steps, an acquisition can fail. You definitely need to try different ideas and approaches to make it work; however, after some years, there is also a time when you need to consider whether the sale (or closure) of an acquired company is the better solution. It is a difficult decision for most companies, and many studies show that a divestiture is often not even on the table. Probably most of us have seen issues with "pet subjects" in companies. The lesson learned: Apply the concept of sunk costs, which is, in essence, not to throw good money after bad. You cannot change the past, but you can make better decisions today for the future. In your calculations, exclude historical investments and only look at future cash flows. Historical losses are sunk costs.
Follow Best Practices from my M&A Playbook
The more complex an M&A deal is, the better it is to follow a process. I have developed an M&A Playbook that addresses the most crucial topics of an M&A transaction. Also, remember that you don't have to solve everything by yourself. Combining your best people with external experts makes it easier to be successful. You can make it work!
Feel free to contact me to discuss specific mergers and acquisitions examples.
