Success or failure in a business deal is often determined by comparing the amount a buyer pays for the company against the value it returns over time, says Leroy M. Ball, president and CEO at Koppers Inc. The best opportunity can turn out to be a losing proposition if you overestimate the value of the business you’re acquiring.
Koppers is an integrated global producer of carbon compounds and treated wood products for the aluminum, railroad, specialty chemical, utility, rubber, steel, residential lumber and agriculture industries. Ball has led the company since 2015, but he has learned a lot about M&A throughout his career. His biggest lesson came about when he didn’t pay enough attention to personnel issues.
When you’re making an acquisition, you have to let people know as soon as possible whether there is a place for them in the new organization. You need to spell out where their job will be located, who they’ll be reporting to, what their pay and benefits will be, and other changes in organization or strategy that could affect them, Ball says. This becomes critically important as you seek to win support and engagement early in the integration.
“Uncertainty in an organization leads to chaos and confusion, which is a recipe for disaster, so make sure that you address the people issues head-on as early as you possibly can in the process,” he says.
Ball focuses on four areas to get the best chance of a great outcome in each deal.
The first step is to temper your emotions. Negotiations are always a chess match in which the seller tries to get key decision-makers to fall in love with the deal.
“Always ensure that you have at least one key individual playing the role of skeptic and planting seeds of doubt in the seller’s mind to minimize the leverage they try to extract on those that have bought the story,” Ball says.
At the same time, make your due diligence thorough. Major risks must be identified, valued and considered — either as part of the final consideration or protections built into the reps, warranties and escrow of the purchase agreement.
“Nothing can take a good deal south quicker than an unexpected or undervalued risk popping up within the first couple years of ownership,” he says.
Cost synergies can be relatively easy to identify and well within the buyer’s control. They are not, however, what typically separates a good deal from a great deal.
Market-facing benefits are the true catalyst. Sales and profitability that come from new channels to market, access to different geographic markets and new product development opportunities can all take a deal from marginal to amazing.
“An important caveat is to make sure that you do your homework and understand the possibilities, but risk-adjust those opportunities heavily,” he says. “They are often the hardest to depend upon, and come with margin eroders that are unaccounted for and reduce the overall value of the benefit. Pay as little as you can for potential market benefits and you give yourself the best chance for success.”
Finally, don’t discount the impact of integration. Set expectations early and deliver upon your promises.
“Even when people don’t like the message, they will respond much better when they believe they are being treated in a forthright and honest manner. People need to understand their place in a new organization as soon as possible. The atmosphere during an acquisition is ripe for gossip and lack of credible information will only fuel it to dangerous levels,” Ball says.
Communicate often and honestly, and set yourself on the road to success, he says.