M&A success Featured

6:37am EDT January 31, 2006
Far too often, merger and acquisition endeavors lead to disappointing outcomes. Many M&A attempts simply crash and burn before reaching closing, after consuming lots of time and money. Then, according to a Harvard Business Review report, only one in six completed transactions ultimately achieve the hoped-for financial benefits.

Why do so many acquisition transactions fall apart during negotiations, produce under-performing results or, worse yet, wind up causing disastrous consequences? Such setbacks are frequently rooted in the absence of a tailored M&A strategy. Many transactions get underway without the acquirer having established a clear picture of what kind of acquisition might truly make sense.

Also often lacking is a planning road map that addresses how to overcome obstacles to a smooth integration, and that lays out steps to quickly capitalize on opportunities created by the acquisition.

On hearing of a company for sale, entrepreneurial-minded executives are naturally inclined to spring into action. “I really want to buy this company. Let’s go investigate, find out what it’s worth and find a way to get it.”

Responding to their leader, who appears enamored with the idea of doing a deal, the buyer’s team members immerse themselves in myriad transactional details. From that moment forth, tight timeframes preclude stepping back to reconsider basic questions, such as, Why are we doing this acquisition, and what do we hope to get out of it?

Clarify fundamental aims
Acquisitions are much more likely to be successful when a fundamental M&A strategy has been well thought through. Each distinct M&A strategy necessitates raising a different set of questions during the acquisition process, and requires divergent courses of action after the deal is done.

Formulate acquisition criteria
Having a clear M&A strategy provides a solid foundation for establishing detailed acquisition criteria that will serve to keep the strategic focus in the forefront. M&A criteria can be used to quickly screen acquisition opportunities and even prioritize them. They add discipline to the acquisition process and help eliminate wasting time on deals that appear interesting — maybe purely for financial reasons — but that don’t fit the strategy.

  • Business compatibility. A complete set of acquisition criteria includes many questions related to basic compatibility. Are the target company’s values and culture similar to the buyer’s? How are important business decisions made? How is performance measured? How are employees incented? Are customer expectations, service requirements and pricing structures well aligned between buyer and target?
  • Anticipated impacts. Filtering questions should also address implications for customers and company management. If the target operates within a complementary market segment, will existing customers embrace the expanded product offerings? Will the acquirer’s key people have to go through a steep learning curve to understand the target’s business? Will the buyer’s traditional business suffer due to management splitting its focus?
  • Ingredients of success. Some screening questions should revolve around the viability of meeting essential economic thresholds. Are we sure we possess the capabilities and resources needed to fully capitalize on the acquisition and scale up the acquired business? Do we really understand the target company’s competitive position within its market? Is its segment growing, stagnant or shrinking?

Stay true to strategic focus
Sorting out the appropriate M&A strategy helps the potential acquirer delineate between truly compelling reasons for making an acquisition and those that amount to rationalizations. Tightly defined acquisition filtering criteria help to bring well-suited M&A candidates to the forefront and rapidly eliminate poor fits.

With solid criteria in hand, it becomes possible to proactively expand M&A efforts to target desirable candidates with attributes that match key criteria — including companies that might not be on the market — rather than being limited to those known to be for sale. Finally, when everybody understands the precise goals of an acquisition, the post-closing integration process has much improved chances of success.

Jonathan Dean, Certified Public Accountant and Certified Valuation Analyst, is director in charge of Doeren Mayhew’s corporate finance and strategic services group. Doeren Mayhew, located in Troy, Michigan, is a regional accounting and consulting firm that provides a wide range of professional services to middle-market companies. Contact Dean at dean@doeren.com or (248) 244-3256.