One of the area of my consulting practice that is most enjoyable is advising clients on merger and acquisition issues. While very few of my clients actually do a deal, more and more are considering inorganic growth as a means to address both the economies of scale that come from combining back office solutions as well as what are perceived as historic opportunities to perform “roll-ups” in a variety of vertical niches. Understand that my clientele is exclusively privately held businesses whose annual revenues are under $50 million. In fact, in the $1 – $50 million range, they are usually on the lower end when we start working together.
When I have the opportunity to become involved in a strategy conversation about the potential benefits of a transaction, then, it is not with multinational, public companies who are measuring cross border opportunities as a defensive mechanism to preserve market share against more aggressive competition. These facts notwithstanding, I enjoy reading research performed on the larger company front because many of the issues studied trickle down into my part of the market. This past fall, the global law firm Eversheds published a study, The M&A Blueprint: Inception to Integration, wherein the authors claim that deal teams need a more holistic approach and stronger connections between the planning, completion and post-deal integration phases. Amen!
The universe of participants in the study included 400+ large businesses who had pursued cross-border deals in the period 2009-2012. Many respondents felt that the inability to envision the end from the beginning (think through integration and beyond during due diligence) was the single greatest cause of unrealized potential.
Robin Johnson, M&A partner at Eversheds, said: (bolding of phrases added)
The current economic climate has made the business of doing deals much tougher, with the research highlighting an acute awareness of risk in the process…Our research shows that the overriding factor contributing to the success of a cross-border deal, is the presence of a core team providing the ‘connective tissue’ to link all the phases together, taking the deal from the inception stage through to post-completion integration. Businesses need to start joining the dots between the different stages of the deal cycle to move the focus from just simply ‘doing the deal’ to thinking about life for the business beyond the deal.
The Eversheds report recommends a methodology that rolls out as follows:
- From the start – 38% of deals where the in-house team were brought in too late suffered problems during integration.
- Early warning – 59% of all respondents said they had spotted potentially damaging issues early enough to advise that a deal should not go ahead.
2. Planning and due diligence.
- The crucial stage – 43% said the most common cause of the failure to realise value in transactions was down to avoidable errors in the due diligence and planning phase.
- Joined up thinking – 70% felt that linking due diligence and integration planning together would help to improve the deal process.
3. Deal execution
- What matters most – The reasons General Counsel would advise not to proceed with a deal were illegality/regulatory (45%), e.g. bribery, competition and antitrust, and commercial concerns (45%), e.g. price and valuation, litigation risk, integration costs.
- A false saving? – 83% did not use external lawyers to a large degree during integration, although they were acknowledged to add value. The main reason for this was cost.
- Avoid mismatches – 26% felt that the failure to realise value in a recent cross-border M&A deal was due to a misalignment between legal dealmakers and the day to day business team.
Recognizing that Eversheds is acutely focused on the implications for the legal field, they found that involvement of external transaction advisory experts earlier in the deal process yielded better results. Applying this thought to and the process outlined above to my own experience, I strongly recommend that cultural due diligence be brought front and center early on. Internal teams are not usually objective enough to evaluate their own culture, let alone that of another entity. When we delve into matters of governance, decision making, core values in action, executive team personalities and styles, we are able to more accurately predict what may happen in integration and beyond. If red flags go up, back away!