For the novice or uninformed, there are plenty of opportunities to derail a merger or acquisition and create problems for everyone involved. Here are some ways to ensure that your next deal is a failure:
1. Build your investment thesis around considerable cost containment synergies. There just aren't a lot of opportunities for cost savings in AE deals. Sure, you might identify some redundancies at the corporate or administrative levels. But, this is a people-based business. People take up space to work effectively. You won't be consolidating manufacturing plants or finding large-scale redundancies in AE transactions.
2. Turn a senior manager loose to "make it happen." Successful deals require a critical degree of communication, alignment, and consensus amongst your leadership team. Get on the same page and commit the resources that you need to "make it happen."
3. Structure half the deal around an earnout. We generally won't see or recommend anything more than about 20% of the total deal consideration tied to a pay-for-performance provision. Try to structure a deal around a low fixed consideration component and a high variable consideration component and the results are likely to be messy and only beneficial for the lawyers trying to sort it out.
4. Bring in the seller's key leaders and managers late in the process. There is a natural reluctance to keep this from the key folks in the selling organization until it is a very well-defined deal. This can lead to a lot of backtracking and wasted time. Of course, be careful here...no need to bring everyone in on the first meeting. But, there will be natural backlash if the key folks feel like this was kept from them.
5. Make your first acquisition a big one. If the deal is going to add more than 20% of your size, think twice. Forget, for a moment, about the obvious issue of affordability. Post-transaction integration (if you want to really create value) can be a very time-consuming process. Start small and get some successful ones under your belt before placing any big bets.
This article is featured in PSMJ's M&A Insider - Volume 8, Issue 11, which also provides a full list of recent M&A transactions as well as spotlights current M&A opportunities.
Ready to make your next deal a success? There is no better way to "drink from the M&A fire hose" than to attend one of PSMJ's upcoming M&A Roundtables…two days of proven M&A advice that could save you from a million-dollar mistake!
Looking for more information on M&A? Check out these related posts from PSMJ's M&A experts:
Growth Through Acquisition is Here to Stay
How to Measure Merger or Acquisition Risk
It Takes a Lot of Patience to Grow by Acquisition
Making Sense Of It All: Five Forces That Are Changing AE Mergers & Acquisitions for Good!
Expert Interview: Assessing Current M&A Market Conditons and Trends