M&A Strategy and Implementation

By April 19, 2022Other

This article dives deeper into the first and last steps of the mergers and acquisition (M&A) process. Having a good strategy for acquisitions and a good implementation plan are essential for a company at any size or stage. A company will be better prepared for the drastic changes of reorganization associated with M&A activity when it has a strategic plan for expanding through M&A. 

Most of this article focuses on the stages of preparing for and successfully integrating with another company. The article also includes examples and common pitfalls to watch out for when going into an M&A. For more information on the other steps in the process, read our M&A Stages Article

Why Should Companies Consider a Merger or Acquisition? 

 Before going over why companies should consider a merger or acquisition, remember that your company must have sound strategic reasons to acquire. That means multiple reasons—a good strategy is multifaceted. Too many companies get excited, believing they will buy their way into a new industry or a better position in the market, and end up being unsuccessful. These failures often cost the company the new industry position as well as millions of dollars. In fact, 70% to 90% of acquisitions fail (HBR).

Sadly, there are thousands of examples of companies that complete an acquisition but never turn a profit. Why? Either because they didn’t have a well-rounded strategy for integration, or they failed to adequately plan how the target company would create synergy with the acquiring company. Investopedia gives an example of four different deals that turned out to be a disaster about which you can read here.

The biggest driver for considering an M&A is that this action will increase value for your company. Value can be realized in many different ways; here are just a few:

  1. Synergies– This value occurs when combining two things creates greater overall value than their previous combined value, and these synergies are the way companies can make 2+2=5 a reality. To read more about synergy in M&A, read this scholarly article which provides some insights. 
  2. Competitive dynamics– Depending on your industry, staying ahead of the competition, or making sure no one can compete with you, can be very important. Acquiring technology or other companies is a way of maintaining this control.
  3. Valuation arbitrage– Acquisitions can lead to value increase on an earnings per share and value basis depending on the multiples. 
  4. Financial Engineering– Imaginative acquisition financing can bring value to the deal. 
  5. Growth in the Entry vs. Exit Multiple– This strategy is not typical for mergers, but in acquisitions you may want to build up a company and sell it later or use it to address another industry. 
  6. Diversification– It may be wise to reduce risk by diversifying products, customers, vendors, suppliers, and so forth. Diversification can reduce the volatility of earnings, thus enhancing value.
  7. Management or Talent growth– Management teams can drive a positive integration… or derail it. Knowing the talent being acquired is important for both companies as they take a role in developing the end company. 
  8. Many, many more

Read more about these types of value creation in our other article M&A Stages.

Learn more about why companies Merge or Acquire

This website shares definitions about the different types of M&A then explains some of the main reasons a company should be looking to merge or acquire. The reasons include: 

  • Synergies
  • Growth- In market share specifically
  • Increased supply-chain pricing power
  • Eliminating competition. 

Read more here.

What Is Needed in a Successful M&A Strategy?

For your company to create a successful M&A strategy, you need to create a blueprint that explains the why, how, where, when, and who. Mckinsey says that “the M&A blueprint prompts business leaders to conduct a thorough self-assessment along with a comprehensive market assessment.” Along with the self-assessment, a company needs to write out the boundaries or limits on the M&A deals it wishes to pursue (Mckinsey). This blueprint is where you go through the process of asking tough questions such as:

  • What new opportunities does this company open for my company?
  • Is my company going to merge with our target or keep it separate?
  • What kind of competition would nullify our business?
  • What metrics do companies have to meet to be considered for M&A?
  • How well-positioned are my company employees to change and adaptation which may result from an M&A?

There are a lot of questions to be asked and assessments to be made, which cannot all be covered in this article. Many companies have guides that can help direct you on which questions are right for you. Some companies, such as consulting firms, specialize in assisting companies through the creation of an M&A strategy all the way through deal close and implementation. 

HBR teaches sometimes we are too focused on “taking” and should think more about what we have to give to our M&A

“Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it” (HBR).

A large percentage of M&As fail on many levels. This article explains that trying to create value by draining resources is neither efficient nor effective. Instead, we need to be more like investors who realize they need to put in money, time, and more to have a successful outcome.

Key Ingredients to a Successful Post-Merger Integration Plan

Many professionals suggest that the success of M&A comes down to whether synergies were created or not. Here is a list to help your company make sure synergy is reached during integration:

  1. Early preparation 

A post-merger integration planning process must begin once you and your management team are around 80% certain of the deal. It is wise to start preparations before a deal closes because the due diligence process helps you understand what changes may need to be made if the deal goes through to the end. 

  1. Cultural alignment

Over the past decade, a lot of research has come out about how diversification and company culture can either make or break a company. To learn more about the other company, conduct a culture audit during the planning stage of the process.“ A culture audit reveals the level of incompatibility between the two cultures and determines the amount of effort needed to reach an acceptable level of synergy. Based on this estimated expenditure of resources, energy, and time by the acquiring company, a more accurate determination of the purchase price can be made to reflect the acquisition’s true value” (Forbes).

Deloitte’s guide to a successful cultural alignment in M&A

When planning for cultural change, Deloitte recommends taking a few important factors into account: (1) assessing the cultural compatibility between both companies during due diligence, (2) defining the desired culture that will fit the business strategy, (3) establishing ownership through dedicated resources and (4) involving management on both sides throughout the change process.

Business strategy will only be as effective as the people who are implementing it. Company culture defines how people get things done in an organization and, in this way, culture should be considered when negotiating and implementing M&A deals. Culture is easier to grasp if time is taken to assess it, define the desired future state and design a detailed concept for reaching this objective. (Deloitte) 

Read more about Deloitte’s four factors for cultural change in this PDF.

  1. Communication strategy

Many stakeholders want transparent communication around the changes happening in an acquisition. Being open with your employees can help smooth out their anxieties and prepare them for the company shift. Having everyone in the company involved will aid in the process as M&A reorganizations involve 30 to 40% more from the employees of the organization than other types (HBR).

  1. Adequate leadership and resources

A common mistake in the integration phase is not putting enough resources or leadership into the task. HBR did a study on over 2,500 M&A reorganizations and found that leaders’ time devoted to the reorganization was 41% to 60%, on average, versus 20% to 40% for other types of reorganization (HBR). Make sure that sufficient time is devoted to the integration and that high-level employees from the other company can participate in the overall process.

  1. Post-acquisition integration team

Following step four, this is a team made up of employees from both sides of the acquisition who plan and lead the movement to a new synergistic future.

  1. Integration action plan

Here is when the entire plan comes into action. This plan should have a time frame, key metrics, and overarching goals to be achieved by the combined company. With only one-third of M&A reorganizations using an implementation plan, making one is a sure-fire way to stand out (HBR).

  1. Leadership team evaluation 

After 90 days, a leadership evaluation is suggested in order to figure out which leaders you want to keep in the organization team and which should be removed. Leadership during a time of fluctuation is more important than ever. If bad leaders continue to influence their departments, then integration will result in failure (Forbes).

BCG has its own twelve-step process which follows the three main categories of aligning direction, creating or capturing value, and building the organization up (PMI stands for post-merger integration).

(BCG)

Things to Consider When Selling Your Company

When moving forward with a thoughtful strategy, it is important to know the preparations, resources, and expectations of the business on the sell-side of an M&A. 

Forbes has twelve key things to consider when selling. These are just a select few:  

  1. M&A valuation is negotiable
    This is mainly directed at privately held companies but still applies to public companies. Because the private company does not have public shares nor required publicly available financial statements, the true value of the company is harder to determine. Before accepting a deal, make sure that you, as the seller, are doing your homework into who is buying, what competitors sold for, projected financial growth, and so on. 
  1. The M&A process can take a long time
    Often the process of M&A is longer for public companies but not as complicated for private ones. 
    Read more about the stages and how long it can take in this article M&A Stages.
  1. Buyers will do a tremendous amount of due diligence 
    Setting up an online data room makes the due diligence process more efficient. This data room will house the company’s essential documents including contracts, IP information, employee information, financial statements, and more. You can read more about the importance of online data rooms here. 
  1. All financial statements and projections will be vetted
    It is extremely important that your company has been following Generally Accepted Accounting Principles (GAAP) in all of its financial statements. If not, the buyer will most likely not offer a deal. 
  1. Get a great M&A lawyer as well as a legal team
    Not only can this team help you in understanding the different processes to go through, but they also help you navigate through complex agreements and deal structures. 
  1. Hiring an investment banker can bring significant value
    Investment bankers can help in various ways ranging from prospective buyers to help the management team in presentations to the Board of Directors. 
  1. The definitive acquisition agreement is important
    The acquisition agreement can protect the seller and should be drafted by the selling company first. These are some of the key provisions to cover in the agreement:
  • Transaction structure
  • Purchase price and related financial terms
  • Adjustments to the price
  • Indemnity escrow or holdback for indemnification claims by the buyer as well as the period of holdback
  • Conditions for closing
  • Treatment of employee stock options

    It is important to note that a term sheet is given in advance of the agreement and outlines the deal in an easy-to-use format which makes the acquisition easier to compile. 
    Read more about the key considerations in this Forbes article. 

Conclusion

Over half of M&A transactions fail or underperform. Being prepared and having a plan, whether on the buying or selling side, is extremely important for the longevity of the company. Success can be achieved with the rewards being great for both sides, as long as the integration of the company—as well as its greatest assets and employees—are successfully combined. 

More information and reading on successful and failed M&A

Here is a great article about five M&A deals that crashed and what we can learn from their mistakes. 

Another article is about companies either rushing into deals or running into synergistic problems. 

Many companies fail because they are not able to successfully integrate.

Examples of good and failed M&A.



Resources Consulted

https://www.prophet.com/2017/08/3-strategies-driving-merger-success/

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/a-blueprint-for-m-and-a-success

https://www.bizjournals.com/portland/news/2021/08/02/5-tips-to-develop-a-strong-m-a-strategy.html

https://hbr.org/2012/09/simple-rules-for-a-complex-world

https://hbr.org/2007/09/rules-to-acquire-by

https://hbr.org/2016/12/a-5-step-process-for-reorganizing-after-a-merger

https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/taking-organizational-redesigns-from-plan-to-practice-mckinsey-global-survey-results

Professionally Reviewed by Karen Mildenhall

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Author Tyler Rowberry

Tyler has lived, traveled, and worked all over the world from Madagascar to Minnesota. He believes those international experiences are what have shaped him to provide unique value wherever he works. His unique value has led him to work on social innovation projects of poverty alleviation in Madagascar to finding new markets to enter for a billion-dollar start-up company. He has found that the most important thing anyone can do in a company is learning fast and always discuss ideas with others. Tyler's core belief is that it is in the pursuit of ideas with others that will help make the world a better place.

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