How to achieve long-term success in M&A transactions
Understanding the M&A lifecycle
So you are planning to grow your company through an acquisition? Where should your main focus be during this transaction in order to create value for money? On getting the deal done? On future profitability? To be honest: no and no. If you want a transaction to succeed, you need to understand the M&A lifecycle and every choice you have made before, from identifying a deal to integrating the new business into your current company. In the coming months, we will share our stories and thoughts about each of these phases of the M&A lifecycle to offer you insight in the entire process and help you benefit from the promised returns of a deal. We will emphasise the integration of your steps and actions, and what might happen if you deal with every step in isolation.
Turning an M&A transaction into a long-term success
The ‘signing’ of the deal to buy or sell a company is often the most memorable moment for those involved in the transaction. Getting the signatures on paper is the moment you have been working towards, maybe for months. The happy news might even be in the papers tomorrow! But as crucial as this moment is, signing is only one of the steps towards a successful M&A transaction. The process may consist of numerous prior and next steps to be taken before the deal is successful and requires involvement of many employees from various departments within the organisation, who are possibly only involved in one step. How to align all these individual efforts to an integrated journey and avoid disappointments? How can you achieve long-term success in M&A transactions?
Understanding the M&A lifecyle and interdependencies of its stages
In fact, the key to a successful M&A transaction is: considering it as a lifecycle. It’s not about every individual aspect, but how you respond to every step that came before and in anticipation of the next. Each decision that is made influences the ones that follow. Some decisions are made deliberately, some are not. When, in retrospect, it turns out that a particular decision may have limited your options further along in the lifecycle, you can still make the best out of this situation – as long as you understand what has happened before and respond adequately. This is especially true in a dynamic industry like Technology, Media and Telecommunications, in which quick decision making is often crucial and lifecycles are short.
Creating value by overseeing the M&A lifecycle and decisions (to be) made
And mistakes will probably happen. After all, ‘to err is human’. It may not be the end of the world, but trying to prevent them from happening may save you many inconveniences. That is where actual value is created. For instance, your company may be market leader and decide to buy the number two. This may offer you many immediate benefits, but what if, shortly after the deal, the Competition Authorities in one of your geographies point out that your influence is too strong now. Future acquisitions or growth may be prohibited, providing your competitors opportunities at your expense. What if, in an earlier stage, your advisor or someone with a broader view asked you a few critical questions about your ambitions? That could have saved you a lot of money and disappointment.
Weak spots in deals arise from dealing with the M&A lifecyle as isolated stages
Sometimes, creating value is a matter of achieving the best possible deal within limited time. Sometimes it’s a matter of improving the process. And sometimes it’s explaining what an (apparently not so important) weak spot within the targeted company will ultimately mean for you. We often compare buying a company to buying a home. When you have found the house of your dreams and hire a constructional advisor to check for issues before signing, he or she might discover a weak spot that might eventually lead to leakage. Will this stop you from buying the house of your dreams? Probably not. Will it be an advantage for you in the negotiation process? Again, probably not. But it will be valuable if your advisor is able to quantify that the weak spot has a 20% risk of leakage in the future and how you can anticipate this. For example, negotiating a guarantee for the next four years or repairing it anyway before it becomes an issue if repair costs are low. Smart decisions, thinking one or two steps ahead. This is also true for buying a company, whether it’s weak spots in the financial prognosis or in the fields of legal, tax, HR, and compliance.
The M&A cycle in a nutshell
The illustration below shows the M&A lifecycle and a short description of each phase. In the coming months we will publish a series of articles on each step of the M&A lifecycle, sharing stories and thoughts about each of these phases of the M&A lifecycle to offer you insight in the entire process and help you benefit from the promised returns of a deal. In the lifecycle we will emphasise the integration of your steps and actions, and what may happen if you deal with every step in isolation.
Identify the Right Deal. Either through active selection of companies or business units, or by reacting to offers in the market (one-on-one or by auction). This phase involves setting corporate strategy, identifying growth areas or selling non-core activities.
Pricing and offer. Initial pricing of a company and assessing how easy or difficult integration or separation is going to be, as well as which legal and tax structure will be most suitable (and its impact on pricing).
Perform due diligence. What do we buy? It is crucial to assess the real value of the company, the presence of ‘skeletons in the closet’, financial aspects such as balance and cash flow as well as non-financial analyses (e.g. company culture, integrity, operational synergy benefits, and operational analysis of real estate).
Execution. After the due diligence phase, a Sales and Purchase Agreement is drafted, the relevant authorities are informed and consulted, and the ‘closing’ procedures are executed.
Deliver the Promised Returns. After the transaction has been completed, the expected results must be achieved – how to realise synergies and to prevent that in a future strategic re-assessment the new business will be considered as a non-core activity and be resold (without any added value).
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