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With merger and acquisition activity heating up, here’s a due diligence checklist for regaining clarity. M&A is a complex process that requires significant and diverse skills and resources to execute well. (An excerpt from an article by Barry Jaruzelski, Marian Mueller, and Peter Conway).
Imagine that you have just concluded a major merger or acquisition. Your organization is energized and focused by your speech, which outlined the features of the M&A deal and the potential of the combined entities. Having crossed off every item on your due diligence checklist, you expect big savings from restructuring; more importantly, you know that a year from now this newly created company will be the leader in its industry, with significant growth in revenue and higher profit levels.
Then flash forward to the first anniversary of your M&A deal announcement. The company’s performance is below expectations and you’re left with a nagging sense of doubt about the transaction. Wall Street analysts are questioning your firm’s strategy, the wisdom of the deal, and the prospects for your stock.
What goes wrong? Often, when you look closely, a common set of attitudes is at play — implicit assumptions held by the leaders who put the M&A deals together and conducted the due diligence. These attitudes fall into two broad groups. First are fallacies, misleading beliefs about the nature of M&A itself. Second are self-deceptions, the acquirers’ misperceptions of their own company’s capabilities and competence. By becoming more aware of them, you can raise the success rate of all your M&A deals significantly.
Five Fallacies to Avoid
M&A fallacies are often ingrained in a company’s legacy practices, including the due diligence practices that have been successful in the past. It’s not enough to recognize these fallacies. You must take specific precautions to keep from being blindsided by them.
1. “We can’t walk away from this deal.” This fallacy about M&A seems to make intuitive sense. The people who put a deal together — often the business unit general manager and his or her staff — know the target company’s strengths and weaknesses and have the most at stake in the deal’s success. Like all of us, however, they are subject to the vagaries of human nature. When they are too close to a deal, it clouds their ability to make an objective, unbiased decision. They are far too likely to focus on details that confirm their preconceptions and ignore details that contradict them. This is known in the field as “deal fever.” It often manifests itself in statements like “We already have an agreement. Backing out would be too embarrassing to the CEO.”
You can generally avoid deal fever with a layered decision-making process. The deal team, including the business leader who champions the acquisition, should present the case to a separate group or individual who can review its attractiveness more objectively. You must balance these prudent checks and balances against your need for speed.
2. “Any experienced negotiator can negotiate deals.” Executives often assume that all forms of negotiation are alike; thus, their commercial experience has prepared them for M&A deal making. Unfortunately, the auction-like nature of competitive deals can make mergers and acquisitions very different from negotiating a product launch or joint venture–related agreement.
The answer is to think ahead of time about what you are willing to pay and to develop a true “walk-away” price. During negotiations, as you learn about the sellers’ motivations and as new options are suggested, this preparation can help you turn down any new arrangement that doesn’t give you what you need. Keep internal or external advisors in the loop to continuously check the value of the deal and provide advice on hard stops.
3. “M&A performance is all in the numbers.” Many executives assume that if the financial arrangements are secure, the rest of the deal will follow. But all deals have two other significant factors to consider that are often not accounted for in the numbers: the human element and the need to develop the capabilities required to succeed in the new or merged business. This is especially important if the new business model is different from the company’s established model. A comprehensive due diligence process should take into account both the cultural and capability aspects of the deal.
4. “Information in the M&A process will naturally be kept confidential.” When middle- and low-level employees get wind of a possible acquisition, leaks are possible, and they can have major consequences. Confidentiality should be taken very seriously and enforced during the due diligence process; leaks can come from a variety of sources.
Sometimes, key components of the due diligence process can be outsourced to a third party to reduce internal communications. These extra steps help reinforce the importance of the rules, even when the staff is already aware of the guidelines for confidentiality.
5. “There’s time for detailed postmerger planning after the merger takes place.” This fallacy is a comforting assumption for executives trying to rapidly conclude a detailed acquisition (while maintaining all their other commitments). However, it rarely leads to good results.
Identify a postmerger integration team and a leader during due diligence, as soon as it is clear that a binding bid will be submitted. This will help you identify some of the key integration risks and issues, and the resources required for integration. It will also lay the groundwork for postmerger review processes and metrics that can help hold the integration and business leaders accountable.
Self-Deception vs. Reality
Self-deceptions are often more difficult to address than fallacies, since practitioners think that they are already following the best practices. Experience suggests otherwise.
M&A is a complex process that requires significant and diverse skills and resources to execute well. By being aware of the trap these common fallacies and self-deceptions present, teams can design and execute an M&A process that is more effective and yields outcomes that consistently create rather than destroy value.
Full Article @ http://www.strategy-business.com/article/00098?gko=2f75f
- Mona Pearl on Cutting Edge Due Diligence in Cross-Border Mergers & Acquisitions: How To See What Your Competition Cannot See (prweb.com)
- Despite due diligence and best intentions, not all deals work out (business380.com)
- Primer on Due Diligence From RAPS Helps Regulatory Professionals Better Evaluate Complex Biopharma Deals (prweb.com)
- On Wall Street, a Renewed Optimism for Deals (dealbook.nytimes.com)