M&A - Asking the right questions before the deal! Part 2 of 2

By Hal Craig, Trout Creek Consulting, LLC
 
This is the second of two parts about questions to ask before making a merger or acquisition.  
 
Is there a good cultural fit between the buyer and target?   It’s a given that firms must learn to (a) work effectively with people around the world since the locations of customers, suppliers, talent, and regulators necessitate a global perspective; (b) adapt to and adopt new technology; and (c) succeed in an environmental of generally increasing regulation.  Separate from this, the cultural fit between buyer and target organizations is very important for synergy realization, keeping the “magic” that made the acquirer and target successful as standalone companies, and ultimately, the ongoing viability of the merged organization.  The many facets to consider when assessing cultural fit include:

• Business model (e.g., product, service, “razor and blades”, licensing)

• Compensation (e.g., variable pay, equity incentives, holiday/vacation/sabbatical policy, flexible hours and location)

• Decision making processes (e.g., hourly “2 minute management meetings to touch base" versus annual 1,000 page “Strat Package” review; consensus versus top down)

 

• Financial (e.g., frequency, quality, and time horizon of forecasts; project accounting)

• Organization norms (e.g., definition of business casual, class of air travel, gym and even a rock wall at the office, donut Fridays versus wine cooler Fridays – yes, I know of a firm where the East Coast office supplied donuts on Friday morning while the West Coast office supplied wine coolers and hors d’oeuvres on Friday afternoon)

 

• Organization structure (e.g., matrix, global business unit, regional leadership)
  
  

With cultural differences it is important for the acquirer and target to understand each other’s frame of reference.  For example, a manufacturing company that acquires a high-touch service company or a software company will need to understand that the target’s “assets go home every night” and that the business models, cost structures (e.g., % of sales for COGS, SG&A, R&D), and value drivers of the acquirer and target will be different. 

Are there other ways to achieve the strategic vision?  Is this the only acceptable strategic vision?  Strategic buyers can become fixated on a specific target or targets – “either we buy X or bust” – either overpaying to secure the target or fumbling going forward when the acquisition doesn’t occur.  It is very important for companies to think through multiple routes to reach their desired strategic vision.  Having a “first choice” acquisition target shouldn’t mean an “only choice” path to growth.
 
Strategic visions so narrowly defined as to allow only one or two acquisition targets with minimal alternative routes (e.g., joint venture, internal development which is otherwise known as innovation) to achieve the vision may be unachievable given the probability of acquisition success.  Viable strategic visions should (a) result in value creation for the firm and (b) be achievable via multiple paths.
 
Does the acquisition move the needle?  This question is not an endorsement of large, transformational acquisitions over smaller, bolt-on acquisitions.  Rather, this question is an endorsement of investing resources in deals that create material value for the buyer's shareholders.
 
Do we have an integration plan and the talent to execute the plan?  It is one thing to know how, how much, and when value should be created; it is another to achieve value creation.  The detailed integration plan and the talent to execute it should be in place at deal closing.  Buyers should be realistic about the quantity and quality of talent that will be necessary to achieve a successful acquisition integration that delivers synergies while keeping the pre-acquisition businesses of both buyer and target running smoothly.
 
Do we have a clear, easy to communicate, rationale for the acquisition that important stakeholders will understand and support?  There are many stakeholders in an acquisition – investors, boards of directors, management teams, regulators, creditors, employees, customers, financial analysts, media, suppliers – several of whom can stall an acquisition or limit value creation should the acquisition proceed.  The buyer should identify the most important stakeholders for a particular acquisition and have a rationale and method of communication that obtains sufficient stakeholder support.
 
Conclusion
 
In many business situations, the questions asked are as important, if not more important, than the answers given.  This is particularly true in mergers and acquisitions, where many deals fail to create the desired shareholder value for buyers.  Correctly done, M&A is a powerful tool that allows buyers to achieve growth, position themselves for the future, and create value for their shareholders. 
 
Trout Creek Consulting’s Actionable Strategy and Immediate Impact Workshops can help clients ask and answer the right questions.