Stalled M&A returns. Value left on the table. Surprises in execution. Post-tax reform, M&A investments are in high gear. But even in this strong economy, actual performance is still too often not living up to the hype.
Buyers can’t be faulted for being a little M&A-happy. So many more are in the game, and all the activity can seem to portend prosperity. However, keeping a level head and maintaining healthy realism and skepticism is wiser than ever.
Resist rushing the strategic process
As tempting as it is to simply jump into the flow, hold back in favor of meticulous planning and selection. Ask the logical questions. What are our goals? Where do we want to grow? How much do we build? How much do we acquire? Do we need to fill in a gap, strengthen operations, expand geographic reach, offer different products or services? What kind of acquisition would help?
In a conversation with The Deal
that was based on a Grant Thornton survey
of top-level execs, Grant Thornton, Grant Thornton Transaction Services Principal Chris Nemeth
said respondents named three areas where their companies could do better:
Only 38.2% of top execs were very clear on acquisition targets they should pursue.
- Proactive highlighting of the transactions to pursue
- Structure, discipline and accountability in pursuit and execution
- Preparation for the complexity of execution
Grant Thornton survey
A whole industry — investment banks, deal brokers and others — shops transactions. “It’s easy for a potential buyer to sit back, receive pitches and deal books, and fall into a pattern of reactivity,” Nemeth said. “It often seems difficult and time consuming to go through a formal planning process and define priorities, then initiate discussions with chosen contacts. But, time and time again, we see that this yields real benefits. Control the pipeline; assemble a profile and be deliberate about whom to target. It’s hard work and takes a lot of effort on the front end. But proactive deals tend to perform a lot better. The close rate is higher, and the post-close performance is better.”
Build a solid core competency
M&A has undergone so many changes that even seasoned buyers are facing a learning curve. The old model was a massive deal every few years done primarily by big companies. In today’s deal economy, deals might be smaller but they’re faster and executed by all kinds of companies.
“For a long time M&A was a bit of a novelty,” Nemeth noted. “It wasn’t something companies did day in and day out. When an opportunity came along, they’d say, ‘We have smart people; let’s just dive in and we’ll figure it out.’ But as deals become more competitive and leveraged, with market multiples going up and companies being leaner, smart companies are taking the time to proactively build the proper M&A execution capabilities.
“It starts with a recognition that M&A is a risky, point-in-time opportunity with high stakes, and a core competency must be part of the core growth strategy. Companies have playbooks and methodologies for other projects but often not for M&A. Deal-making is complicated, and many functional areas have to collaborate. In our current environment, you have to build internal capability, create a robust M&A execution playbook and process, and conduct training.”
“It starts with a recognition that M&A is a risky, point-in-time opportunity with high stakes, and a core competency must be part of the core growth strategy."
Chris Nemeth, Principal, Transaction Services
This has been the experience of the vice president of corporate development in a multibillion-dollar organization: “As the velocity and complexity of deals increase and the margin for error to create value decreases,” he said, “it is critical to leverage an experienced internal M&A team (e.g., corporate development, legal, finance, tax and IT) with trusted advisers who know your company well and work to help solve the problems and hurdles encountered in every deal. One of the keys to success is having a fully engaged executive sponsor and a very strong, experienced and dedicated project management office.”
Staffing is also a point of focus at the Sinclair Broadcast Group, said Corporate Development Vice President Scott Shapiro. “Something we struggle with as a middle-market company is from a resource perspective, not just post-transaction but upfront, being proactive. Making sure that through every step of the process you adequately resource — from synergy tracking to integrating operations to accountability.”
Only 36.8% of top execs strongly agreed that efficient M&A execution is a well-understood core competency in their company.
Grant Thornton survey
Take a holistic approach to due diligence
Historically, M&A has had an almost exclusive financial focus, which is where companies have concentrated their due diligence. “But that’s only one perspective,” Nemeth said. “It’s now clear that we need an encompassing view of the target company. This view is possible only through a holistic business diligence.”
A broad and deep assessment is a priority for global equipment supplier SPX Corporation, according to Vice President of Business Development & Strategy Franklin McClelland: “We look at due diligence as much more than a pro forma financial exercise. Ultimately, we want to build an entire picture of the target company, one that not only assesses the financial and operational health of the business, but also attempts to look at the softer elements — things like would the employees fit well, culturally, with our staff? Does management have similar values to ours? Is there clarity of purpose? Ultimately, we need to be able to picture any target being part of the broader SPX family.”
Ensure a cultural fit
Only 42.7% of top execs rated their deals as strong in key employee retention.
Grant Thornton survey
Today, doing a deal well still takes working the numbers, but the people quotient has risen in priority. Virtually all companies are in the people and information business. Even in a traditional manufacturing company, the minority of employees actually touch the product; most are focused on the service of external or internal customers. A successful buyer must value people/culture integration as highly as any other factor.
Knowledge and sensitivity are critical. “More than just going to dinner with people and sharing common points of view,” said Christina Ungaro, executive vice president and director of corporate development at investment management company JLL, “it’s getting underneath the target’s day-to-day operations. I’ve heard stories of targeted companies that have walked away from otherwise very lucrative transactions because it was not a cultural fit.
“Approach it no differently from the way you would a recruiting exercise. It might mean sampling a percentage of the population and getting into resumes, backgrounds and performance reviews.”
Christina Ungaro, Executive V.P. and Director of Corporate Development, JLL
“Approach it no differently from the way you would a recruiting exercise. It might mean sampling a percentage of the population and getting into resumes, backgrounds and performance reviews,” said Ungaro. “You want to access how good a fit that population is with your population. It’s a mistake to be too far back and look at aggregate data. You have to try to get granular.”
Focus on the concrete synergies
Nemeth emphasized certainty when it comes to synergies: “From a synergy standpoint, what is shown in the research is when synergies are more controllable — let’s say, more on the cost side as opposed to cross-selling or things dependent on the market — those deals and returns tend to be more predictable. Having a laundry list of theoretical synergies ends up being trickier and not as valuable as a handful of concrete synergies that we know how to execute and can accelerate post-close.”
Only 35.5% of top execs were very clear they had vetted and understood the synergies associated with their deals.
Grant Thornton survey
Be skeptical about every deal
Acquirers shouldn’t assume a deep dive is necessary only for distressed companies, trusting that an apparently flourishing company is a sure bet. “Some healthy skepticism is a good thing,” according to Nemeth. “Even in a high-performing target company, you have to ask yourself, ‘If they’re all that, why are they selling?’”
Ungaro advised a careful examination of factors: “Look at things like, Are we reaching the peak of an economic cycle? Are there market tailwinds that have been pushing them along, or is this just a really good management team? We look at revenue recognition policies. Whenever I see profit margins expanding significantly in recent years, we look at things like deferred maintenance.”
"You have to force yourself…to bring out your inner pessimist."
Scott Shapiro, Vice President of Corporate Development, Sinclair Broadcast Group
Shapiro proposed caution and realism: “The issue is, Do we have rose-colored glasses on for a deal because we just want to do deals? You have to force yourself out of that box to bring on your inner pessimist.”
Moving too quickly is not an option, said Nemeth: “For something as high stakes as M&A, a ‘We did OK’ is just not good enough. We owe it to each other to figure out how to continue to do better.”
Principal, Transaction Services
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