An M&A Process That Creates Value: What Every CEO Should Know (Part 1 of 3 – Planning and Strategy)

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An M&A Process That Creates Value: What Every CEO Should Know (Part 1 of 3 – Planning and Strategy)

Organic growth can be slow and hard to come by.  In sectors that are periodically most affected by political uncertainty, trade disputes, and other geopolitical changes, customers can end up deferring their buying decisions, which makes new revenue elusive. In other instances, revenue expansion requires substantial investment in R&D that may not pay off for years. Sometimes, growth is constrained by the inability to attract needed talent or the absence of important intellectual property.  With growth an imperative, some small-cap CEOs turn to mergers and acquisitions (M&A) as a solution.

However, in an environment in which any earnings hiccup will be punished by the public markets and could undermine investor confidence, getting it right when doing an acquisition is essential. The stakes are even higher for a small-cap CEO since a significant misstep can destroy — rather than create — value.

A CEO betting that a significant acquisition (or a series of smaller acquisitions) will jump-start growth must be aware of the importance of a sound M&A process.  While a good process cannot guarantee success, a poor process can virtually assure failure. There are some general rules that can enhance the likelihood that a deal will positively impact the company’s future:

Design The Process; Don’t Just Let It Happen

Veteran M&A warriors understand the importance of designing the acquisition process with the particular target, transaction, and desired result in mind.  The ability to move quickly can be crucial.  By the same token, sufficient time must be provided to allow an adequate pre-purchase investigation.

When designing that investigation, the CEO should consider:

What will be the focus of the acquisition investigation?  The nature of the acquisition investigation will be governed by deal-specific factors including the key strategic or other drivers for the transaction, industry-related risks, target-specific risks, regulatory issues, tax concerns, countries of operation, employee issues and the like.  Rather than looking at everything with equal vigor, focus should be on key assumptions and risks.

Who should be involved?  Some companies choose to involve only a small core team in their acquisition activity. Other successful acquirers use their business units and support staff in the due diligence process.  This approach can provide greater insight from those who are on the front lines of the business and can help to secure early “buy in” from these managers.

Yet, it is important not to strain the company’s existing operations by diverting already-busy managers.  Augmenting the team with legal and financial consultants familiar with the issues presented in the M&A process can bolster the team and help to complete the transaction in a timely manner.  Research suggests that successful M&A teams generally devote additional specialized resources to their transactions than do average performers.

Develop written work plans.  A written work plan, including a timetable and responsibility checklist, is crucial.  Assigning specific tasks to internal and/or external resources and having everyone abreast of who is doing what and when is as important in an M&A transaction as in any other group project.  Use of computerized scheduling resources, intranet and work-share programs can aid in this task.

How will the deal team report in?  As various participants in the due diligence process complete their review, assemble the findings and share them with key decision makers. Many companies believe there is value in having the information shared broadly within the deal team so that patterns can emerge.  Sloppiness in one area may simply be indicative of a weak department.  Sloppiness in multiple areas may indicate a deeper problem.  When information is shared more broadly, transaction participants may realize that factors that they initially shoved aside as insignificant were, in fact, important.

Don’t forget IT.  Information technology and enterprise systems within the target are a crucial issue in an acquisition of any size.  If the target’s systems are not up to par, or cannot readily be integrated into those of the acquirer, delays in financial reporting can result, and costs to bring the systems to par can be surprisingly high.  In addition, while systems improvement is in process, managers will not have the information needed to successfully integrate the target.

An IT integration plan will be crucial.  If the combined technical resources of the acquirer and target are not sufficient to implement the integration, thought must be given to utilizing outside resources.  Costs should be factored into valuation models and financial forecasts.  For public companies with reporting obligations and potential exposure under federal securities laws for lapses in internal controls, planning and implementation failures can have serious legal implications. Analysis of the target’s cyber security measures will reveal whether its systems are well protected or, instead, that substantial post-closing investment would be required.

An M&A Process That Creates Value parts 2 and 3 focus on managing risk and successful integration, and are available to Small-Cap Institute subscribers.