Authors: Michael Ho, Ph.D. and Jim Parrino, Ph.D., Managing Directors, Fifth Third Bank Buyside M&A Advisory Practice
Last year saw more than its share of global mergers and acquisitions. As of October, more than $3 trillion in transactions have closed in 2019, according to Refinitiv.
While the largest transactions make headlines, M&A strategy plays no small role in mid-market company growth, as well. Acquisitions can sometimes offer the most direct path to geographic expansion, new lines of business and core competencies or pivotal technology.
Yet, middle market companies rarely have a dedicated corporate development team to define an acquisition strategy, identify potential acquisitions or vet new opportunities. Consequently, it's not uncommon for firms to go down the path of an acquisition only to run into unforeseen roadblocks along the way.
Sometimes an acquisition wasn’t a good idea in the first place—maybe it wasn't a good strategic fit or did not support the broader strategy—and better to discover this before the ink dries. There is a cost for uncompleted transactions: time and resources wasted, other opportunities missed and, potentially, damaged reputation.
In order to see an M&A deal to a successful end, companies need to understand how the transaction fits into the bigger picture and think many steps ahead. Here’s what it takes.
1. Have a Clear Strategy
A builder wouldn’t dream of breaking ground without having a detailed blueprint. Yet, all too often, firms rush into an acquisition without first thinking about what’s driving the decision. Before companies get serious about M&A they need a well-defined business strategy that outlines where the company is headed and exactly how an acquisition will help them get there. Taking it a step further, companies should identify the qualities they're looking for in potential acquisitions and investigate how they'll finance the deal.
At the same time, it's equally important for would-be buyers to take a realistic look at their own strengths and shortcomings internally and in the marketplace. In addition, what can they offer an acquiree that it could not get on its own or via another buyer? While some firms have the perspective to answer this accurately themselves, an outside advisor can offer invaluable insight and an outsider’s perspective in the early stages of an M&A plan as well.
2. Understand the Process
There’s a direct connection between the number of deals a company or its advisor has completed and the outcome of any new deal. Put another way: experience is key to a successful outcome of a deal. This often comes down to process and planning. While every deal may be unique, the critical steps and challenges needed to reach a successful conclusion are often similar.
Because most companies don’t have dedicated corporate development teams that live and breathe M&A, it’s important to work with a buy-side advisor to chart a course and keep the deal on track. M&A is a highly specialized process, and generalist managers tend not to have the experience or expertise to efficiently and effectively manage the process.
3. Assemble the Right Team
Even seemingly straightforward transactions require well-orchestrated teams of experts who understand the nuances of their specific areas of focus and implications for the bigger picture. Where many companies stumble is assuming they can count on their current bench of advisors and professionals. While these experts may be adept at supporting regular corporate activity, they tend not to have the M&A-specific experience needed to do the necessary due diligence or integration.
In reality, M&A typically requires input from M&A attorneys, tax experts, human resource professionals and bankers, among others. Even companies with robust corporate development teams may need help tapping into a network of experts.
4. Look Beyond the Dollars
At the onset of a deal, buyers and sellers alike tend to focus almost exclusively on the headline numbers. As the transaction progresses, however, it often becomes clear that many other variables can factor into the success of the close. This is particularly true with private companies, where non-economic issues such as a founder's legacy, corporate culture, and buy-in from key employees or customers come into play.
Depending upon how the transaction is structured, or who the buyer is, these non-economic issues could jeopardize the transaction.
5. Stick With the Timeline
Buyers often assume that if they run into roadblocks—and inevitably they will—they can simply push back deadlines, or rewrite the terms as they go. This presents many issues, including potential damage to the buyer’s reputation for future deals. Even if the seller is willing to be flexible, veering from the timeline often comes at a cost.
Delaying the closing may result in the seller getting “deal fatigue” and becoming impatient with the process and the terms of the deal; it may make the seller less willing to be flexible in the negotiations. Likewise, changing the deal terms during the process can “poison the well” of amicable discussions, which can impact the transaction negotiations and post-closing working relationship between buyer and seller. Lastly, the longer the process drags out, the increased likelihood that an external event, such as a competitive offer, may impact the transaction.
Timing is particularly important when there are other buyers in the picture. Doing the work upfront—including outlining a strategic plan and assembling a team—is key to move quickly and decisively, whether that means moving ahead or looking elsewhere.
To be sure, middle-market companies need to understand what it takes to see a deal to completion, but it’s just as important to know when to walk away. That requires discipline on the buyer's end: having a clear plan in place that all parties involved agree too—and if that plan goes awry, there's an exit ramp. While no company wants to go down the path of an acquisition that doesn’t pan out, it’s far better than the alternative: closing a deal that should not have been done in the first place.