So, in a nutshell, what are the keys to successful corporate mergers and acquisitions? What follows is my guidance and my opinions taken from a career full of M&A deals. This is practical, time-tested advice for executives desiring to grow their companies via acquisition.

First, let’s get something straight.  Good corporate M&A isn’t luck. Rather, it’s the culmination of a disciplined process wherein the right people find the right deal at the right time and the right price. Judiciously used, corporate M&A is perhaps the most powerful business tool available for achieving size, scale, and diversity, obtaining critical technology, and securing competitive advantage. Good corporate acquisitions both protect and grow shareholder value.

Of course, many pitfalls await — paying too much, losing key employees, misjudging industry considerations, missing red flags in due diligence, becoming bogged in integration problems, and litigation, among others. Most acquisition problems can be avoided by following sound acquisition procedure and deliberately instilling standardized practices in the acquisition program that minimize the amount of miscommunication, mistakes, and disruption.

This 3 part-posting will examine the key personnel, procedural, and investment rationales that I believe maximize the chances for corporate M&A success.

Part Three: Investment Rationales

M&A practitioners are aware that investors and public markets have a “show me” skepticism of corporate M&A. It is critically important to understand from the outset what rationale and justification outside parties will expect to hear and, later, what facts and numbers the investment community will wish to analyze in order to validate an acquisition’s
success. The following concepts are the investment community’s principal acquisition success indicators:

• Hard Cost Savings: The investment community wants to have a clear sense of what “in-the-bag” cost savings can be expected from acquisitions, and when the results and improved profitability will be reflected in the financial results. It is imperative to have detailed yet understandable responses to cost savings questions. Responses should directly address quantifiable improvements such as those due to buying power, shared facilities, reduced personnel, lowered administrative charges, aligned inventories, etc.

• Demonstrated Organic Growth: The delineation between growth in size and profitability that is bought and growth in size and profitability that is home-grown or organic is perhaps the single most important measure of whether or not value is being created in an acquisition. If the expected cost reductions and top-line enhancements such as cross-selling or new product/service offerings do not increase both size and profitability, the combined company may not be worth more than the sum of its parts in the eyes of the investment community. To address the acquisition versus organic growth question, many investment analysts employ methods similar to retail analysis, using year to year company sales and operating income analysis as proxies for “same store” sales and profitability. Here, analysts re-categorize expenses and painstakingly try to back out the effect of acquisitions from existing operations. The fact that companies and facilities often disappear in integration makes year over to year changes difficult to track and sometimes
  impossible to analyze.

• Technology Cost Savings: The investment community is particularly fond of technology’s role as a motivation and justification for acquisition. In particular, proprietary MIS platforms often play dual roles as both cost savers and unique competitive advantages in acquisitions. Important information technology solutions that can be replicated throughout an acquirer’s business may provide an important point of differentiation with the investment community to investors.

• Size and Definition of Market: Lastly, expect that the investment community will repeatedly want to verify that the size and the definition of the buyer’s particular market segment both allow for unabated growth. Investors will want assurance that the market for acquisition targets contains an abundance of targets within the predetermined criteria.

Conclusion

Mergers and acquisitions offer companies the opportunity to quickly grow, diversify, and create lasting shareholder value. Successful corporate M&A comes from detailed and methodical acquisition programs that give top priority to people, procedure, and deal fundamentals throughout.

Posted by: Mory Watkins

So, in a nutshell, what are the keys to successful corporate mergers and acquisitions? What follows is my guidance and my opinions taken from a career full of M&A deals. This is practical, time-tested advice for executives desiring to grow their companies via acquisition.

First, let’s get something straight.  Good corporate M&A isn’t luck. Rather, it’s the culmination of a disciplined process wherein the right people find the right deal at the right time and the right price. Judiciously used, corporate M&A is perhaps the most powerful business tool available for achieving size, scale, and diversity, obtaining critical technology, and securing competitive advantage. Good corporate acquisitions both protect and grow shareholder value.

Of course, many pitfalls await — paying too much, losing key employees, misjudging industry considerations, missing red flags in due diligence, becoming bogged in integration problems, and litigation, among others. Most acquisition problems can be avoided by following sound acquisition procedure and deliberately instilling standardized practices in the acquisition program that minimize the amount of miscommunication, mistakes, and disruption.

This 3 part-posting will examine the key personnel, procedural, and investment rationales that I believe maximize the chances for corporate M&A success.

Part Two: Acquisition Procedures

The acquirer’s focus must be on implementing standard purchasing procedure and mechanics to consummate deals with a minimum of mistakes, miscommunication,
and disruption. The following is my advice regarding the necessary procedural elements of a successful corporate acquisition program:

• Establish an Internal Deal Network: The most effective way to ensure plentiful
  and quality deal flow is to harness the industry knowledge and contacts of the acquirer’s own frontline managers. By using internal resources, acquirers can quickly build an effective referral network from those who know best which are the best candidates, and who may be receptive to the notion of being acquired.

• Standardize Screening Criteria: For obvious reasons, it is best to standardize nearly
  everything possible in the acquisition process. Early on, buyers should analyze their standard economics for acquisitions. Acceptable purchase price schemes for different levels of trailing adjusted cash flow, company size, profitability, net worth, working capital, liquidity, etc. should be formally decided upon and promulgated among all persons needing to know. The discipline of having established acquisition guidelines is critical. An acquisition template including analysis of all pertinent deal information and financial history may be distributed to authorized deal personnel to complete for streamlined analysis and approval.

• Buy Trailing P&Ls; Scrutinize Balance Sheets: It is critical to maintain focus on pricing deals as a multiple of trailing cash flows and not be distracted by notions of sharing combined value with the seller or paying for growth in the seller’s projected earnings. The purchase price should always be set (or at least considered) as a multiple of trailing cash flow, adjusted for non-recurring addbacks and deductions to cash flow, and then further adjusted, if necessary, for the perceived quality of the balance sheet. Sellers are often eager to be compensated for what they believe to be excess asset value on their balance sheet. Here extra discretion is advised. Buyers should carefully consider both the adequacy of the acquired company’s capitalization and the liquidity of acquired assets. Buyers hastily making acquisitions without considering targets’ need for permanent and working capital may soon find that they have severely overpaid.

• Use Stock Carefully for Acquisitions: In the acquisition game, using stock as currency is an obvious strategy. The caveat to indiscriminately issuing shares for acquisitions is that in the long term the theoretical cost of equity is always greater than the theoretical cost of debt. Upon analysis, an acquirer should be able to determine its break-even point, in terms of accretion, between the cost of using equity and the cost of using debt for acquisitions. Acquirers must pay close attention to this constantly changing statistic and be aware of the utility that slight alterations in the mix of cash and stock in acquisitions can have. Not relying too heavily on (under-priced) stock for acquisitions can prevent incipient symptoms of “acquirer’s curse” wherein share price problems adversely effect acquisitions and vice versa.

• Quantify the Consideration Amount: Fixing the number of consideration shares instead of the consideration amount for an acquisition (when stock is used) subjects shareholders to the risk that a short term dip in stock price might change the accretive nature of the deal. This risk can be mitigated by fixing the consideration amount and using an averaging formula that prevents either party of the deal from benefiting undeservedly from stock volatility around the time of closing.

• Analyze Accretion: As discussed above, an accretion analysis that quantifies what the acquirer gets in terms of reportable earnings per share versus what it has had to give up in terms of cash, stock, and assumed debt to get the deal done must be performed for every deal. Accretion analysis is useful as a pricing tool to maintain purchase pricing discipline. In effect, the accretive nature of an acquisition reflects the pricing boundaries that a buyer is able to pay for an acquisition under different conditions and in different deal structures. Accretion analysis also lets a buyer manage and build growth into the price of deals to make up for the fact that the larger the acquirer becomes, the more difficult it will be for a deal to have a meaningful accretive impact on earnings. [NOTE: In addition to analyzing the accretion of every deal in isolation, a buyer must also analyze the accretion of all proposed deals in conjunction with each other because accretion isn’t additive…it’s a quotient. To accurately determine the effect acquisitions will have on reported financial results, an acquirer must iterate scenarios that encompass every likely combination of deals likely to close.]

• Tie Up the Sellers: The buyer should negotiate to keep the sellers working at the acquired company from the onset of the deal. Maintaining the sellers at the company has the effect of transferring knowledge critical for success, and, where stock consideration is taken, keeping the owners motivated and the acquirer shares in friendly hands. Keeping the sellers involved can be accomplished in many ways, including escrowed purchase price, required stock holding periods, employment contracts, stock options, and earnouts. It should be noted though that earnouts are sometimes difficult to keep track of and must be structured carefully to allow for accurate measurement and corporate consolidation without losing the basis of the earnout.

• Issue Stock Options Judiciously: Like the issues associated with using stock for acquisitions discussed above, the true and sometimes changing cost of granting options must be continually considered by the acquirer’s management. Acquisition guidelines should be set regarding who is eligible for options, when, and for how many.

• Simplify the Post Closing Mechanisms: In virtually every acquisition, there are issues that require further follow-up after the deal closes. Simple, but iron-clad, procedures for post closing audits, warranties and purchase price reconciliations should be part of the form acquisition agreements and coordinated with the outside due diligence provider and counsel (discussed above) so that follow-up is timely and automatic. Resolution of post-closing issues can often be accomplished easily by using pledged stock or escrowed cash consideration to satisfy financial target deficits.

Next, the final installment — Investment Rationales necessary for Successful Corporate M&A (Part Three)

Posted by: Mory Watkins

So, in a nutshell, what are the keys to successful corporate mergers and acquisitions? What follows is my guidance and my opinions taken from a career full of M&A deals. This is practical, time-tested advice for executives desiring to grow their companies via acquisition.

First, let’s get something straight.  Good corporate M&A isn’t luck. Rather, it’s the culmination of a disciplined process wherein the right people find the right deal at the right time and the right price. Judiciously used, corporate M&A is perhaps the most powerful business tool available for achieving size, scale, and diversity, obtaining critical technology, and securing competitive advantage. Good corporate acquisitions both protect and grow shareholder value.

Of course, many pitfalls await — paying too much, losing key employees, misjudging industry considerations, missing red flags in due diligence, becoming bogged in integration problems, and litigation, among others. Most acquisition problems can be avoided by following sound acquisition procedure and deliberately instilling standardized practices in the acquisition program that minimize the amount of miscommunication, mistakes, and disruption.

This 3 part-posting will examine the key personnel, procedural, and investment rationales that I believe maximize the chances for corporate M&A success.

Part One: People/The M&A Team

In my opinion, more than any other factor, the proper choice of the M&A team dictates an organization’s chances for M&A success. M&A is after all very much a people business, and matching the right personnel to the right role is critical. Team members are functionally spread thin, acquiring new companies, integrating acquired companies, and performing their core, non-acquisition related duties. It is imperative that the M&A team be kept small, focused, highly organized, and above all capable of working well together.

The core members of the M&A team should include:

• Board of Directors: The M&A process should begin and end with the Board
  of Directors, but the Board should also be kept well informed throughout
  the process. The Board should include members who are experienced
  in M&A and embrace growth via acquisition. Prior to beginning the
  process, the Board should approve the proposed size, customer profile,
  characteristics, and profitability of companies to be pursued.

• Chief Executive Officer: The CEO should be a strong leader capable of
  solving integration problems, knitting together diverse cultures, and overcoming
  natural human aversion to change. Ideally, the CEO should also be an established industry figure who will serve as an enticement for potential acquisition targets.

• Chief Financial Officer: In addition to regular duties, the CFO should be capable of performing specialized tasks related to acquisitions, including i) managing wide-ranging integration issues, ii) creating and enforcing standardized practices for financial reporting, budgeting, and compliance, iii) raising capital for acquisitions, and iv) communicating acquisition rationale and results to the investment community.

• Corporate Development Officer: This individual is the most important member of the M&A team, serving as the company’s central, accountable acquisition authority. The CDO should be responsible for managing all internal and external aspects of the acquisition program, including origination, valuing, structuring, negotiation, due diligence, and closing elements. In addition, the CDO should undertake various strategic planning duties, including industry and competitive analysis.

• Operations Team: A small team of operationally experienced individuals should be responsible for implementing and overseeing an integration plan constructed from the top down.

And don’t forget the external team — the service providers. Some acquisition functions cannot and should not be handled in-house:

• Due Diligence: Internal operations managers should visit target companies early and often during the buying process. Depending upon the activity of the acquisition program, travel, time, and skill sets required (such as accounting), due diligence may be best handled by the staff of a national accounting firm. If possible, I recommend that the due diligence firm be the same accounting firm handling the acquirer’s audit function.

• Acquisition Counsel: Using internally developed form documents and agreements, experienced outside counsel can leverage inside counsel’s time and effort in the acquisition function.

• Real Estate: Again, depending upon the activity of the acquisition program, issues pertaining to both acquisition real estate and existing real estate portfolio consolidation may be most efficiently handled by a national real estate services provider.

• Environmental Analysis: Assessment of environmental risk, unfortunately now a major
  risk in all acquisitions, is best outsourced to specialized consultants.

• Employee Benefits Analysis: Assessment of employee benefits and related compliance risk in acquisitions requires highly specific, and current knowledge and should be outsourced.

Next, the Acquisition Procedures necessary for Successful Corporate M&A (Part Two)

Posted by: Mory Watkins