If you are considering mergers & acquisitions, there are four key steps to take. What are they? Find out below.
Step 1: Define Your Goals & Success Factors
If you are considering mergers & acquisitions, your first step should be to define your goals and success factors. The basis of your strategic acquisition or merger should stem from an analysis of your current competitive position and your future objectives. That means understanding what you’re doing with your business, where you want to go and what you value most.
If you are considering mergers & acquisitions, your first step should be to define your goals and success factors. The basis of your strategic acquisition or merger should stem from an analysis of your current competitive position and your future objectives. That means understanding what you’re doing with your business, where you want to go and what you value most.
Ensure you understand what it is you are trying to gain through this strategic acquisition or merger. Is your goal to increase market share? Do you want to enter markets contiguous to your current ones? To acquire new products, processes and intellectual capital? To increase your economies of scale so that you can be the low cost company in your market? Perhaps you are trying to eliminate a competitor, expand a product line or achieve a vertical integration.
Regardless of your goals, focus on them relentlessly throughout the process and align your decisions with them. The strategic acquisition or merger should be a way to achieve business alignment between your company’s current state and the future state you desire for it. These factors become the items to test for in screening prospective targets and then performing due diligence.
There are a number of important factors to consider as you screen targets for strategic acquisition. One is acquisition integration feasibility. What are the organizational and operational challenges of integrating them? For example, which of the key people would you want to keep and would they stay? Another integral step in evaluating targets is developing revenue and cost models for the combined organization. Define key success factors to realize value along with “threshold” assumptions and a business forecast to understand what you must achieve for the strategic acquisition to be successful.
As you search for mergers and acquisitions candidates, avoid becoming too fixed on a particular one – search for alternatives and understand the pros and cons of each. Though a target may seem to be a perfect fit that is equipped with just the right management and expertise, there may well be drawbacks.
For example, a potential target company may require that you seek additional capital, either through debt or equity. Its financial statements may be “dressed up” or it may be overly reliant on a few key people. Hidden issues like a culture clash can also sink any transaction.
Step 2: Plan and Execute Due Diligence
Due diligence is more than a light audit or an exercise of checking arithmetic. When done properly, due diligence should test the strategic fit of the acquisition.
Due diligence is more than a light audit or an exercise of checking arithmetic. When done properly, due diligence should test the strategic fit of the acquisition.
First, consider your goals for this acquisition and the drivers of the valuation. Knowing what you need to preserve will dictate what you need to test for in due diligence. Your overriding goal is to verify that the value you expect is actually there. It encompasses financial, operational, legal, technology and people due diligence. There is also customer due diligence – understanding what cements those relationships and how to sustain them.
Also plan generously for transition and closing costs – making sure the strategic acquisition or merger is financially viable pre-purchase. As a rule of thumb: acquisition integration will cost at least 10% of the acquisition price. If you cannot absorb a wide swath of sensitivities around forecasted performance – if it all must go right from day one – it won’t succeed. Your post-merger integration plan should include performance tracking measures that post-close will help you monitor the transaction’s success.
Step 3: Plan for Integration
Value is not made when you sign a mergers and acquisitions deal – it is made during acquisition integration. More deals fail due to poor acquisition integration than any other factor, so begin your post-merger integration plan as soon as the target is identified. Develop your plans according to function and accountability, and concentrate on those issues raised during due diligence that threaten your ability to realize value.
Value is not made when you sign a mergers and acquisitions deal – it is made during acquisition integration. More deals fail due to poor acquisition integration than any other factor, so begin your post-merger integration plan as soon as the target is identified. Develop your plans according to function and accountability, and concentrate on those issues raised during due diligence that threaten your ability to realize value.
As you develop your post-merger integration plan, remember the four Cs of acquisition integration:
- Compensate – If you want existing management to stay, make their targets achievable and compensate appropriately.
- Communicate – People on both sides of mergers and acquisitions should be completely aware of what’s going on to help quell rumors and paranoia. People will respond to uncertainty by assuming the worst.
- Care – How you react to challenges can make all of the difference. Even small inconveniences can generate ill feelings. Respond quickly and completely.
- Cull – If you must say goodbye to any members of management, make your decisions quickly, but carefully.
Major transitions require strong leadership ; it sets the tone for savings and efficiencies. That is why it is critical to create a transition steering committee and a functional team. These groups should engage leaders from both sides – those with a stake in the strategic acquisition. Members of the acquisition integration team should understand their role in realizing value assumptions. They should set their expectations high and work from a well-defined work plan, revisiting it as conditions on the ground change. The acquisition integration team must include line managers who are close to the action and can see problems brewing
Keep in mind, acquisition integration provides an ideal time to leverage economies of scale and shared resources. As you plan, consider whether centralized functions make sense.
Step 4: Perform the Integration
Now that you have defined your success factors, executed due diligence and planned for integration, it is time to actually perform the acquisition integration.
Now that you have defined your success factors, executed due diligence and planned for integration, it is time to actually perform the acquisition integration.
In this step, you will merge operations , processes and cultures to realize your objectives. As you integrate, focus on re-validating all of the plans you developed since the mergers and acquisitions deal was first considered. Remember, this is an iterative process – evaluate what drives value, what is working and what is not. And throughout, remember speed is critical at this stage – delay drives failure and may cost you key people. This is the time to sweat the small stuff, like being sure that acquired employees know how to enter expense reports and check their benefits.
Track performance at every stage. Before the mergers and acquisitions deal ever closes, determine key metrics and develop a reporting process around them. First, thoroughly document your expectations, potential savings, and your plan. If you neglect this step, your savings are likely to slip away. Report early and often – when public companies merge, Wall Street analysts track closely their success in achieving the savings they claimed for the deal. Private companies should do no less.
Establish post-merger integration milestones that are on equal footing with performance milestones. They should also measure and drive value creation. If you expect revenue growth in the first year, you must expect to hit each post-merger integration milestone. Tie incentive plans and earn outs to the completion of milestones. Also execute essential day one activities: control, communications and governance. Drive the acquisition integration deep into the organization, holding managers responsible for successful execution of each. Throughout, focus on the future – not how things “used to be done.”
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