How can you do everything right when putting together a deal (or any project or product for that matter) and still get to the wrong answer? By falling in love with the deal. Even when the deal is set up appropriately from the beginning, it meets all the valuation and other qualifications to enter the deal process, there are many other factors or information that can be discovered during the remainder of the deal process that could and likely should require you to walk away from the deal. However, after spending endless nights working on it, engaging large teams of individuals, spending several tens or hundred of thousands of dollars on attorneys, accountants and advisors, convincing the board to do the deal and potentially telling all key stakeholders that the deal will be closed, its hard to see the facts through the emotional tie of wanting to reach the finish line. Somewhere along the way facts can turn into emotions.
Turning a Blind Eye
I encountered this turning a blind eye to the facts by CEO’s several times in my career. The most memorable was when the head of corporate development and I went to the negotiation table to complete a deal to acquire a software company. We agreed with the CEO upfront of the negotiation parameters and at what point the deal stopped making financial sense for us. During the negotiations it became clear that the other party was intent on changing the initial terms outlined and the deal metrics would no longer be accretive to our company. We walked away from the table. Ultimately, we were scolded by the CEO about how important this deal was to him and we were to go back to the table and accept the terms the acquired company had now outlined. Ultimately, under this directive, the software company was acquired and never became accretive. It became a black-eye on the company’s ability to make acquisitions and we were penalized in the public markets by our shareholders.
There are several ways to ensure that a deal stays true to the initial strategic and financial objectives.
- Ensuring that the objectives of the deal are well known and understood by the deal team and key stakeholders. Create alignment on key strategic and financial metrics. Agree to guardrails as to where the deal can go off track and should be scrapped.
- Understanding the key financial metrics necessary to be achieve for a successful outcome. These metrics should include not just the acquisition target’s post-integration financials but also the costs of integration including team retention but also opportunity costs. What is the cost of the deal and integration teams to do manage the deal? What other strategic objectives could they be moving forward instead?
- Continually updating and refining the deal metrics as information is gathered. As the deal continues to evolve, the integration teams are starting to meet and the acquisition target team members are sharing more data and information, ultimately new facts emerge and assumptions can be modified.
- Creating an integration plan upfront to ensure timelines and costs that are included in the financial metrics can be met. Developing the integration plan during the deal process with both side’s teams provides the opportunity to learn about what can be eliminated and leveraged post-integration and in what timeframe. It provides the chance to validate initial assumptions and project roadmaps.
- Create an integration team that made up of individuals that will be responsible for the financial, product and customer outcomes. The integration team should include the operators of the business that will be required to meet objectives post-integration in order to ensure integration plans are consistent with current operating processes and procedures and to obtain buy-in from the operators as they will have to live with the results. Vital information regarding the time and cost of integration will also come to light.
- Understand the culture, motivation and morale of the acquiring company’s team and how these will impact the deal metrics and integration plans. The acquiring company founders and key team members may have different objectives and motivations once they have sold their shares. Teams may have different personality types, way of interacting and collaborating, and leadership styles all which could led to difficulties integrating the businesses.
- Plan to have an executive sponsor spend significant time at the acquired company post-acquistion. Providing on-site facilitation of the acquired company’s assimilation into the culture, way of life and processes of the acquiror will help accelerate the integration process.
- Create a retention plan for key team members, that is included in the deal metrics. There are typically several team members that are required to ensure a successful integration and ongoing support of clients and the products. Review each team member for their importance and how long they are required to stay with the company for the financial objectives of the deal post-integration to be achieved. Develop a retention plan, preferably that is customized by person, to encourage them to stay through important milestone dates.
- Be willing to walk away. Maintain an open state of mind that the deal may not be consummated for multiple reasons and that failure to do the deal is likely to be deemed a success as the acquirer will not be saddled with financial obligations which will not produce sufficient returns.
- Create a debate team. Have a team of independent advisors, either from your internal team or paid consultants, for the deal that are focused on keeping independent and bringing to the forefront issues with the deals that could have the deal go outside the originally agreed upon guardrails.