10 Ways to Ensure Your M&A Transaction Is a Complete Failure27 September, 2017
The M&A failure rate is high largely because acquiring companies often fail to address critical factors related to technology and talent that can destroy M&A value in the due diligence and integration phases. At ShareVault, we've facilitated billions of dollars in M&A transactions, and we've seen a lot of mistakes. Here we've compiled a list of 10 M&A transaction and integration practices that will ensure that your next deal is a complete disaster.
#1 Ignore the Target Company's IP
A healthy acquisition is focused on the IP, the target’s assets and how they can be integrated into the acquiring company’s products and services. Deals often fall apart when there is not a clear and deep understanding of the target company's IP and assets. Buyers need to know that they are getting what they paid for. If a company does not own the IP that it purports to own, not only is the buyer not getting the value they paid for, but they may also inherit liability in terms of infringement.
A surefire way to see a deal unravel is to take an undisciplined approach to evaluating IP and not developing the confidence that what the target company claims is theirs, is theirs, and that the IP is protected.
#2 Ignore Business Obligations and Agreements
Organizations are never stand-alone entities that exist in a bubble. Today's companies have many obligations, contracts, and agreements both within the organization and without. These include agreements with suppliers and vendors, agreements with customers and agreements with its own employees. All of these obligations and agreements have terms associated with them, including pricing structures, royalty rates, benefits packages and termination provisions.
Failure to fully examine these agreements is your best bet for inheriting redundancies, risk, indemnification obligations and hidden costs.
#3 Keep Everything
Just as focusing on the IP and key assets of the target company is critical, it is equally essential to identify those assets that are not necessary to the success of the strategy.
These assets can include:
• Manufacturing processes
• Manufacturing personnel
• Redundant sales teams
Part of the strategic plan and due diligence focus when acquiring a company is understanding which pieces of the acquired business are unnecessary. An excellent way to destroy value is to take on those extra facilities, processes, people, costs and technology infrastructure that are not needed for the success of the new company and not having a plan for divesting those assets.
#4 Remain Oblivious to Cross-Border Issues
Because startups often have limited budgets, they'll often attempt to cut costs by hiring overseas contractors who are often much less expensive. However, to further cut costs they'll neglect to hire overseas council in order to ensure that the proper documents are in place for that jurisdiction to protect IP. They’ll take an existing form meant for the U.S. and attempt to apply it in Croatia or India, for example. Ignoring the structures and safeguards (or lack thereof) of these cross-border agreements is another good way to ruffle a deal and incur headaches and additional expenses.
#5 Let My People Go
Equally important as divesting of talent that is redundant or unnecessary to the new organization is retaining talent that is critical for success. Retention is often essential for ensuring the continuity of the company you are buying. Often – especially with deals in the tech sector – talent is key and in a competitive environment can be difficult to replace. Structuring the mechanism for retaining and motivating employees is equally as important as structuring the purchase price.
#6 Failure to Communicate
During an M&A event, many questions will arise. Employees will want to know if they're going to keep their jobs, if their boss will still be their boss, whether the company will retain its culture or adopt a new one. The biggest mistake integration teams make is trying to convey this information in a one-off, company-wide meeting.
Executive teams can be very focused on communication on day one or post announcement and the communication in and around that event, but often lose sight of the importance of the sustained internal and external communication required to fully integrate newly structured companies.
If you want to fail, then fail to formulate an M&A integration story—the story executives will share internally with employees, as well as how that story translates externally to customers.
#7 Don't Play Well With Others
A good due diligence team has many parties involved. There’s the deal execution team, the corporate development people, accountants, attorneys and other vendors assisting with the transaction. On the other hand, there are the integration or operations teams that focus on monetizing and integrating assets after the acquisition.
Too often there is a detachment between these groups. Effective integration requires healthy communication. It is imperative that the integration team maintains constant contact with the deal execution team from day one. This ensures the goals of the acquisition are prioritized, so the work that needs to be done to successfully integrate the company is done from the very beginning.
It is important to note that first-time acquirers often struggle with melding the concept of integration and execution. Organizations with little M&A or integration experience are encouraged to hire advisors and consultants (with experience in their vertical) to augment the team with experience.
#8 Ignore Post-Merger Aspirations
A great way to doom a deal is to fail to consider what company executives want to do after the acquisition. During the strategy stage, and certainly through the diligence stage, there has to be an assessment or hypotheses concerning what those people want. Ensure that executives and teams are well aware of career plans post-integration.
Often, there is an assumption that the CEO or CFO will simply go away. That is usually not their intent; often they desire to remain part of the acquired company. So, it's important to fashion a deal that takes into consideration both compensation as well as future career aspirations.
This goes for the board as well. Although they are supposed to be focused on shareholder value and the best interest of the owners, they will often have concerns about what they will be paid out and what their role will be after the deal is concluded. Realize that board members are people too; they have life and career aspirations after the boardroom.
Bottom line: consider what executives and board members want to do post-merger.
#9 Ignore Cybersecurity Issues
Failure to examine and identify holes in the target company's security environment can be perilous.
Five years ago, cybersecurity was often glossed over during the due diligence phase. But today, with the proliferation of the cloud and almost daily high-profile data breaches that are reported, it is a due diligence factor that needs to be scrutinized. It requires effective communication between external advisors and the deal team and the technology team that is inheriting the data.
It is important to understand where data is captured for the company. Is it in the cloud? Is the data center secure? Smaller data centers generally do not have the resources to fend off all the cybersecurity issues that are prevalent today. So, it is also important to conduct due diligence on the data center a target company utilizes.
#10 Assume All Mergers Are the Same
Having an experienced due diligence team is great, but it can also lead to the false assumption that what worked the first time will work every time.
Each merger is different. Even within the same industry, people and cultures can vary from company to company. As a result, what worked the first time won’t necessarily work every time, and what didn’t work during previous transactions could actually prove useful the second time.
Experienced due diligence teams can be a great asset as long as they remain flexible and realize that it's possible to learn the wrong lessons from experience.
To learn more about increasing M&A transaction success, download our white paper: M&A Integration: Maximizing Return on Technology & Talent