The M&A process has been compared to many things, including a game of chess, a special marriage, even a tattoo, and there’s a kernel of truth in all these analogies. But first and foremost, I think, it’s a team sport.
Having worked on more than two dozen mergers and acquisitions in the manufacturing industry in recent years, I’m reminded again of this truth each time I get involved with identifying a new target and executing the actual acquisition.
The timing may be right and the candidate a promising match, yet it’s how you pick the players on your team that determines how successful the outcome will be.
Ideally, the team coach - the CEO, assisted by the CFO - can already rely on a winning lineup that he or she has put in place preparing for this moment. Together, they have hashed out what types and sizes of businesses to put on the target list, and what the company is willing to pay for these businesses.
Like the General Manager in football, the bank works with the coach to ensure the team has all it needs to succeed. Similarly, the bank also learns from and listens to the coach, to calibrate financing T&Cs that make sense for the business.
What's your game plan?
Identifying and defining the right targets is the most important part of building an acquisition or growth strategy. It should consider whether the company and the targets can or should be able to help each other with new or more robust applications and/or technologies, relationships with key customers, and with building out their respective management teams.
When all these criteria have been established, the company may already be able to identify the specific targets it would like to acquire. Once the decision has been made to move forward, it’s time for the coach to rely more heavily on the M&A “quarterback” to handle the game.
Who's your M&A quarterback?
That quarterback - often the company’s Vice President of Corporate Development - manages the action on the field. The goal is to ensure that the acquiring company’s team and its due diligence professionals, as well as the selling party, all keep the ball rolling - even in situations when the game seems to have reached a stalemate.
How could this play out, all sports metaphors aside for a moment? Let’s look at a real-life example.
Imagine the following scenario: Target company A declines to even discuss an acquisition. That’s when a Plan B should be in place and swiftly executed. Zooming in on target company B becomes the priority now, without closing the door for company A.
An acquirer must nurture relationships and be willing to give the seller time to decide to do a deal. However, the company must also be flexible enough and ready to quickly move down the list to initiate talks with a lower priority target.
When it gets personal
Selling a business is often a deeply personal decision. That’s crucial to keep in mind when dealing with the founder as the potential seller. The timing must be right, and sometimes it can take years of relationship building before a seller will decide to move forward.
Ideally, at that point, the acquiring company already has an all-star team in place - including (let’s return to our football analogy) its running backs and wide receivers.
Who's running with the ball?
In my M&A lineup, the due diligence professionals are the running backs and wide receivers. They run with the ball and get it done. These team members are, in many cases, executing on the direction of the coach or the quarterback, but they also have to be the best at what they do and think “on the fly” to be able to make adjustments as the game develops.
An experienced deal attorney is a must-have in this group. In preparing an acquisition, he or she helps the CEO and VP Corporate Development to put together the Letter of Intent; the football analogy here would be drawing up the game plan.
Ensuring proper legal due diligence is also part of the deal attorney’s role. The attorney verifies the target company is properly registered, complies with all laws and regulations, and has disclosed all lawsuits and other significant legal matters.
On the financial side of the due diligence process, the attorney’s equivalent on the team would be a seasoned transaction services professional. This expert’s role is to scour the books and records of the target, to validate the financial and related information the acquiring company has received, and to make sure that information is complete and reliable.
Which items seem to be unusual and/or non-recurring? They may be distorting the target's financial results. Focus on details and a fine nose for inconsistencies are expected from the financial due diligence “running back”, but so are communication skills and a keen eye for the bigger picture. After all, who’s in a better position during this phase for close-up assessments of the target company's finance and accounting personnel?
Tackle the tax issues
Then there’s the tax due diligence professional on the team, whose role isn’t limited to verifying that the target company has paid all its taxes. The tax structure of the acquisition also needs to be put in place, to minimize taxes going forward.
Here’s how this can play out: Has the target company filed returns everywhere where it is supposed to? If not, then there may be a risk to the acquiring party in the future. Unearthing this detail may also open an opportunity to get a specific representation from the target’s owner/s to assume responsibility going forward for “legacy” tax issues that may creep up later on.
Speaking of “legacy” issues: In manufacturing, the process wouldn’t be complete without bringing in environmental due diligence experts to look for possible contamination (land, water air) that could cause problems later. Are all required permits up-to-date? Are there any compliance issues with environmental laws?
Probably the most crucial part of the due diligence process is ensuring that the acquisition target will be able to live up to its potential. Operational due diligence ensures that the reasons that put the company on the target list in the first place still hold up under closer scrutiny: Will the target be a “good fit”? How can products, customers, suppliers, strategies, practices and corporate culture complement or strengthen those of the acquiring company?
To return to the football metaphor: Operations, legal, financial, environmental and tax professionals are like the players on the field in the first couple of quarters in a game. They are the best on the team, and they work hard to build a lead. These top performers’ role is to remove the hurdles and set the pace so that the project doesn’t suffer surprise setbacks at a later stage.
HR, insurance, IT: Building out the lead
In the manufacturing industry, the HR, insurance, and IT professionals often enter the M&A playing field later in the process, analogous perhaps to the players late in a football game whose role is focused on maintaining the lead that their teammates have built in the earlier stages:
The HR lead will evaluate key personnel of the target company and general compliance with employment laws.
The insurance pro on the team will check if the target carries proper insurance, what its claim experience has been, and if any larger claims have not been disclosed to the purchasing party.
IT due diligence tasks include evaluating information systems of the target and assessing what efforts will be required to integrate the systems of both parties.
In the digital domain and when targeting an Internet-dependent service company, the latter action item - IT due diligence - needs to be tackled during the first stage of the process.
Different industries require different M&A game plans, but one thing remains the same: in M&A as much as in football, much rides on getting to draft the right talent and having our dream team in place if we want to be dancing in the end zone.