Monday, April 15, 2013

May the Odds Be With You

This blog has highlighted the difficulty for acquirers to create value for their shareholders. This is due to a variety of factors ranging from behavioral biases to governance breakdowns. This does not mean that all M&A is bad as some do succeed. Those success stories share some common characteristics. A key is the establishment of an appropriate process with effective procedural safeguards.

This process incorporates many of the following steps (my Ten Commandments) :

1)     Avoidance of large transformational transactions-especially when proposed by a new CEO seeking to make a reputation for himself. He usually succeeds in making the reputation-unfortunately, not the one he intended. HP’s Leo Apotheker stands out as the poster boy example with the disastrous Autonomy acquisition.

2)     Actively engage the board in the process from the beginning rather than just asking them to approve a fully cooked deal under a tight deadline.

3)     The board should establish a subcommittee chaired by a knowledgeable outside director to challenge management concerning, inter alia, pricing, valuation, synergies, and alternatives.

4)     Establish a firm up front walk away price before the negotiations begin. Beware having to adjust your price to “win”-AKA the winners curse. This reservation price should reflect your best alternative to a negotiated agreement (BANTA). This protects against accepting an unfavorable agreement compared to a better alternative outside of the negotiations. To paraphrase Warren Buffett-there are no called third strikes in M&A. There is always another opportunity.

5)     Carefully consider the “whole deal” and not just price. Remember, you can name the price if I can name the terms, and I will win every time.

6)     Ask yourself if you are honestly the best owner of the target. This means you can extract the highest value through an optimal mix of strategy and execution. If not, then you are unlikely to extract the premium paid in a competitive bidding situation. As my favorite Chicago mayor Richard Daley Sr. eloquently stated-“don’t play no games you can’t win”.

7)     Make sure you get what you thought you were buying through extensive hands on due diligence(DD). DD is not glamourous and is frequently out sourced to consultants by executives who do not want to get their hands dirty. This leads to failure like those at HP in their failed acquisitions program. The seller enjoys an informational advantage over the buyer. Since they are unlikely to tell, it is up to the buyer to find out. A useful supplement to DD is using the reps and warranties in the sales and purchase (merger agreement) to flesh out matters you should explore more deeply.

8)     Develop a detailed integration plan updated by DD results covering the first 100 days after the closing. You need quick victories and must consider the complex social issues.

9)     Tie management’s incentive compensation to the target’s post close performance.

10)  Conduct a post mortem a year after closing to uncover lessons to be learned.

Of course, there are no guarantees, but the odds for success can be increased through an appropriate process.

Good luck


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