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
j
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