Managing the Entire M&A Process from Start to Finish Part 2

Formulating the M&A strategy

Strictly speaking about M&A, there are many reasons why you acquire companies. But the simple overlap between M&A and strategy is quite simple. Either you have a strategy, and you find a target, or you have a target, and you have to build a strategy around it. 

Interactions can start from the top (top-down approach) or the bottom (bottom-up approach), but more importantly, you need to understand what is the business objective of any organization, either a business unit or a division. So you can partner with leaders or technical leaders. 

On the top-down approach, you're trying to understand the business objectives or directors of a leader in their respective divisions. The bottoms-up approach is trying to dive into the roadmap and identifying them and how to fill that gap. 

It could go both ways. So you could end up with the same strategy, but you could start it from the top or from the bottom. 

We live in a world where we all want a real strategy and process. But in reality, there's a good chance that you don't know every single target out there. Sometimes, an interesting target comes along, and they want to sell to you. Even though you're not familiar, it's interesting and you must build a strategy around it. 

Sometimes it's quite handy from an opportunistic and defensive point of view. For example, a company approaches you, claiming that your competitor is acquiring them. Then you have to think about what you're missing. Can you build a strategy around it, and is there a compelling enough reason to even entertain the deal? 

Typically they are an adjacency, or it could be one of your suppliers trying to divest a small portion of their business. You can have a hundred companies in your pipeline but you don't have a hundred thesis ready for any of those companies.

There's always an adjacency far enough that you don't look at it, and suddenly they pop up, ready to be acquired. 

Managing pipeline

It varies depending on the size of the company. If it's a smaller organization they can shuffle the priorities in their mind. Some people use Excel or cloud-based tools. But those are just tools. The most crucial part is updating your knowledge about private companies. That's hard because data is not available. 

How do you update the rationales? As I mentioned earlier, you cannot have 100 deal thesis for a hundred companies. There are also the ever-changing opinions of the decision-makers. Those are some of the components that are hard to capture, but you have to deal with it.

Thinking about integration 

Getting a full picture of the integration plan is impossible during the targeting phase. But it's very useful to have a high-level thought of how you will integrate down the line. An integration plan provides a clear objective during engagement and helps teams learn from the target company.

The goal is to confirm, modify or invalidate your initial assumptions. Your discoveries should be the basis on how you modify your deal thesis. Because there's always some level of integration no matter what you do. 

Working with the deal team

Deals require confidentiality, and as a result, corporate development must only involve relevant people in each process. This could be the technical leader on the product side and on the business side as well. 

As the deal progresses, more people will become involved. The goal is to communicate sufficient information to the relevant people so they can focus on their execution. 

Working with business leaders 

Before issuing a letter of intent, a deal lead needs to facilitate discussions where stakeholders must first convince themselves if they want to acquire the target. Similar to a family looking to buy a house, they first talk to convince themselves that it is the house they want.  

As the deal lead, you must facilitate the discussion among stakeholders to get approvals. It could be as simple as agreeing on what to do or getting commitments to add CapEx. Like a family trying to furnish a certain room to become an office. You facilitate a discussion for them to converge and discuss the commitment on what to do. 

Managing the process

There are many ways to manage this, and it's not just one solution. Let's say you have a cadence of 1-on-1 meetings with certain stakeholders or smaller group discussions for specific topics. 

Sometimes it involved multiple stakeholders or functional groups. Then you have a team meeting that runs the entire show. Lastly, you also keep in touch with executives. This is where you must zoom in and zoom out. 

For some problems, you need to go to smaller group discussions, some problems with 1-on-1, you have to facilitate to bring it to an end.  

Managing the people

We have project managers to keep people in the line of what they're supposed to be doing. We also have a cadence of submitting twice a week or once a week, depending on how intense the due diligence is. 

There are also reports from each function so it can broadcast to different people. And the most crucial part is identifying anything that comes out of the bigger audience and narrowing it down to who gets impacted. 

Then you go to a smaller group discussion to ensure everyone understands the impact. And you go to one on one discussions to drive them to conclusions. 

You have to be realistic that a lot of your team members are not full-time in M&A. And then you not only have to manage part-timers, but you also have to manage external consultants. 

Integration planning

Ideally, some members of the due diligence team become the integration team. But in reality, you may end up with some of them and actually expanding to more people for integration. So in the early stages, there are two parallel workstreams. 

The first when we start the diligence is discovery - trying to learn. Then you try to figure out if any of these risks can be mitigated. Then eventually, you start transitioning to integration. Finally, you have to plan for risk mitigation and start a full-blown integration planning as you finish diligence. 

So it will be best if it's the same group or if the majority will be part of the integration and diligence. However, this isn't always possible. One way to mitigate the disconnect is to involve the integration lead in the diligence process, sometimes earlier. 

Disconnections will always happen if two teams are looking at the same deal because they will have two different opinions. When the lead has the facts and truths of the deal, they you can always go back to that person to realign people, if there is a disconnect.

Value leaks

Because of confidentiality, the other side does not involve many people in the discussion. This often results in people or key talents getting overlooked. You need to make sure that you understand who is the technical brain of the company. There's no point in buying a company if the key talent does not sign the employment agreement.

To identify key people we try our best to interview in due diligence. I always advise people to ask the same questions to multiple people and see if the answer is different about the company. 

Then you list some portion of the truth that you think is true because you will never find out the truth until you acquire the company and deal with them daily. 

Retaining key people

Handling this varies depending on the size and the complexities of deals. In a small deal, you may be able to get away with having the key talent sign an agreement before signing the deal. In a medium or larger deal, they cannot broadcast this deal happening to everyone, so it may happen between signing and closing. 

It also depends on the country. In some countries, non-compete doesn't mean anything because it's not enforceable by laws. Also, non-compete could have financial implications. In some countries, you have to compensate for that. So for them not to work for other countries, you have to find that balance of what can be done in certain deals.

If there is retention risk, start planning for knowledge transfers and redundancies early on. You must remember that you cannot hold people from working for the company they don't want to. They can quit anytime. So you have to worry about knowledge transfer if there is a bottleneck or a gatekeeper. 

Creating a good people experience 

The best way to retain people is to provide them with a positive experience and learn from them for better integration. You have to be open-minded because you're dealing with people that could have a completely different perspective. They also have different processes; you cannot just come in and tell them what to do. You have to be mindful of that.

You also must remember that you are acquiring them because they are successful in their market. They're doing something right, so instead of changing their processes, you have to learn from them and not force your way of doing things.

When it comes to conflict resolution, you have to be creative in solving some of these problems because people care about different things. When you talk to them, you can ask what happened in the previous company to understand them better.

It could be as simple as a car allowance or relocation where it's far enough from where they live. This is just a small amount of money, but it makes a huge difference in people's lives. If your deal thesis involves relocating people, you must be careful because he could make or break the deal. 

It could also be a language barrier which makes onboarding harder. However, many small things can adapt, and there are no silver bullets to address people's issues.

Hardest part 

You have to learn in need quickly because you are facing different people and culture every deal. Sometimes you have to learn completely new business models and its market landscapes. But it's also why most professionals love M&A. Because it's not a rinse and repeat; there's always something new to learn.

Closing

You can categorize this into two parts: internal and external.

For the external, you can manage or assess the target to meet the closing conditions. It could be a simple as signing employment offers or filing for antitrust. For internal, you can prepare for the logistics on day 1 and finalize the integration plans. 

The ironic part is the more complex it is for the external, the more time you have to prepare for integration. The simpler it is, the shorter you have to prepare for day one. So it's like a dilemma.

‍