Winning at the Acquisition Game by Timothy J. Galpin Book Summary
Winning at the Acquisition Game, Tools, Templates, and Best Practices Across the M&A Process by Timothy J. Galpin
A blockbuster merger might seem like an executive’s easy path to profit and glory. In truth, the M&A field is fraught with pitfalls, strategist Timothy Galpin writes in this 10-step guide to mergers and acquisitions. The uncomfortable reality is that, despite the flowery press releases and breathless news coverage, most corporate marriages flop. But in this useful guide, Galpin tries to improve the odds by offering a methodical approach to everything from finding the right companies to acquire to making sure valued employees stick around after the deal is done.
- The M&A process begins with formulating an acquisition strategy.
- Find acquisition targets that fall within your strategic parameters.
- Conduct due diligence to avoid any unpleasant surprises.
- When setting a valuation, beware of behavioral pitfalls.
- Negotiations can be a protracted search for weaknesses and compromise.
- Consummating the deal is an important – and treacherous – part of the M&A process.
- Integrating the combined companies sets the stage for future performance.
- Motivating the merged firms’ workers is a crucial part of a deal’s success.
- Innovating after the acquisition requires an intentional approach.
- Measuring the results of the merger is the final step in the process.
Winning at the Acquisition Game Book Summary
The M&A process begins with formulating an acquisition strategy.
Mergers are often an attractive way to grow, but the first step in winning at mergers and acquisitions is to understand their pitfalls. Ample research demonstrates the harsh reality of M&A outcomes: Overall, sellers win and buyers lose. A KPMG study concluded that more than 80% of M&A deals did nothing to boost the acquiring company’s fortunes, and other studies have shown similarly dismal results. While most acquisitive companies lose out, a minority of buyers do manage to boost their returns, mainly by applying a disciplined, systematic approach to M&A.
“Many companies are looking to change the way they conduct their business, alter their existing business model or scale their enterprise to meet the changes taking place within their industries.”
The companies that thrive in M&A zero in on potential acquisitions that offer one or more of the “10 Cs”:
- “Channels” – new modes of delivering products to customers.
- “Content” – novel offerings or services.
- “Capabilities” – enhancing an acquirer’s systems or people.
- “Customers” – entries into untapped markets.
- “Countries” – nations or regions where the acquirer isn’t a dominant player.
- “Capacity” – broader production output or supply chain abilities.
- “Consolidation” – savings reaped through cutting redundant business offerings.
- “Competition” – staving it off by buying current or future rivals.
- “Cash” – acquiring companies with good cash flows or reserves.
- “Creativity” – access to knowledge and innovation not possessed by the acquiring company.
Find acquisition targets that fall within your strategic parameters.
After you’ve settled on an acquisition strategy, the next mission is to locate suitable targets. There are three broad categories of acquisitions: “Opportunistic” deals fall outside the acquiring firm’s acquisition strategy but are nonetheless tempting. “Reactive” acquisitions are those in which the seller initiates the deal. And in a “proactive” transaction, the buyer launches a thorough search for acquisition partners. The more compatible the partners are, the more likely the transaction will prove profitable for the acquirer. On the other hand, mismatches in strategy or culture can doom a deal.
“Locating potential target companies that fit the firm’s M&A strategy is a key factor leading to successful transactions.”
Finding promising acquisitions is no easy task. Just 5% of companies are actively seeking buyers at any given moment, so aggressive acquirers invest considerable energy in discovering hidden deals. The pitch requires salesmanship: Persuading an acquisition target to consider an M&A offer requires demonstrating that the acquiring firm is a good fit and that the marriage brings benefits to the acquired company. In many cases, a target will rebuff the initial contact. However, the process takes time, and acquirers devote continuing efforts to building a relationship and trust with promising targets.
Conduct due diligence to avoid any unpleasant surprises.
Once you’ve found a viable and willing target, the next step is to do your homework. Because so many M&A deals go south, it’s crucial that the acquiring firm conduct a deep dive into the transaction before closing; after the deal is done, it’s too late. While the start of the acquisition process focuses on the broad contours of a deal, the due diligence phase is a thorough, detailed investigation of every pertinent factor. This includes a look at the finances, legal issues, technical topics, environmental concerns, and operational strengths and weaknesses of the target. The due diligence stage is the time for hard-nosed analysis and raw skepticism. The cost of believing a seller’s glowing words can be steep. Bayer learned this harsh lesson after its $63 billion acquisition of Monsanto: Following the deal, Monsanto’s legal fight over Roundup weed killer ended up erasing $28 billion of Bayer’s market value.
“Caveat emptor (buyer beware) is important advice to acquirers.”
While financial minefields such as pension liabilities are difficult enough to parse, the most challenging part of due diligence is assessing the cultural fit. Because ambiguity surrounds such issues as values, hiring practices, communication styles and training programs, it’s far too easy for the acquiring party to misread a cultural mismatch. The savviest acquirers conduct cultural due diligence on themselves, too – it’s the only way to determine a post-merger cultural fit.
When setting a valuation, beware of behavioral pitfalls.
Private equity legend Henry Kravis pithily summed up the reality of valuing an M&A deal. “Don’t congratulate us when we buy a company,” Kravis said. “Congratulate us when we sell it, because any fool can overpay.” While valuation might seem a straightforward exercise in filling in cells on a spreadsheet, the reality is far messier. Acquirers often overpay. Many factors can spur the mispricing of an M&A deal. Perhaps frothy markets have raised the bar on the prices paid by acquirers. Maybe herd behavior has created intense competition for a sparse field of targets. And because an acquisition is by definition an exercise in optimism, the “Pollyanna Principle” – the tendency to overplay the positive and downplay the negative – can drive up an M&A valuation.
“When valuing target companies, carefully scrutinizing the assumptions that go into creating valuation models is equally as important as, if not more important than, ‘crunching the numbers’.”
Misjudging a target’s value can be costly, as Procter & Gamble learned after taking a $3 billion write-down after its $12.5 billion purchase of cosmetics brand Coty. The good news for acquirers is that there are two sure clues that foretell overpayment: One is the acquirer paying mostly stock for the deal. Purchases funded with equity at a level of 88% or more of the price are risky – they have a 2.6 times greater chance of a subsequent impairment than do deals that rely more heavily on cash. Another warning sign is goodwill, an intangible asset that’s tricky to value. In deals in which goodwill accounts for more than two-thirds of the price tag, the odds of a future write-down are 81% higher than deals in which goodwill makes up 46% or less of the purchase price.
Negotiations can be a protracted search for weaknesses and compromise.
Even with a willing buyer and seller, negotiating a deal can take weeks or even months. The two sides must hash out a host of details – for instance, how the new organization will be structured, who will make which decisions, where the combined company will be located and how much the executives of the acquisition target will be paid. Negotiating strategies vary, too, with some organizations preferring an adversarial, winner-take-all approach and others leaning toward a more collaborative demeanor. There’s even scientific research about how much anger the parties should display during the process to gain concessions: Some is better than none or too much.
“The first rule of M&A negotiation is everything is negotiable.”
Talks typically begin with a letter of intent, or LOI, that spells out many of the terms of the deal. The LOI specifies the purchase price, along with such issues as promissory notes, debt assumption and severance expenses. The LOI also outlines the schedule for the deal, restrictions on the seller’s ability to talk to other suitors, and guidelines around how much access the acquirer gets to the seller’s books and records.
Consummating the deal is an important – and treacherous – part of the M&A process.
The negotiations are done, the deal has been signed and the press release has been disseminated. But that’s not the end of the M&A process. Depending on the transaction, the period between signing the M&A agreement and actually closing the deal can prove difficult. During this period, unfavorable actions from regulators and other third parties can sabotage a deal. And shareholders have a say, too.
“Whether you are a buyer or seller, engaging an experienced M&A attorney to assist with the transaction consummation is essential to avoid what can be very costly mistakes that can even undo a deal.”
Regulators might possess the most power over a deal during this time of uncertainty. Antitrust authorities in the United States, United Kingdom and European Union have broad leeway to investigate business combinations for consumer harm. The United States has a tradition of antitrust oversight stretching back to 1890, and the United Kingdom and European Union have their own regulatory schemes around merger approvals. In another potential deal killer, transactions typically allow the buyer to back out of the deal in the event of a material adverse change, a catchall category that could encompass any number of unforeseen turns in the economy, the markets or the target company’s business prospects. To navigate this fraught stage of the process, make sure to hire experienced M&A attorneys and advisers.
Integrating the combined companies sets the stage for future performance.
In truth, “postmerger integration” (PMI) is an ongoing process, one that starts well before a deal even enters the negotiating stages. Integration should be baked into the acquisition strategy from the start, but practical actions toward PMI begin in earnest after the deal has progressed. The early phase, known as “integration setup,” takes place during due diligence. During that stage, savvy acquirers are researching not only potential deal killers but also how the companies will fit together after the merger. The setup is the time for the acquiring company to establish a framework for PMI.
“Post-merger integration (PMI) is viewed by most dealmakers as the most important factor in creating M&A success.”
Next comes more specific planning for the marriage. During the period of “integration plan development,” a merger task force draws up a blueprint for combining staff, procedures and systems. This plan includes such topics as the numbers of employees assigned to various tasks, timelines for the combination and budgets. Finally, it’s time to execute. Managers of the merged company must monitor the integration plan as it goes into action. One reality of every integration is that it rarely follows the script, so adaptability is critical.
Motivating the combined companies’ workers is a crucial step in a deal’s success.
Keeping people engaged during and after a merger is a huge undertaking. While most executives and managers say the human aspect of M&A is important, they also admit that they don’t feel up to the task. An Oxford M&A Insights Project surveyed managers and found that fewer than 10% felt their firms were adept at communicating, managing and retaining workers and navigating cultural issues. But botching communications and other soft skills can be costly. A merger leaves the work force feeling uneasy – and anxious employees often focus on their fears to the detriment of quality, safety, customer service and other priorities.
“Once the talent is gone, it can’t be called back. And if enough talent leaves, there goes the value you spent so many millions of dollars on acquiring.”
Communication is the best antidote to uncertainty and anxiety. Executives should provide face-to-face communication as often as possible, making sure to not just talk but also to respond to questions. Executives won’t know all the answers to those questions, but managers should know that it’s OK to say that they don’t know. For these difficult conversations, smaller groups are more effective than larger ones.
Innovating after the acquisition requires an intentional approach.
Organizations can take specific steps after a merger to foster creativity and encourage innovation. One tactic is job rotation among the newly combined organizations. This allows managers and frontline workers to see alternative ways of working, with a goal of spurring fresh approaches. Integrating research and development also can help incite creativity among R&D employees at the postmerger entity. In another pro-innovation strategy, companies can delegate responsibility for innovation, a move that creates a sense of ownership among frontline workers.
“Transactions can help or hinder the combined company’s ability to innovate.”
To build momentum, managers can stress some rapid victories achieved by the combined companies’ innovation team. Premerger rivalries can survive the merger, so it’s up to the new company to work past any bad blood among employees who previously were competitors. Postmerger organizations also need to tread carefully around risk taking. Risk is part of innovation, and firms must avoid punishing people for taking risks and instead encourage staff to pursue considered risks. A merger spawns so much anxiety among employees that they can become fearful of putting forth ideas that might not prove successful.
Measuring the results of the merger is the final step in the process.
Effectively evaluating how the merger is progressing is another important part of the M&A cycle. This evaluation helps executives determine if the combined companies are meeting their goals – and if not, how they can change course to improve postmerger performance. The evaluation step also allows organizations to fairly compensate the individuals who contributed to performance outcomes.
“Effective M&A measurement should also support the agile nature of pre- and post-deal activities by prompting corrective and celebratory actions.”
Cost savings and revenue synergies are obvious metrics, but you should look at a variety of results. A merger scorecard should encompass not just financial statements but also factors such as the pace and effectiveness of the integration of departments like IT and HR. The analysis also should measure overall cultural cohesion after the merger. Employee retention, customer loyalty and knowledge transfer are among the metrics that should appear in a postmerger gradebook.
About the Author
Timothy Galpin is a senior lecturer in strategy and innovation at Saïd Business School, University of Oxford, and a consultant to boards and senior management.