A recent review of published literature in the M&A sector reveals an important gap in strategic thinking and organizational readiness. While there’s no shortage of excellent counsel regarding how to prepare a business for sale, how to value the enterprise and how to negotiate the price and terms of a transaction, there’s very little published guidance for executives leading a to-be-acquired ("Target") company during the critical period between the initial public announcement and the deal closing.
The truth is, a set of inevitable change dynamics erupt in and around the target company starting immediately upon initial public announcement. If left unmanaged, these dynamics often lead to substantial business risks that can destabilize the business, negatively impact the final closing valuation and cause enormous disruption during a period when it can least be afforded. While you can’t prevent these dynamics from happening, we believe the proactive, strategic actions of a well-prepared Target executive team can do much to mitigate and manage the potential value destruction during the critical period from announcement to closing.
"Strategic actions of a well-prepared Target executive team can do much to mitigate and manage the potential value destruction during the critical period from announcement to closing."
That’s why I am so pleased to introduce you this week to a friend, fellow M&A Partners colleague, and trusted advisor to many best-in-class acquirers. Stephanie Snyder is the principal co-author of this downloadable resource article, The Art of Being Acquired, portions of which are excerpted in this column. With over 18 years of experience delivering value to acquirers, she knows what she is talking about. Prior to joining M&A Partners, Stephanie led the global M&A team at Nortel Networks and served as Senior Vice President at an M&A advisory and publishing firm, as well as establishing her own successful consulting firm. Stephanie is one of our “go-to players” due to her successful track record in helping organizations like John Deere build their own M&A methodology and playbooks, and in successfully leading change management, culture and communications initiatives during M&A.
Stephanie and I were brainstorming recently, and I wanted to relay a few of her insights and our collective inputs for Target company executives in the following questions.
MH: In our work with many Target company leaders, we’ve identified a series of actions that Target company executives should be prepared to take when leading their organization through being acquired.
SS: While every deal truly is different, we believe there are at least seven crucial actions that Target company executives can and should do during the announce-to-close period in every deal. We see these as a core part of ensuring a business is truly ready for sale, and when done effectively, we have seen sustained business results and improved integration outcomes. Unfortunately, most executives end up putting this essential preparation off until the deal-train has left the station, and it’s usually too late.
MH: Our partner, the M&A Leadership Council, recently did a webinar called “4 Key Strategies for Bridging from Diligence to Integration." How is that different from what Target company executives should be thinking about?
SS: There are essential success strategies from both the buy-side (Buyer) and the sell-side, or Target. There are clearly some common areas of focus between the two sides of the transaction. For example, both sides have a shared self-interest in maximizing pre-close integration planning and carefully clarifying data exchange protocols between the two parties prior to closing. Both have a requirement to stabilize their respective business, customers and key talent.
But the webinar speaks primarily to the Buyer’s role and interest in building a more robust internal M&A strategic capability. It’s been our experience that most sellers are nowhere near this level of readiness at deal-time and therefore are at substantial risk of value erosion. Once the deal is in flight, buyers are not obligated to advise the Target what they should do to preserve value, and often are either prohibited from doing so, or are more than willing to take a price adjustment at closing for any business disruption experienced during the post-announcement to pre-closing period.
MH: How should a Target company executive team get started?
SS: If Target executives can train their key leaders in advance, they should do so. Then immediately post-announcement, they should brief a much broader group of leaders and managers in the art of being acquired and, specifically, their role in leading the organization through this process. Prior to announcement, the primary job of management is to run the business. At announcement, however, managers’ jobs immediately become bigger, broader, riskier and more dependent on M&A and change-related skills they may not be fully competent with, or worse, have never been trained to do.
The period between announcement and close is one of the riskiest times of any deal. (For more information on common deal risk factors, please refer to, The Riskiest Day.) Target executives shouldn’t assume that just because managers are good at running the business that they are ready to lead change. Make sure to equip your leaders and managers with the skills and information they need to understand the unique change management challenges of being acquired, what they should do to deal with those dynamics in a constructive way personally and with their direct reports, and specific actions they should and should not take to protect and preserve your business during this dangerous interval.
MH: One of the most common challenges we see Target executives struggle with prior to deal-close is the extent to which decision authorities should be “status quo” right up until closing. Can you shed some light on that issue?
SS: Acquisitions have a tendency to freeze Target company executives into a “wait and see” mode. Even the most confident leaders tend to question what they can or cannot do after announcement of a deal. A cloud of doubt hovers over each decision and every course of action. It’s as if they no longer have the “right” to run the business. Issues run the gamut, but often include core operational decisions such as: “Can I extend special terms to a major account?”; “Can I execute the facilities lease we have been negotiating for six months and desperately need to keep scaling the business?”; “Should I continue to extend the job offer to that top product manager we have been in discussions with and may risk losing to a competitor?”; or “Can I proceed with a major IT program?”
The problem is the acquiring company can’t take control until closing, but as you get deeper in the transaction process, substantive decisions may need to be disclosed or discussed at a high level. So it often ends up feeling like nobody is in charge, and this lack of governance clarity can quickly grind the business to a halt and frustrate employees and customers alike due to a perceived lack of executive responsiveness or decision-making capability.
Target company executives are fully responsible for running the business until deal-close, but unless you are dealing with a truly sophisticated buyer, chances are these interim governance protocols haven’t been clarified during the pre-announcement stages. Working closely with your advisors, hammer out guidelines that ensure your continuing ability to run the business independently and confidentially, but establish specific decision types, deal-phase timing considerations and financial levels of materiality that enable you to surface major decision issues to legal counsel or the deal team for the appropriate level of advance notification or arm’s length dialogue.