One Line at a Time
by Jack Prouty, President of the M&A Leadership Council
Over the years, I have accumulated go-to phrases to illustrate key points in effective planning and managing of an acquisition/integration. These one-liners help the attendees of the M&A Leadership Council workshops remember key principles of M&A success, and we hope they’ll help your M&A team as you deal with the challenges and complexities of your next deal.
The Rule of 70/70:
Up to 70% of all deals fail to deliver the expected shareholder benefits, and 70% of the reasons why result from what you do and don’t do during integration planning and execution. It is time to change that paradigm and increase the percentage of successful integrations. This objective is the whole rationale for creation of the M&A Leadership Conference, and our wide array of public and in-house education and training programs. Success is employing both the art and science of effective M&A: the what to do, as well as the how to do it.
“I care, but not that much.”
Years ago, I heard a very successful negotiator say, “I have successfully negotiated with terrorists, labor unions and hostile takeovers. I have been successful because I care, but not that much. And yet, when my 17-year-old asked for the car keys, we almost get in a knock-down, drag-out fight. Why? Because I care too much!” This point also pertains to doing the deal. We often see red-flag issues soon after starting the due diligence of a target acquisition: business fit, cultural fit, business ethics, financial performance, etc. Yet we have invested so much already and want to do the deal so much, that we override our concerns and push for a deal that often turns out badly. The best negotiator for an acquisition is the one who cares, but not that much!
“Plan the plan” before you “Execute the plan”.
When it comes to M&A, too many companies proceed with “Fire, ready, aim.” They rush to launch functional teams before really thinking through the strategy of the acquisition, the major objectives to be addressed, the business benefits to be achieved or the risks to be mitigated. If companies would first spend adequate time assessing and planning before the teams start working, they would accelerate the speed of the integration and achieve better overall business benefits.
Address the people issues before starting the integration tasks.
In most acquisitions today, we acquire more human assets than capital assets. The value of the deal is often all about the talent and capabilities in the target company, their intellectual properties and their customer relationships. With any change of ownership, the employees can elect to either stay or go, so they need to be sold on the opportunity to stay. They need to have all their “me” issues appropriately addressed. Until they buy in, don’t expect them to get excited about moving forward and devoting significant energy to all the integration planning and implementation activities that need to be done.
Don’t be incredibly precise about arbitrarily derived numbers.
After being involved in over 80 mergers and acquisitions, I am suspicious when during due diligence, a team member expresses a business benefit with great precision. An example would be stating $246,000 in savings through economies of scale in purchasing. Given that we had limited access to the target company personnel, inadequate data room information and a short time to do our analysis, I would have more confidence in their findings if they said it was between $200,000–$250,000, and I want to know how they think it is going to be achieved: i.e., through the certain actions (e.g., “a 60% overlap with suppliers which increases our leverage as we become their largest customers”). Also, I want to understand the confidence level they have in the number cited (e.g., “50–70% probable).
A committee should consist of an odd number of people, and three is too many.
While consensus management may be the way most organization operate, when it comes to M&A, we don’t have time for “analysis paralysis.” Instead, empower people to make decisions; push decision-making down or up to the most appropriate person; and make timely decisions. A RACI chart can be a great tool for this because it tracks who is to be Responsible, Accountable, Consulted with or Informed. Only name one person to be accountable for each task. We also recommend setting up an executive steering committee to oversee each acquisition so there is senior responsibility/accountability. This executive committee should be no more than five people, with the business owner designated as the ultimate decision maker.
“During M&As, I sleep like a baby: I wake up every three hours and start crying.”
This comment may be funny, but it has a lot of truth to it. I only worry during an M&A deal under two scenarios: 1) when things are going poorly, or 2) when things are going well. At least when things are going poorly, we can identify the problems and address them. But I get really concerned when things are going well, because that could mean we really have an issue that has just not surfaced yet. I am constantly looking over my shoulder, questioning what I have overlooked and what potential issues could emerge to “bite us.” A critical success factor in M&A is paranoia – I live it every day that I am in the trenches of an M&A project!
Availability is not a skill set.
For companies that do not have a dedicated team focused on integration (and only about 5% of companies do), you need to pick the best qualified people to lead the integration effort. Availability is not a skill set! If it does not hurt to pull these people out of their day-to-day job, then they are probably not the right people. My preferred approach is to pick a high-potential individual whom you could see sitting at the executive table in three to five years. In The Art of M&A Integration workshop, we go into some detail on the characteristics and attributes of this individual, as well as the role this critical leader plays in managing up, down and across in the integration effort.
90/10 and 10/90.
Our view is that you need a dedicated team driving the integration effort (This is not always possible, but we view it as a best practice.) Directionally, at least 90% of the people in both organizations should be focused on running the day-to-day business better than ever to avoid any value erosion. Conversely, we want a small but talented team driving the day-to-day integration. A simple way of thinking about this is 90% of the people should be focused on the daily business and 10% focused on the integration. A client further refined this 90/10 Rule: 10% of the organization is focused 90% on the integration and 10% on the daily operations; conversely, 90% of the organization is focusing 90% of their time on running the daily operations and maybe 10% involvement on integration tasks. Don’t get hung up on the 90/10; it’s less an exact figure than a relative ratio of where people should be properly spending their time.
“A lack of planning on your part does not constitute an emergency on mine.”
As General Patton once said, “A good plan today is better than a great plan tomorrow.” To effectively execute mergers and acquisitions, everyone needs to stay in their “swim lane” (that is, their area of responsibility) and deliver their work on time. M&A requires rigor, discipline and accountability. There are a lot of moving parts and many interdependencies. A failure to provide on-time deliverables impacts the overall execution of the plan, and it delays the work plans of all teams relying on you. I see this problem a lot in the interface between IT and other business functions. IT cannot start their tasks until they understand how the business functions plan to integrate. The longer the business functions delay in providing the direction and required information, the longer it will take IT to deliver their portion. The old analogy on having a baby still applies: If you delay starting for three months, it is still going to take nine more months to be complete.
“If we are all in the same boat, then no one can fire the torpedoes.”
M&A is a team sport. To accomplish the overall effort, everyone needs to be working together, communicating and taking shared responsibility. This starts with the senior executives setting the top-down strategic direction, while the functional teams provide the bottom-up execution. There will be leaks in the boat, there will be miscommunications, and there will be mistakes made. Welcome to the world of M&A! However, to use the boat analogy, everyone needs to be rowing together in the same direction, delivering to their roles, and taking ownership for the overall integration. No one gets to sit off on the shore and lob grenades. No “attaboys” or “attagals” for the second-guessers who say (after the fact), “I thought this was a problem, but I did not say anything.”
Don’t major in the minors.
At any given time during an acquisition, there are probably 60 different things that could be done. We don’t have time for that! We need to simplify the list of activities to what is critical (do today), what is important (do tomorrow), and what is nice to have (no time for it). The Pareto principle still applies: 20% of what could be done provides 80% of the benefits. Focus on only the high-value activities that will deliver the greatest benefits or avoid the greatest risks. Run everything through this filter: Does it help us achieve our acquisition rationale and integration objectives; does it help us deliver the synergies of the deal; and/or does it help us mitigate or eliminate the identified issues and risks?
“Your face could stop a clock.”
Effective communication is not only what you say, but how you say it. For example you could look at your spouse and say “Honey, when I look at your face, time stands still.” Or conversely you could say, “Your face would stop a clock.” Essentially, they both say the same thing, but the first statement would get a much more positive response than the second. In M&A, especially during the initial communications in the first week or so after announcement, it is important to spend time not only thinking about the most important employee, customer and other stakeholder questions to be addressed, but how to most effectively communicate those messages. To use a cliché, we never get a second chance to make a first impression. Our communications during the deal should be focused on stabilizing the organizations and building trust and credibility with key stakeholders.
M&A deals are like Band-Aids.
If you pull a Band-Aid off slowly, it hurts; and if you pull it off fast, it hurts. So you might as well pull it off fast and get it over with. The same lesson applies to mergers and acquisitions. You want to move as fast as feasible in integrating the businesses (however you define this integration) and move to the steady state of the new organization. The longer you take to integrate, the greater the business risks and the more value erosion that can occur. We recommend that you start planning and preparing for the business integration as soon as possible (certainly no later than in due diligence). Additionally, we find that the more effective up-front planning you do (ideally, prior to legal close), the faster the integration can occur.
Two of our training workshops, The Art of M&A Diligence and The Art of M&A Integration, go into greater depth and breadth of best practices and lessons learned for successful M&As. But the above is a good list of best practices and lesson learned for you to follow. And if you go to one of the workshops the M&A Leadership Council provides, don’t steal my one-liners before I have a chance to tell them!