Mergers and Acquisitions (M&A) can be a cornerstone in reaching strategic goals by supplying cash flow, brand recognition, size and scale for broader operations, and a bigger market share. M&A can expedite growth quickly if it aligns with your vision and proven market fit.
No matter how aligned, there is always a gap between two companies. When approaching a M&A, you have to decide if you want to bridge that gap or risk falling through.
Mergers and Acquisitions can advance your strategic goals in other ways too:
Increase revenues, improve profitability (e.g. consolidate resources), and gain more users or distribution channels
Position better against competitors (e.g. obtain intellectual property)
Scale efficiencies (e.g. improve purchasing terms and economies of scale)
Advance competencies (e.g. add product capabilities or acquire talent)
Widen and diversify client base, reach more industries, and quickly enter new markets with credibility and expertise
Expand brand positioning leading to greater extension
M&A can also detract from your strategy these ways:
Cost (immediate and overall)
Strain (time and effort impacting the leadership and the team)
Disharmony (misalignment with the culture, team, or systems)
Integration risk (i.e. even if everything looks to align, you may encounter obstacles with the actual integration)
Distraction (all the unknowns end up detracting from your overall vision)
There are many more factors for deciding, but these begin to capture the large impact.
I strongly recommend that you weigh these considerations based on your vision, values, and strategy (maybe while locked in a room alone to think without distraction or persuasion!). Then apply facts, figures, and various opinions to see if M&A can support and expedite your defined strategy.
Should I do this?
For some founders, M&A is a shiny object to grab and cherish. Jim Collins in his book Good to Great noted:
“Peter Drucker once observed that the drive for mergers and acquisitions comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work.”
Deals should be exponential, not additive – i.e. one plus one should equal ten, or at least five. You are investing considerable time, money, and energy into this deal, so it should not be done in order to grow your revenues 10%, to access a small market, or to add a couple developers to the team. Make sure the deal is compelling with a potentially massive return on your investment.
Another way to verify your assumptions is to specifically assign someone to challenge a deal. This “devil’s advocate” should not stand to gain any recognition or reward if the deal succeeds or fails and should be designated with creating a strong list of reasons why not to pursue a deal. No opportunity is perfect, and this way you can effectively weigh pros and cons.
Establish milestones and metrics based on your industry, needs, and lots of objective discussion. What can the M&A accomplish and how will that happen? What happens if any expectation is not met? If these types of questions are not clarified, then that’s another reason to consider walking away.
After all these efforts, you should feel more confident about a deal or consider walking away.
Another way to approach a deal is to move closer without committing.
How to take one step closer without jumping off the cliff
Even if you feel overall positive about the opportunity, you know there are risks, so consider some next steps before signing anything.
Some ways to proceed:
Keep Talking. The more conversations, the more you learn about each other and determine if the attraction can last into a committed relationship. Meet with people who know the potential target and talk with a number of their employees, clients, investors, vendors, consultants, and any other key stakeholders. Any “reference” offered may be positive, but you are searching for validation and consistency from the feedback.
Work Together. Interact on a project. This collaboration gives you a real view into the future. Ideally, there is an actual paid project where you can combine teams and see how everyone works together. Another option is to combine teams to draft transitional processes and procedures since these interactions will inform a smooth transition.
Share Clients. Recommend a couple of your clients to the target company. There is a risk if mistakes happen but recognize those risks are amplified after the deal is signed. If one objective for the M&A is cross-selling, then try to engage a couple of their clients (with the other company’s approval and with a referral plan in place in case things don’t work out).
Share Employees. Parachute one or several of your employees into their company. You will lose their productivity for a period of time but gain a huge insight into their operations and culture. Offer to do the same for their employees. Again there is a cost involve, but the insight is much greater than the cost.
If you decide to move forward, consider these ways to mitigate risk:
Earn Out. Structure the deal so there is something for the team up front and something down the road. The distribution, timing, and recipients of those rewards should be based on how much you want the acquired company’s team to remain involved. Openly address performance and motivation so new employees feel excited and not trapped.
Remove the Ceiling. If possible, create an incentive plan where if the results exceed expectations, then leadership and employees from both companies have greater rewards. I’ve never seen this approach fail (if margins are significantly impacted, you can always update the plan or focus reports on the long-term gain and margins) but I have seen greedy founders close their startups.
Invest in Expertise. Retain the best lawyer, investment bank, accountant, and people operations expert to prevent downside risks and to boost upside opportunities. Considering the stakes, these investments are worthwhile to ensure the best arrangement for all parties.
Weigh the Intangible. While measuring the current financials and scrutinizing the projected model, ensure someone reviews the target’s brand, reputation, capacity to grow, and any other important factors. Initially, these may be hard to identify, but they can influence the decision to move forward.
Account for Change. Recognize that opportunities and threats may arise with the combined business as well as new tax consequences, regulations, changes in supply chains, interest rates, and inflation. These areas may cost a significant amount so they're worth checking.
Even with the best consideration and planning, mergers and acquisitions can still be surprising. Here are some ways to set your own expectations:
Patience. The M&A process includes identifying, vetting, negotiating, signing, onboarding, measuring any earnout, and completing transition. The steps may take many months, if not years. It could take three to six months before you begin to realize any benefits. While you may be excited about the deal, the two entities could take weeks or months to finalize.
Alignment. Like you, the target’s founders and leaders will have a personal connection with their business. To considering selling it, they may want someone who offers a future, not just cash, so comprehend how they see the future and confirm if it aligns with your vision.
Retention. These people are crucial, so determine the potential effects of earn-out provisions, culture adjustments, title and management changes, and new responsibilities. If retention is important, engage key employees multiple times before, during, and after the transition.
Interaction. There will be a huge number of elements (people, systems, clients, etc.) causing countless issues to sort. Some will be productive and some detrimental, but either way, most will be time-consuming. Overcommunicate policies, benefits, and systems as a way to anticipate questions and to prevent problems.
Connection. Getting various platforms and software to integrate may involve training, new connections, or replacements to handle the necessary complexity. You may want to assign a project or product manager to facilitate these integrations.
Projection. Build a model showing what the two companies look like together for three years into the future. Scrutinize the numbers and assumptions, as well as any problems or potential obstacles. Clarify the immediate and long-term financial expectations.
Resilience. Any change brings uncertainty which leads to stress. Even if there will be minimal changes, people’s perceptions can break from reality. Explain what the team can expect, starting with the strategy and moving into logistics. You also may offer a new benefit and/or facilitate discussions between new coworkers to breed support.
Overall, start thinking about integration before any deals are signed. If you don’t have the bandwidth for this responsibility, designate someone to own the integration. The approach should be to overcommunicate and to be candid. If you cannot reveal information yet, let the team know that and what needs to happen before you can share more.
Successful integrations are challenging and even the big corporations get this wrong. A couple examples:
In 2018, AT&T bought WarnerMedia for $85 billion. In 2021, AT&T received $43B in a combination of cash, debt securities and WarnerMedia’s retention of certain debt.
Verizon acquired AOL in 2015 for $4.4B and Yahoo in 2017 for $4.5B (almost $10B combined). In 2021, Verizon sold Yahoo and AOL assets for $5B.
While money is not the sole criterion in a M&A deal, you can imagine these companies were unhappy with the results.
M&A offers both high risks and incredible rewards, so proceed and prepare carefully.