Strategy Session: Why half of all mergers destroy shareholder value
Buying another company is hard, but you can take steps to increase the odds of success
by Marzena Czarnecka
Life’s good. The business is growing, the balance sheet looks good, and you’re getting – well, cocky’s not the right word … let’s go with ambitious. It’s time to really grow. Maybe that means buying a significant package of assets, or maybe it means taking out a competitor. Either way, you’re rarin’ to go. You’re ready.
Illustration Luc Melanson
You’re probably going to screw it up.
The statistic most analysts toss around is terrifying: 50 per cent of all mergers and acquisitions do not create the value they’re supposed to. The reasons behind the appalling failure rate are, at their core, pretty simple, says David Sparrow, partner with the financial advisory and corporate finance groups at Deloitte in Edmonton. “Failed acquisitions are the result of either failure of approach or failure in execution,” he says. Translation: If you’re not going to screw it up going in, odds are you’re going to screw it up going out.
Don’t get depressed, though. Pretty much everyone does this the first time or two (or five) out of the gate. And while there’s no substitute for real-life experience to hone your deal-making and deal-evaluating skills, there are some basic best practices that ought to keep you from totally losing your shirt.
1. Have a Strategy
XYZ Inc. is up for sale – the CEO’s a friend of a friend, and he calls you up and asks if you’re interested. Maybe you’re interested and maybe you’re not. But without a well-thought out big picture business strategy and a related acquisition strategy, you can’t really decide whether buying XYZ makes sense or not. “Establishing an acquisition strategy that’s part of your overall corporate strategy is where it all begins,” Sparrow says. (He’s taking for granted you’ve already got a big picture strategy. You’ve got one, right?) “Sure, it’s great to have a deal land in your lap,” he says, “but you have to put it in the context of, ‘Who would you rather buy? How would you otherwise grow organically?’ You need to evaluate the potential universe of opportunity, and think about the parameters of your ideal deal – and about your rationales.”
If you don’t have that yardstick already in place when the deal comes knocking, you have to scramble to set it up before you dive in and get to know the target. But let’s be real – most deals don’t come knocking. Experienced acquirers actively troll for deals all the time.
“We are always looking for new opportunities,” says Trent Yanko, president and CEO of Legacy Oil & Gas. “You never really know when the next opportunity will come, and they take time to materialize.” He’s taken Legacy through 10 sizable transactions, each one actively “sourced.” But you can’t actively look until you know exactly who you, as a company, are, and what you want to be when you grow up. In other words, have a strategy.
2. Dive Deep
Sparrow calls the next step in the evaluation process target screening, but it’s really much more than that. To evaluate an individual acquisition opportunity, you first need to understand the entire market. That helps you target the right companies and helps you decide, with increased speed and efficiency, which targets are worth investigating in depth.
“For every 100 evaluations we do, we may transact on only one of them,” says Brett Herman, president and CEO of TORC Oil & Gas. But each evaluation bolsters his team’s market knowledge. “We jump into data rooms to understand what the new techniques and technologies are, to understand what is going on with the service side, to see the advances in technologies on other plays, to understand what’s attracting capital flow,” he says.
The more you do this, the more adept you become at identifying the target in which you want to dive deep. Before you buy or bid, dive as deep as you can. Learn everything you can, and compare how it fits into that all-important strategy. Can you digest the size? Does the geography make sense? What about the financial performance? Can you afford to buy a company that’s underperforming with the knowledge that you can turn it around, or do you need it earning cash flows from the day you buy it?
There’s no one right answer to any of those questions, but there is one right guiding principle. “Any acquisition idea starts with the upside of the asset: what can we do with it?” Yanko says. If you own those assets, that company, can you improve production? Pricing? Operation costs?
“The idea is not to pay for it all,” Yanko says. “We are looking for things that are accretive – augmentative – that make the company better and stronger. And if we can continue to build and generate cash flow while building more cash flow, it’s a win-win all around.”
Execution is much more than signing the cheque and the closing documents. What Sparrow calls “the art of execution” is part due diligence (diving really, really deep into the target) and part constant evaluation as you move through negotiations to close. There’s a lot of grey area to cover here. Getting a basic valuation based on financial results and deciding whether you’re willing to pay that is easy. Putting a value on softer issues, which include everything from human resources and talent issues to customer and community relationships is a lot harder. And making sure you have all the key management players on board – within your own shop and at the target’s – to ensure the acquisition goes smoothly? Colossally hard.
What keeps this stage of the process moving forward, and what makes the difference between an accretive, successful-by-your-metrics deal and a face-flopping disaster is drawing it all back to that all-important first step, your strategy. “With any deal, what you need to do is not just look at it today, but ask where it will take you in the future,” Yanko says. “Each asset or company acquisition puts you on a certain path and you have to understand where that path is taking you. It will have ramifications for the future. A cheap deal today may come back to haunt you in the future.”
This is also your last chance to run. And there is no shame, baby, in deciding two-thirds of the way into the process that this acquisition is not right for you, whether it’s because the upside is insufficient, the liabilities too unpredictable or the course it puts you on actually diverts you from your big picture. “Never fall in love with the assets,” Herman says. “Never do a deal just for the sake of doing a deal.”
Doesn’t make sense at the last hour? Walk. Sure, there may be a bit of egg on your face for a while. But it’s still better than repenting at leisure for years because you bought a lemon.
You got the deal done, but don’t you dare relax. If you want this baby to really be accretive, the real work’s still ahead of you. This is why so many acquisitions don’t fulfill their potential: because assets, operations, systems, teams – whatever your acquisition brought together – don’t get integrated into the broader operation. “Integration should be part of the strategy, and it should unfold hand-in-hand with due diligence,” Sparrow says. “As you go through your financial due diligence, strategic or operation due diligence and transaction due diligence … you gather information for integration planning.” Integration is where all your value creation opportunities come into play– or get whittled away. Take no shortcuts here.
Sparrow encourages phased integration approaches. What do you want in place on day one? What about days two to 30, the really intense part of the transition? And the first 90 days, that crucial first quarter, what do you want to have achieved at the end of that? And finally, what does your completed, “transformational” integration in the perfect future world look like? The more time you spend planning and executing on integration, the more likely your acquisition will deliver the intended results.
“An experienced acquirer will integrate very quickly because they know what to look for,” Herman says. “Companies that are not experienced acquirers struggle with integration– it’s probably the most challenging part of any transaction.” Herman’s goal on any acquisition is to have integration well underway before the deal closes, “so when the deal does close, you’re already well on your way.”
So, are you ready? Develop an acquisition strategy that’s part of your big picture strategy. Get to know your market, industry and potential targets and assets intimately. Keep your strategy first and foremost as you execute on the deal, and walk if due diligence suggests it doesn’t fit with your strategy. And then, invest heavily in integration.
That’s it. Go to it. And if you do royally screw it up … well. The next time? You’ll do better. “There’s no substitute for experience,” Herman says. Damn straight.