Despite the unprecedented uncertainties in the world, many companies are continuing to plan major transformations and more than half of those surveyed are planning to do this through Mergers and Acquisitions (M&A). 57% emphatically indicated they intend to continue to do strategic revenue growth deals according to E&Y’s Capital Confidence Barometer survey of more than 2,900 C-suite executives globally. Harvard Business Review is also reporting that only about half are pausing activities in this area. Nearly a quarter are pursuing distressed companies. This is not unlike the M&A activity after the 2008 financial crisis.

Probably the most active since the NASDAQ, the tech sector is already at record highs with the world turning to virtual and relying more on technology during the pandemic. Companies like Google, Verizon, Uber, and Amazon have all been active in acquiring companies that largely fill in products, services, and capabilities where there are gaps. Other industries that are directly or indirectly supporting the response to the pandemic, such as health care and PPE, are also identifying potential opportunistic acquisitions. At the same time, companies like Nestle, MasterCard, Morgan Stanley, Thermo Fisher, and, even, Royal Caribbean have fulfilled transactions in the last few months.

Several studies have shown that add-on acquisitions of smaller competitors with similar products and services tend to be generally more successful as typically these companies will already have all or most of the management capabilities, infrastructure and systems in place. Further, in most industries smaller competitors tend to get a lower multiple of earnings or EBITDA and this could enhance your value when the combination results in a higher multiple. In the current environment consider mergers as well as acquisitions. A merger could be consummated through a stock transaction with little or no cash. You may even find opportunities to partner based on commissions or payouts.

You should follow a very systematic and disciplined approach through the M&A process of sourcing, execution & integration. Many acquisitions are not successful. To help you avoid failure, we have identified the seven main reasons for not succeeding.

The first step is to gather information around which of your smaller competitors may be struggling. Your own knowledge and network will be helpful here.  You can also talk to investment bankers who can provide leads, and there are outside resources available. Since it is expected that nearly a third of smaller businesses may not survive, it is worth looking at distressed sales as well.

You should plan to approach candidates quickly, vetting them and ascertaining whether there is any interest. As indicated earlier, be careful about any FTC regulations that may apply; your lawyers should be able to help you.

Once you have a list of potential candidates, prioritize them and have very clear objectives of why you want to pursue each one. This should be linked directly to your company’s strategy. Is the company seeking new technology? Is regional or geographic expansion a major thrust? Do you seek new end-markets or channels? Or is it a roll-up? A key question to ask is whether you have the management capabilities, infrastructure, and systems in place? Finally, is the opportunity close enough to reduce risks?
Below are the more common steps in the M&A process and can help you be more disciplined in your approach.

The initial negotiation is primarily around deal structure and valuation. Some considerations are that you expect to pay a lower multiple for a smaller player. You should, if possible, prefer an asset transaction as you leave the liabilities behind. Consider part cash, part stock deals – especially if you want the current owners to stay on after the merger. Once there is an agreement with a candidate to proceed further, there should be more detailed due diligence that could include business, customer, financial, and legal research.

In the COVID environment, it is important to pay special attention to the impact on sales, margins, customers, suppliers, employees, what work-from-home might mean in this particular case, or are employees furloughed, and how management handled the changes that have taken place. Law firms with M&A capabilities are available to help in the negotiations, develop the structure, and the closing documents. Remember that many of the companies pursuing M&A are looking for a bargain.

Finally, there is the integration, which is where many companies fail. A well thought out plan with clear objectives is needed. Some key things to remember: integrate what has to be integrated to achieve the objectives. Do not close plants unless you can pick up the manufacturing. The customer interface is critical. If the acquired company’’s core competencies are important, ensure that these are maintained. Both your employees and employees of the acquired company, need to clearly understand the process and expectations. Most companies will set up several integration teams, which can help make the integration more seamless.

Here are some things to consider to increase your probability of success:

• Communication is Vital: Starting with initial announcements through the complete integration process, employees need to know the strategic direction and, more importantly, what it means to them. Confusion and uncertainty leads to inefficiencies and loss of productivity. Communicating with other stakeholders is important as well: consider customers, industry partners, investment community, etc.

• Reporting Relationships. Clarity on reporting relationships is vital. Do this as soon as possible so that people understand the organization structure. For close-in acquisitions there are likely to be many more reporting relationships. For enabling acquisitions reporting may be limited to a few senior executives plus, at a minimum, the finance department, other back office operations, and possibly R&D/Engineering. Interestingly, one of the merger principles at Dow Chemical was that the CFO had to be a Dow person (even if the CEO was not).

• Decision Making Authority. Quickly determining and defining the key executives and integration team leaders with clear decision-making authority helps resolve people issues.

• Project or program structure can be deployed to manage the integration, especially for a larger transaction, with a mix of a small full time integration team and part time representation from the necessary functions. Having dedicated integration resources will help maintain business momentum with separate groups focusing on day-to-day operations.

• Key Employees & Retention Plans: It is important to identify key employees, even pre-closing, and evaluate if retention plans are needed. Competitors will go after these people or they can be out looking for jobs during the uncertainty

• Finance: A key priority is always cash management and processes for financial closings where systems can be an issue. You can use short term solutions such as downloading financial information, then building a bridge. No matter what you do, think about this ahead of time and have a plan in place.

• HR: Non-US acquisitions can be more straightforward because you can leave policies and procedures in place. In the US, you must consider the differences in benefits and processes. There may be a cost associated and transitions can be complicated.

• Legal: Laws differ from country to county and all outstanding legal issues must be identified with a plan on how to deal with these.

• Tracking Growth and Cost Synergies is essential to get the full value creation benefits. Focus on four to five areas that represent the greatest opportunities with clear, quantifiable goals and assigned responsibilities. As you learn more, open the aperture beyond traditional synergies to identify other value creation opportunities.

About the Authors

Rahul Kapur has 40+ years of successful business experience spanning a variety of areas. He served as Chief Strategy Officer at both Aearo Technologies (now 3M) and Dow Brands (a division of Dow Chemical). As a business consultant, he provides companies of all sizes with his expertise in strategy development, M&A, new products & innovation, and data analysis and modeling. He has helped nearly 20 companies develop their strategy to transform their businesses, using Icon Investment Partners’ proprietary business transformation system. Currently, he is Managing Director of Icon Investment Partners, Chairman of Guilford Group, Managing Member of Ark Capital Investments, LLC, and Senior Advisor for &Marketing, Crossroad Transactions, and Quest Safety Products, as well as on the boards of several start-ups.

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