Strategic, Organizational, and Technology Surprises-Essential Preparation for Successful M&A

Joseph Feldman, President, Joseph Feldman Associates
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Joseph Feldman, President, Joseph Feldman Associates

Among a company’s potential growth opportunities, acquisitions can be an important strategy for accelerating growth, improving competitive position, and expanding into new markets. And while all significant business decisions are subject to uncertainties, the all-encompassing nature of acquisitions makes such investments among the riskiest and subject to surprises. Eliminating uncertainty and surprise is, of course, impossible, though anticipating and preparing for what may lie ahead is not. 

Acquisition discussions reflexively focus on strategic fit and assessment of valuation, with “completion” of due diligence seen as a security blanket to comfort the envisioned scenario of success. However, our recent research suggests that addressing the inherent uncertainties of acquisitions might be enhanced through greater consideration of post-closing surprises. Specifically, post-closing surprises should be viewedas possibilities to be anticipated and prepared for, rather than presuming that surprises are simply avoidable through good diligence and strategic vision. And with technology’s role as integral to a company’s success as ever, the CIO’s contribution to deal risk assessment has evolved from optional to essential for firms preparing for potential surprises. 

“It wasn’t so many years ago that pre-acquisition assessments of a company’s technology was limited to check-the-box activities, reflected Patrick Moroney, CIO of Central States Funds and previously CIO of several private equity-backed industrial and healthcare companies. “Meantime, the level of connected-ness among a company’s operations, financial results, and its information systems has completely changed that. Acquirers must consider the increasing dependency of all organizational functions on technology as digitization and a globally-pervasive internet raising competitive standards. The thoughtfulness of a target’s technology strategy (or its absence) can provide leading indicators of post-closing surprises that could make-or-break a deal’s success, such as: supply chain vulnerabilities and data breach risks.” 

  ​Addressing the inherent uncertainties of acquisitions might be enhanced through greater consideration of post-closing surprises  

“The financials aren’t great, but don’t worry, it’s strategic”  

The sources of acquisition disappointment may be familiar, though that doesn’t preclude missed opportunities for doing the basics well. Indeed, “sometimes it’s about simply asking the basic questions” about the deal economics, integration planning, and preparation for post-closing surprises. 

Perceived or real urgency to close a deal can also confound adequate focus on the basics. A housewares industry executive reflected on a deal with notable post-closing surprises, “More rigor would have helped. The acquirer was so enamored with owning the new company they looked for the ‘best’ in scenarios.” And an information technology executive added: “One of the biggest mistakes acquirers make is they get emotionally attached to making the acquisition and lose patience during the due diligence process.” 

Among the basics of deal economics are clear identification of the few key drivers for projected cash flow, anticipated deal synergies (whether enhanced top-line growth or expense savings), and thoughtful sensitivity analyses. One healthcare company corporate director expects clarity in a discussion of “what do you have to believe” for realization of results under a range of different scenarios, and for each such case what plans are in place to ensure execution risks have been well-considered. Finally, he cautions that assertions of “the financials aren’t great, but don’t worry, it’s strategic”are inherently problematic and no substitute for appropriate analyses and plans. 

For industry-leading acquirers, ongoing investments in analytics and technology have normalized remarkable capabilities simply not always found in mid-sized firms. “This disparity in the power of analytics between an acquirer and a target presents a challenge for CIOs accountable for delivering acquisition synergies and value,” observes the partner in a global technology and management consulting firm. “Every CIO’s integration playbook should anticipate multiple possible paths to realizing value. Believing that effective cultural and process integration will follow some a straight, predictable path is a formula for disappointment. And after-the-fact re-allocations of capex and operating budgets are remedies that please no one.” 

Organizational Certainty for Most Acquisitions is an Oxymoron  

“Proper assessments of people who aren’t your employees may be impractical. That said, acquirers should temper their optimism that the target’s management will be just fine. Planning for more changes, perhaps many more changes, in the target’s team would be sensible in most cases I’ve worked with,” counseled a senior vice president of human resources with two decades of acquisition diligence and integration experience.    

The leader of a manufacturing company described the management team of an acquired business as “totally competent in running the business; totally incompetent in doing things differently to grow it.” And a middle market company board member reflected, “…we found out after the acquisition that the management team did not talk to each other. During negotiations, they had presented the team as a tight group, and in reality, they had very diverse views regarding the future of the company.” 

Counsel for “Modesty, Humility” 

The CEO of a consumer products company encountered a major customer loss shortly after an acquisition closed. While this possibility had been theoretically considered, in reality the impact required a few years to recover. The CEO reflected: “We hadn’t adequately tempered our projections for year one post-closing to account for the unknown; doing so would have been prudent vis-à-vis our investors, without needing to ease expectations from our sales team or retained management.” 

Acquisitions are among the most far-reaching, ambitious business decisions that senior executives may face in their leadership of a company. And so, while bold vision and high confidence may be more readily associated with and essential elements for acquisition proposals, a financial services corporate director describes acquisitions as potentially “fraught with peril” and so advises that deal decisions be approached with “modesty, humility”. 

Acquisitions may anticipate the potential value of new capabilities to be leveraged across a buyer’s operation, especially new technology and analytics capabilities. “During pre-closing diligence and analysis, CIOs may be pressed for more confidence in realizing technology value than can be validated on a deal timetable,” reflects Adam Stanley, Global Chief Digital and Information Officer for Cushman and Wakefield, real estate services leader. “Technology deployments done concurrently with acquisition integration are unpredictable on many levels. As such, best practice should be to manage under a rolling validation process. Build a strong, scenario-tested, business case based on known variables during the deal due-diligence. Then, after close, continuously validate those variables against reality as you integrate. In any case, prepare for variations versus pre-deal assumptions and be ready to adjust as necessary.” 

Anticipate Surprises 

“Great strategy, planning and integration execution are essential, but not sufficient to ensure success with acquisitions. There will be surprises”, reflected the chief executive officer of an industrial products company. 

And while unforeseen developments may sometimes limit an acquisition’s value, other surprises can also prove quite positive as previously unforeseeable opportunities are realized. 

As one investment banker reflected, “Though experienced [acquisition] people should not be surprised, they probably will be.” Perhaps with more attention to such possibilities, surprises can be met with preparations that mitigate deal-damaging news. 

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