New England Biz Law Update
Given the right set of key assumptions, lots of transactions can look good on paper. Recent history, however, is littered with failed and under-performing transactions once built on optimism and the best of intentions.
Taking the time to think through a deal’s broader implications not only alleviates stress in the process, but also helps determine a transaction’s merit. Rather than over-reliance on one particular financial or strategic point, management needs to weigh multiple strategic and financial factors so that decision makers can take a more holistic view of a potential transaction. In parallel with the quantitative analysis, take the time to focus on the “softer” issues.
Strategic Fit
Management and the board of an acquiring company need to have a clear vision of the strategic objectives for an acquisition. Without completing a detailed review of why the company needs to make an acquisition, management ends up reacting opportunistically without adequately considering other alternatives. These alternatives could include another acquisition target or evaluating the feasibility of spending capital to internally build the additional capabilities necessary to fulfill the desired strategic objectives.
It is much more difficult to complete this objective analysis in the midst of a transaction. Therefore the better companies evaluate the need for acquisitions to fulfill critical business objectives as part of their annual planning process. By completing this type of analysis well before an imminent transaction opportunity, management is able to take a more objective view of the proposed transaction.
Management teams that evaluate buy or build alternatives are much less likely to be infected with “deal fever” when presented with an acquisition opportunity. The buy vs. build analysis should include a consideration of the proposed transaction impact on existing strategic initiatives. If the transaction will require the company to take on additional debt, the resulting decrease in the company’s borrowing capacity may impact prospective capital investment needs that are independent of the proposed transaction.
Management
One particular area that often needs additional emphasis is an accurate assessment of how the combined entity will be managed post-closing. The financial merits of an acquisition will only be realized through management’s successful execution of the combined entities’ strategic plan.
To maximize the odds of success, buyers need to expand the scope of human-resources diligence to include a detailed and critical review of the management resources of both the buyer and the seller. Once this analysis is completed, buyer and seller can more confidently design the post-closing reporting structure.
A successful acquirer must have empirically driven assessments of the strengths and weaknesses of their existing management team before contemplating a major transaction. In assessing the impact of the transaction on the buyer’s organization, one must identify the anticipated challenges over the next 12 to 24 months that could negatively impact the successful integration of the two entities.
Creation of a scorecard that attempts to rank the critical success factors for each management function can be used to facilitate internal discussions of senior managers involved in the decision making process. Management employees of the target should be viewed as a vibrant talent pool that can be used to augment weaknesses in the buyer’s existing management team and address future succession issues.
As part of designing the post-closing reporting structure, a buyer needs to accurately assess its existing management team to see if it has the requisite skills to manage a larger organization. It is important to analyze resource constraints and skill-based constraints separately.
Resource constraints may be temporary in nature and related to specific integration activities. This type of constraint can often be addressed by the retention of outside professionals. The more critical analysis centers on skill-based constraints.
Senior management must honestly assess the capabilities of their existing direct reports and determine if the skills of these managers will allow them to be effective in a larger organization. As an example, a highly competent and technically sound CFO may not have the skills necessary to take on a more strategic financial role and effectively delegate to a strong controller.
Integration
A major transaction has the potential to disrupt even the best-run organization. Therefore to minimize the disruption consider designating a specific integration manager that will be responsible for the successful implementation. This individual needs to have the full support and commitment of executive management and the board.
In a larger transaction, this position can be a full-time job. Once the due diligence teams go back to their full-time jobs, companies can lose the ability to hold managers accountable for the achieving the projected revenue and expense synergies. Setting up a formal process to monitor and measure achievement of the synergies helps assure success.
It is also imperative that the integration manager is able to address the target employees immediate concern of whether they will still have a job. The retention of crucial employees is always a vitally strategic integration issue. However, these same employees want and deserve a clear understanding of their future role. Employees worth keeping will take a cynical view of vague or undefined employee selection concepts. The well-designed human resource integration plan is one that quickly and humanely addresses the on-going employment concerns of the target’s employees.
Buyers who take the time to carefully address the softer aspects of an overall transaction will best position their companies to maximize the potential benefits of a given transaction.
Alternatively, those buyers who avoid the development of an acquisition strategy will find themselves continuing to be in a reactive mode. As a prospective buyer these managers will find that without the benefit of a clear definition of what defines a desirable acquisition target, they will continue to divert valuable resources reacting to buy-side transactions that are inconsistent with their strategy. Ultimately, the pursuit of less than optimal opportunities can undermine the successful execution of a company’s stand-alone strategy.
Jack Bradley is president of Bingham Strategic Advisors LLC, a subsidiary business of Bingham McCutchen LLP. Jack has more than 24 years of experience in commercial and investment banking.
