Per our earlier article on A Merger & Acquisition Leader’s Playbook For Success, avoid the traps of 1) poor strategic focus, 2) poor cultural integration and/or 3) poor delivery of synergies by leveraging the full playbook and its seven sub-playbooks: Strategic, commercial, operational, financial, governance, organizational, change management.
This article focuses on The Financial Playbook and its components of The Deal/Due Diligence, financing the deal, and further M&A.
When it comes to the deal, the first of the many investments you need to get a return on is the purchase price. As we’ve seen, only 17 percent of deals add value. Thus, it is better not to pay enough and lose than to over pay and win one of the 30 percent of deals that require a lot of work for no gain or, even worse, one of the 53 percent of deals that actually destroy value.
Let’s start with doing the deal with the expected transaction price for your investment case, most likely a number somewhere between fair value and must have at any price. These might inform your opening, expected, and maximum prices.
Your target may have gone through the same thinking, yielding, for example, something like this:
In this case, there’s a win–win deal to be done. Depending on whom else joins the bidding and your relative negotiating strengths, the purchase price should be somewhere between their $35MM minimum and your $50MM maximum and most likely somewhere between your $40MM and their $45MM expected prices.
Think through your strategy and plan for the negotiation as well as your posture and general approach. The expected deal price is an important component of that.
But it’s far from the only component. Different factors will come into play in different types of mergers and acquisitions, including:
- Cash acquisition
- Acquisition over time
- Acquisition in which some of the key people stay
- Merger in which you’ll have control
- Merger of equals
- Merger in which you won’t have control
Due diligence is your chance to check the accuracy of the information provided and your own assumptions between making an agreement in principal and closing a deal. The critical thing to keep in mind is that due diligence is successful either if it leads to a satisfactory merger or acquisition or if it prevents one that would have been unsatisfactory.
The due diligence checklist, Tool 11.3 in the M&A Leader folder at www.primegenesis.com/tools, digs into eight areas: (1) financials, (2) business structure and operations, (3) contracts, (4) product and intellectual property, (5) customers, (6) employees, (7) infrastructure, physical assets, and real estate, and (8) legal and compliance. Digging into all those is essential.
Another approach is to dig into the information and assumptions on synergy value creators, cost reductions, and cultural compatibility.
The second component of the financial playbook is funding the deal. Your real investment is different depending on how you finance the deal. Consider options for funding beyond cash including equity, seller funding or earnout, and debt, among others.
Equity deals essentially divide shares in the new, combined entity between the owners of the previous entity. Theoretically, no cash trades hands. There’s no need for debt financing. The negotiation focuses the new owners’ different levels of equity.
Seller funding. At some point, delaying when you pay the seller becomes a loan from the seller. Or if the seller has to hit some milestones or deliverables to earn part of their sale price, that becomes an earnout.
Debt comes in different forms from general loans to bonds to credit lines to bridge financing to mezzanine or subordinated debt.
The third component of the financial playbook is mergers and acquisitions (M&A). Further acquisitions, mergers or joint ventures with other companies, brands, technologies, systems, and the like layered on to the new, combined platform—especially in a relatively fragmented market—can enable all the other plans.
Just be deliberate about your choices and what you’re buying. It’s easier to see if the company you’re acquiring has hard assets like buildings, plant, and equipment. It’s harder to see if they do not—like many service companies. For example, consulting firm A could buy consulting firm B lock, stock, and barrel, subsuming their brand, intellectual property, and people. Or they could hire away their key people.