Let’s continue diving into the entrepreneurship alphabet and today we will like to discuss about the acronym M&A which stands for Mergers and Acquisitions.
We will start from the beginning, with the first letter of the alphabet: ‘A’, sharing our perspective and experience on acquisitions processes we participated in. We will mention the ‘M’ later in this article and we will go deeper on our next article, coming your way soon!
So let’s start, by definition, an acquisition in business, refers to the process where one company purchases most or all of the shares or assets of another company to gain control over it.
It’s crucial to realize that being an acquisition target is a mark of achievement, indicating your company has attracted major industry attention. Conversely, you could hold something highly desirable to competitors, yet lack the financial capacity to capitalize on it yourself.
Why companies acquire others?
Although there is extensive literature describing various types of acquisitions depending the relation between acquiring and acquired companies, our team defines just 2 types of acquisitions, Offensive acquisitions and Defensive acquisitions. And we use this classification because it helps us decide how to move forward with the deployment process.
We call Offensive when the goal of the acquisition is to expand market reach, gain new technology or intellectual property, increase operational efficiencies or similars.
And we call Defensive to the ones with the only aim to eliminate competition -“I buy you and let you down, no mercy!”
If you’ve been following our insights so far, you will likely recognize our preference for Offensive acquisitions, which we believe offer greater potential for value creation instead of destroying it.
How my company could be ready for an Acquisition?
Whether you are buying or being bought, thorough preparation is crucial.
Unfortunately, in many Acquisition processes, scenario preparation is often not done correctly, and by “scenario” we refer to evaluation of the Pre-conditions and the Post-conditions to ensure a successful acquisition and deployment process.
We call Pre-conditions to every check or assessment conducted to determine whether the target company aligns with our needs. This is valid for both acquiring and acquired companies.
Here first question should always be -“Is that company the right fit for our project’s continued growth?”-. In certain situations where the company to be acquired is in a poor financial position, and acquisition becomes the only viable option, the choice may be limited—either accept it or face the risk of going under.
Post-conditions, address the -‘Now what?’- phase for both sides after the deal closes. This is where the real profit will come at the long term.
Both, Pre- and Post-conditions, require strategical planning, but for some reason a complete approach is rare, yet is common to find it solely focused or limited to the Pre-conditions and Post-conditions isolated, leaving a gap in understanding the full sequence.
Large corporations often prioritize the financial and legal transaction, over-focusing on paperwork such as, LOIs (Letter of Intent), NDAs (Non disclosing Agreement), DDs (Due Diligence), PSPAs (Pre Sales and Purchase Agreements) and final SPAs (Sales and Purchase Agreement), in order to satisfy shareholders and to ensure legal compliance.
While necessary, this can overshadow other crucial human and strategic elements which could already be addressed at that Pre-Condition stage. This raises the following question:
Is financial and legal compliance as a standalone Pre-Condition the most crucial factor ensuring a successful acquisition process?
In our opinion, this above-mentioned view limits the success ratio of the operation as it only addresses the tip of the iceberg, leaving a massive amount of hidden ice to manage and by ICE we mean:
(I) Intelligence,(C) Capital and (E) Emotions
- Intelligence: Know-how accumulated by acquired company during years of being in the market.
- Capital: Among others we highlight, Human Capital (Value derived from the skills, knowledge, experience, and abilities of employees) and Intelectual Capital (The intangible value of a company’s intellectual property, such as patents, trademarks, copyrights, etc.,).
- Emotions: Emotional impact on the staff: their fears, uncertainties, and resilience in the face of the change.
These 3 items should already be taking into account when analyzing the Pre-Conditions, in order to have a soft landing once the acquisition paperwork is finalized and deployment team starts its “magic”.
Another risk in acquisitions, is the so-called “I know best syndrome”.
Incorrectly managed acquisition deployments happen when acquiring company, claiming efficiency or similars, tries to impose its systems, tactics and operations, without paying attention to acquired company’s (I)(C)(E).
Is the imposing policy really efficient for Post acquisition deployment?
In our experience it is not, and here is where a correct Pre and Post conditions analysis bear crucial in order to take advantage of the cumulated (I)(C)(E) of the target company.
We will illustrate it in 3 examples:
- If the acquired company has developed (Intelligence) a process which ensures a higher ARPU (Average Revenue per User), would be no logical to impose a different process with smaller return, just because does not match with the current process of the acquiring company. Don’t you think?. Unfortunately it happens more often that you may think.
- If the acquisition reveals talented individuals (human Capital) capable of filling key roles in the acquiring organization, wouldn’t be wise to leverage their potential leaving some egos aside?
- If the deployment was not properly communicated, fear and uncertainty (Emotions) could generate a misunderstanding espiral potentially leading to less implication of the people or even resignations with negative impact in the results of the acquired company. Isn’t it better to speak openly?
Instead of forcing changes initially, prioritize understanding the acquired company. Then, make a detailed planning and finally clearly explain your intended plans.
While deployment varies based on dedicated resources, teams and their skills and experience, in our view the key recurring factor is always the need of an accurate definition and implementation of the Pre- and Post-Conditions.
Are “M”&“A” a good couple?
Other important issue we perceive is the relation between the ‘A’ and the ‘M’ from our acronym. Normally if acquisition is made to continue with a Merger between companies (very common on horizontal mergers), the Post-conditions become more and more important. On the other hand, if the acquisition has not implied a direct merger, and the acquired brand will continue on the market (quite typical in vertical or conglomerate mergers and less likely in horizontal ones), the purchaser tends to focus mainly on the Pre-Conditions with a greater emphasis on the financial returns of the investment tracking ROI and ROE, rather than building a robust Post-Acquisition team.
«Cheap acquisitions could cost more in the long run from integration failures, while other expensive ones could create value through synergy.«
We should always ask ourselves: -“How deep does the (I)(C)(E) of the iceberg go?»-.
We hope shared insights were useful for you. In the weeks ahead we will also cover some aspects of Mergers, providing tips for a smooth transition, as this article did not have space to address them.
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