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M&A strategist: Be sure to ask these 4 things before acquiring a company

The COVID-19 crisis may have put the brakes on major M&A activity but the current turmoil could soon lead to new restructuring and dealmaking, some experts predict.

[Source illustration: Murika/iStock]

BY KEVIN HUTCHINS - May 13, 2020

Test-driving a car is one way to help decide whether to purchase it, but there is no way to truly know how it performs until some miles are put on it. It’s the same as falling in love with a potential new home, but only after moving are the real charms of the home apparent—as well as the creaks. Such is the case in acquiring a company. The due diligence has been performed, the board sees a strategic fit, and the deal has closed. But now what? Has the groundwork truly been laid for a match that will bring growth and competitive differentiation for years to come? While M&A activity plunged in the first quarter of 2020 as COVID-19 hammered the global economy, one study suggests that deals won’t come to a complete standstill as lower share prices and the desire for many companies to restructure creates new opportunities. A top Goldman Sachs executive has even predicted a revival in activity “in a reasonable period of time.”

Despite the current uncertainty, there is never a bad time for business leaders to be thinking about the right approaches to an acquisition and the mistakes to avoid. Mergers and acquisitions are exciting, but when the honeymoon period is over, a deal’s success or failure can hinge on considering, understanding, and addressing certain key factors. I’ve spent more than 15 yrs as an M&A strategist at Juniper Networks and industry-wide. The following are four key questions that teams at acquiring companies should consider:

WHAT TO ACTUALLY DO WITH IT? Companies engage in acquisitions to grow market share, expand into new markets, or gain new technologies and capabilities much more rapidly than organically doing so in-house. But to truly assess strategic fit, an acquiring company must dig deeper and develop a highly detailed view that addresses the question, “What exactly would we do with this company?” It’s essential to be buttoned up on the business reasons for the acquisition and the precise value it can be expected to bring in a year, two years, or five years.

These evaluations should be built into the financial models that are presented to the board. Because it’s initially hard to size up an acquisition target from afar, this usually starts as a hypothesis built on the best available data. Then it can be refined through due diligence for a more specific view before the deal moves to signing. The iterating should continue even after the acquisition closes since it’s hard to tell what’s been purchased until the deal is actually done.

WHAT MAKES THE TWO COMPANIES TICK? One of the principal challenges with M&A is combining two organizations that are usually geared toward different outcomes. For example, mature companies are optimized for predictable shareholder return and profitability while growth companies are optimized to invest in growth, capture market share, and scale new business models.  Said another way, companies have sets of priorities, capabilities, and ways of thinking and making decisions that make them successful in their space. The company usually optimizes around these. If a company is pursuing complex sales, it will do what it takes to become more efficient and effective at that. If the company is integrated into one that is all about transaction velocity, a disconnect could result.

When companies march to different drummers in this way, there inevitably will be challenges. That doesn’t mean the difference will necessarily kill a deal, but understanding and planning for such discrepancies early on need to occur or it will be difficult to realize the desired post-acquisition value. Make sure the combined companies are optimized in the same ways.

DO COMPANY CULTURES ALIGN? At the center of every merger are the people. Bringing people together is imperative. The larger elements of a deal can be discussed ad nauseam—the market, products, intellectual property, etc.—but cultural differences are often where acquisitions end up falling flat. It’s critical to take this into account throughout—during due diligence, during the planning between signing and closing, and during planning and execution after closing—and identify approaches to mesh the cultures. 

Where many people drop the ball on both sides of the deal is (1) failing to be open, listening, and understanding, (2) taking shortcuts because of pressure to move fast, and (3) not creating incentives to drive cultural alignment.

Sometimes, acquiring companies fall into one of two extremes: a one-size-fits-all approach (“this is how it will be done”) or a hands-off approach (“don’t touch them”). The best route is somewhere in the middle: a deep understanding and appreciation of the best aspects of both companies’ cultures and plotting out ways for the new whole to be greater than the sum of its parts.

WHAT DOES SUCCESS LOOK LIKE? It seems a cliché to say that every deal is different and therefore the measures of success also differ. However, that’s the case: There is no standard template. Instead, look to key measures that address: (1) to what extent the acquisition achieves strategic objective (and better than alternatives) and (2) does it deliver a financial case (also better than alternatives). 

By defining a specific and select set of measures upfront and using those to set priorities and targets, companies can drive alignment and stay focused on the right integration actions rather than spinning wheels. By adhering to these four guidelines, companies can take more of the guesswork out of acquisitions and benefit from well-integrated mergers that grow the business.

Kevin Hutchins is the senior vice president of strategy and product management at Juniper Networks.

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