Acquisitions are often a graveyard of failed dreams. It’s not the fact they didn’t close. Sure, you got the deal done but so what. I’m talking about the deals that close but never deliver the value forecasted in the business case. Here is a little comparison to think about.
When a middle market Private Equity player doubles down on their investment and supports the management to grow inorganically, a little bit of magic starts to happen. In summary:
- The management team that stayed with the business is now inspired to execute their strategy much quicker by not just organic moves, but also by acquisition.
- Because the PE firm trusts the team, the quality of M&A ideas is usually excellent. Often these ideas were in the heads of the original selling team but were too risky for the family.
- PE firms recognize the need to allow the operational competencies of their portfolio management team to shine through in evaluating targets.
- Additionally, PE firms have analytical, HR, and market assessment skills that can collaborate symbiotically with the local team to execute the deal.
- Because the portfolio company management team knows they have to run the company, post-acquisition, they are totally invested in a thorough evaluation of the target and how it will be integrated post-acquisition.
- The local team knows the sector better than the PE firm could ever know it, are smart at measuring talent, systems, NPS, KPIs, competitive value propositions, etc. They intrinsically know how the deal could enhance their capability aligned with the strategic plan.
- Every aspect of the acquisition process is stronger because of the collaboration between the PE partners and the original (or new) team they invested in. Think about it, all aspects are stronger: assessing targets, understanding targets, calibrating value, negotiating the most appropriate deal, inspiring the sellers to stay on, post-acquisition planning and of course making the deal a success. Remember a management team selling out to a PE player may still own a minority stake. And eventually that stake could be worth significantly more than the original stake they sold!
- Finally, every PE portfolio company (let’s assume an acquisitive one) will be sold one day. At that point, there is very little debate about whether the acquisition was a success! Has the exit of the portfolio company that the PE partners have nurtured, helped to build a bigger business and helped to professionalize, generated an attractive IRR%?
Public Company Acquirers
I know I am about to make an extreme comparison but let me make some observations. This is what too many public company acquirers do which explains the failure rate:
- The CEO is a deal maker. He/she drives deals from an investment banking background. Loves the chase and rarely involves the operational management team who will run the acquired business.
- Post-acquisition planning is something that is done 5 mins before the due diligence plan is built!
- The strategy is well articulated, but deal pipelines are heavily influenced by what is for sale., often delivered by investment banks selling stuff.
- The deal leader has never built a $50m business in his/her life. Therefore, he/she does not understand what the fuss is about regarding the achievements of the target.
- The corporate development team is smart, but they have never held CEO, COO, or CFO roles with P&L responsibility. They have not developed operator muscles. That’s like asking an accountant to design the next Aston Martin.
- The acquirer is confused as to what business they are in and overstretch into areas with limited knowledge. The acquisition strategy of SDL.
- The lack of operational experience bites them as they assess the economics and guts of the business. The acquisition of Autonomy by HP.
- The precision they bring to hiring a production manager in everyday life is thrown out of the window when onboarding 100 new employees through the acquisition. The assessment of cultural fit is rushed in a chaotic way, which would never be accepted in a formal interview process.
- The acquisition team is missing the skillsets that probe and understand the seller’s dreams, drivers and emotional source code.
- Trust was not developed with the sellers in the initial stages of the deal process. The main consequence is in the final negotiations on price and structure. Without trust, many of the tools of negotiation are worthless.
- The post-acquisition plan is never driven with openness and collaboration in mind. Instead of work streams containing members of both sides of the deal, there’s a big brother “we know what’s best” mentality.
- Finally, and the most damning consequence. Unlike the PE illustration above, public company HQ teams don’t help the divisional CEOs expand and build a much better business. They often leave them alone until the annual strategic review when they expect magic to happen.
We need to get better at acquiring companies and successfully integrating them. There will always be risks but by deploying a rigorous playbook and driving the process through an operator mindset, we can increase the odds of success.
Does your acquisition process need a refresh? Is bandwidth a little stretched? TPP – Creating successful acquirers, together.