7 Steps to a Successful Company Merger or Acquisition

Thinking about merging with or acquiring another business? This seasoned financial advisor gives his insight.
Ghostwriter: The Open Organization, Red Hat
February 06, 2012

Recessions like the one we've recently been through tend to make companies stronger—those that survive, anyway. With the economic prospects looking up, therefore, your company may be in a great position to think about acquiring a competitor or making a strategic acquisition to bolster yourself for the years ahead. But buying another company is more than just a financial transaction. You have to think about everything from meshing computer systems to sorting out your sales and marketing team. In other words, making a merger or acquisition is a lot of hard work.

Given that, we asked Paul Burmeister, a partner at Tatum, a national professional services firm that helps executives with all sorts of operational, financial and strategic challenges, for some guidance. Burmeister who, as COO and CFO of companies from a variety of industries, has led successful business turnarounds and integrated major acquisitions, provided the following tips if you might be thinking about making an acquisition or merging with another company.

Check your own liquidity and financial health

Before you enter any transaction, says Burmeister, determine if you have the financial wherewithal by performing a thorough financial health check. “Since the recession, most organizations have shifted their focus away from profit and loss statements and towards liquidity,” he says. That means asking if you have enough liquidity to carry off a transaction successfully. Once you determine if you have the liquidity to make and sustain an investment, then ask if your capital structure can bear the added strain. “If not, assess a range of debt and equity capital funding strategies that will give you the balance sheet you need to be successful in the M&A game,” says Burmeister.

Make sure your people can see clearly

Before closing a deal, Burmeister says, you’ll also want to ensure you have a team in place with the experience to assess a transaction, complete an investment, forecast its performance and tolerate sensitivities around the results. “The ability to envision and solve the challenges (financial and organizational) you will face in integrating the transaction and creating a smoothly functioning new company will be absolutely key,” he says. “If not, consider bringing in temporary, specialized executive leadership to help you through. In all, you must be dead sure that the projected benefits, synergies and savings from the transaction can be realized in fact.”

Define your goals and success factors

In putting together your M&A strategy, you should analyze both your competitive position as well as your future objectives. “That means understanding what you’re doing with your business, where you want to go and what you value most,” says Burmeister. “That means making sure you understand what it is you are trying to gain through this transaction.” To do that, start by answering the following questions.

  • Is your goal to increase market share?

  • Do you want to enter markets contiguous to the ones you already play in?

  • Do you want to acquire new products, processes and intellectual capital?

  • Do you want to increase your economies of scale so that you can be the low-cost company in your market?

  • Perhaps you are trying to eliminate a competitor, expand a product line or achieve a vertical integration?

“Regardless of your goals,” says Burmeister, “you should focus on them relentlessly throughout the process and align your decisions with them. The acquisition should be a way to bridge the gap between your company’s current state and the future state you desire for it. These factors become the items to test for in screening prospective targets and then performing due diligence."

Consider M&A candidates

Now that you know what you want out of a merger or acquisition, it’s time to begin the search for the right fit. But what factors should come into your screening process? “One is integration feasibility, meaning: What are the organizational and operational challenges of integrating them?” says Burmeister. “For example, which of the key people would you want to keep, and would they stay? Another integral step in evaluating targets is developing revenue and cost models for the combined organization. Define key success factors to realize value along with “threshold” assumptions and a business forecast to understand what you must achieve for the acquisition to be successful.”

Burmeister also suggests that as you search for candidates, do your best to avoid becoming too fixed on a particular company. That means keeping your eyes open to potential roadblocks as much as the benefits of a target or, “you may face a surprise and fail to recognize the value you are seeking,” says Burmeister.

Plan and execute due diligence

When it comes time to evaluate a potential deal, you’ll need to do more than just some simple math or even an “audit lite.” “When done properly, due diligence should test the strategic fit of the acquisition,” says Burmeister. “Start by considering your goals for this acquisition and the drivers of the valuation. Knowing what you need to preserve will dictate what you need to test for in due diligence. Your overriding goal is to verify that the value you expect is actually there. It encompasses financial, operational, legal, technology and people due diligence.” Burmeister also warns that you shouldn’t neglect conducting due diligence on the target’s customers, specifically understanding what cements those relationships and how to sustain them once the acquisition goes through.

Create a transition team

“Major transitions require strong leadership; it sets the tone for savings and efficiencies,” says Burmeister. “That’s why it is critical to create a transition steering committee and a functional team.”  Burmeister says these groups, which must include line managers who are close to the action, should engage leaders from both sides of the acquisition and they should set their expectations high and work from a well-defined work plan, revisiting it as conditions on the ground change.

Carefully plan and perform the integration

When it’s finally time to merge the operations, processes and cultures of the two companies, you should, “focus on revalidating all of the plans you have developed since the deal was first considered,” says Burmeister. “Remember, this is an iterative process: Evaluate what drives value, what is working and what is not. And throughout, remember speed is critical at this stage; delay drives failure and may cost you key people. This is the time to sweat the small stuff, like being sure that acquired employees know how to enter expense reports and check their benefits.”

Other tips for ensuring a smooth transition include establishing milestones and creating incentives plans tied to their completion. “Drive the integration deep into the organization, holding managers responsible for successful execution of each,” says Burmeister. “Remember, value is not made when you sign the deal; it is made during integration. More deals fail due to poor integration than any other factor, so begin planning as soon as the target is identified. Develop your plans according to function and accountability and concentrate on those issues raised during due diligence that threaten your ability to realize value.”

Extra tip: Keep in mind the four C's

In doing your best to ensure that your M&A transaction fulfills all the goals and objectives you have hoped, Burmeister suggests using the “Four Cs” to keep you on target:

  • Compensate: If you want existing management to stay, make their targets achievable and compensate appropriately.

  • Communicate: People on both sides of the transaction should be completely aware of what’s going on to help quell rumors and paranoia. People will respond to uncertainty by assuming the worst.

  • Care: How you react to challenges can make all of the difference. Even small inconveniences can generate ill feelings. Respond quickly and completely.

  • Cull: If you must say goodbye to any members of management, make your decisions quickly, but carefully.

Photo credit: iStock

Ghostwriter: The Open Organization, Red Hat