The Prouty Team

Successful M&A Starts Long Before the Negotiation Table

We’ve been hearing a lot about M&A. More companies today seem to be searching for the Pixar to their Disney — the deal that will give them the competitive edge necessary to ride off into the sunset in a true 1+1 = 3 scenario.

In reality, not all mergers or acquisitions lead to fairytale endings. Most studies put the failure rate between 70 and 90 percent. While successful M&A is complex, contextual, and somewhat enigmatic, we do know it begins with steps taken before ever getting to the negotiation table. Regardless of whether you are a consolidator or a consolidate, here are some best practices to consider to get the most out of your due diligence.

Know Thyself

Before starting any M&A process, it can be helpful to identify the non-negotiables — those parts of the company that must endure regardless of any strategic opportunities that could present themselves.

According to James Collins and Jerry Porras’ Harvard Business Review article, “Building Your Company’s Vision”, it is more important to know who you are than where you are going. Your strategies will change as the context in which you operate changes, but your core ideology (your enduring values and fundamental reason for being), should remain a source of lasting guidance. It should serve as the glue that holds an organization together as it grows or diversifies.

Deeply understanding and guarding your core values and core purpose can provide a benchmark to help you identify a likeminded organization. This can be an indispensable first step to mitigating the all-too-common pitfall of a cultural mismatch down the road.

Be Realistic About Strategic Possibilities

Rarely can a merger or acquisition solve the problems created by a declining market or deficient brand value. And, in some cases, M&A can create a distraction for addressing such threats. Take the union of media giants AOL and Time Warner, for instance. While on paper it seemed to be a perfect match, greater challenges were afoot. Apart from reported culture clashes, the companies were also facing the decline in dial-up internet and the bursting dot-com bubble — industry forces that size or combined resources alone could not easily combat.

Similarly, when Kmart merged with Sears in 2005, both companies were losing ground to big box competitors and high-end department stores. Individually, they struggled to carve out strong brand value in their marketplace. That proved to be a cancer that their newly formed union could not cure.

Taking a realistic view of your market position is an important step to recognizing the true value of any strategic possibilities presented through M&A.

Identify Your Potential Shared Vision Early

Most business scholars agree that one of the most important steps to successful integration is creating a shared vision for the newly formed company. M&A can create strategic possibilities that were never available before, and defining an exciting and compelling vision can serve to energize and align the newly formed team to think more about “we” instead of “us versus them”. It provides the newly formed company a guiding road map to ensure everyone is on the same page.

Brainstorming possibilities for this shared vision, however, can begin early in the process, before considerations of a letter of intent even enter the picture. Just as in dating before marriage, identifying commonalities about your envisioned future — where you ultimately want to live, whether you want to expand your family, what you want to create together — diminishes the possibility of surprising and potentially insurmountable differences down the road. And it makes creating the shared vision easier when the marriage does, in fact, come to be.

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