Tuesday, April 26, 2016

Lesson #234: Setting Mergers & Acquisitions Goals



Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As discussed in the past, M&A can be very distracting to an early-stage business still trying to optimize their stand-alone business.  Especially when things can often go awry in merging businesses, management teams and employee cultures.  But, assuming you have done your homework on those fronts, and you are comfortable in taking the leap into world of M&A, here are some ways to set desired M&A goals for your business.

What Does the M&A Target Bring You?

There are many things an M&A transaction can bring you: customers, market segments, operating scale, revenues, cost savings, human talent, new products, capital, patents, you name it!  The key is prioritizing what is the most important thing your business needs to succeed, preferably something you cannot easily build on your own.  If you have the best product in the market, I tend to stay away from targets that only bring you customers or additional market share, as those relationships can be secured through strong sales and marketing efforts without having to dilute your equity owners.  So, focus on transactions that will materially move your business to new heights, for reasons beyond simply additional market share.

Is the Transaction Accretive to Your Shareholders?

You are either going to pay for the M&A transaction with cash (which may require raising capital) or with equity (issuing additional shares in your company).  In either scenario, it is most likely going to to dilute the ownership of your current investors.  You just want to make sure that the resulting business is going to be worth materially more together, than they are apart, so that your current investors will actually have a higher economic dollar value of stock, even if their stock ownership percentage is less.

Does 1 + 1 = 4?

In one scenario, where you merge two similar companies both selling into the same customers, your combined revenues will never be worth more than 1 + 1 = 2.   But, as a different scenario, let's say you have two companies selling technology into HR departments, but the first is selling application management solutions into 10 clients in the healthcare industry, and the second is selling onboarding solutions into 10 clients in the insurance industry.  When you merge these two businesses and start cross selling their respective products to unique customer bases, now 1 + 1 = 4, as you double the size of each stand-alone business by selling new products into the other business's client base.  Look for M&A partners that help you accomplish this latter scenario, where you can.

Does the Transaction Improve Your Competitive Position?

Maybe two competitors are in an aggressive pricing battle, lowering their margins farther than they need to.  By combining, they may be able to raise their prices and margins as one company.  Or, maybe a #2 and #3 player in the market combine, to create the new #1 player in the market.  Or, as another example, maybe alone you have 50% dependence on one customer or industry, and combined with another company you can lower that dependence to 25%, making the business perceived as less risky to investors.  Think through these advantages when picking optimal transactions.

Are the Two Businesses Compatible With Each Other?

Mergers in business are very much like marriages between two individuals.  Make sure you date a while, before you combine forces.  Make sure the two businesses share one combined vision for their future.  Make sure the management teams get along, personality fit wise.  Make sure the two employee cultures will mesh well with each other. Do everything you can to reduce unwanted employee turnover in the wake of the transaction.  If the businesses are not compatible, move on.

Assuming you have good answers to the above questions, you are probably in a good position to proceed with your transaction.  But, if you can't craft the right logic, or any warning bells are going off in your mind, it is best to walk away.  Too many things are naturally going to go wrong post an M&A transaction.  You don't want to go into it with known hurdles out of the gate, as it will most likely result in a big distraction and disappointment for you and your shareholders.

Be sure to re-read Lesson #225 on other potential M&A pitfalls to avoid.

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