An M&A strategy might make perfect sense on paper, but the core driver – people – can easily be ignored. While for many organizations hard facts relating to revenue and costs lie at the heart of the deal rationale, the less tangible, human-side of M&A can be equally as important. Indeed, in today’s era of M&A, intangible assets (people, knowledge, etc.) can be the driving force behind value creation – Google, Facebook and Dropbox’s talent-driven "acquihire" M&A activity in recent years is testament to this.
When thinking about corporate venturing, the world of venture capital is a good place to start. The two disciplines overlap to a large extent when it comes to the skills required, some of the objectives pursued and the people involved. Put simply, venture capitalists (VCs) invest in companies to generate a financial return (usually within a pre-defined exit-window). Corporate venturers (CVs) also look towards financial returns (achieved via the nurturing of early-stage companies) but are typically also pursuing access to research and development initiatives, innovative technology and other, more strategic returns.
Many acquisitions are justified on the basis that they will create synergies – being when the combined post-merger value of two companies working as one is greater than the aggregated pre-merger value of both companies working independently (the concept of 1 + 1 = 3). Carefully managed, synergies can contribute to value beyond the sum of the parts of two companies – such as via new revenue channels, access to new geographies, cost rationalization, streamlining of operations, divesting of surplus assets and realignment of market positioning. However, the hope of capturing significant synergies is often misplaced as a rationale for M&A. Identifying and estimating synergies requires a judicious and systematic approach – yet even experienced acquirers can be overzealous in their estimates of the value that can be captured by a deal. The approach to identifying and estimating synergies should be one of realism, with focus maintained on protecting existing operations to maximize the chance of a deal being accretive.
Post-merger integration (PMI) is a fundamental stage to realizing the value of an M&A deal. It is a complex process, usually occurring under extreme time pressure while maintaining business continuity. There is no one-size fits all approach to a successful PMI process. However, careful planning, focusing on the strategic objectives of the deal and the identification and capturing of synergies can help maximize deal value.
Environmental concerns are becoming an increasingly important part of M&A due diligence, yet they are still often overlooked. The key objective of environmental due diligence is the identification of all material environmental risks that may effect a transaction, either pre- or post-closing. Environmental issues can significantly impact the valuation of a transaction from the Acquirer’s perspective (such as if liabilities are discovered).
An IT due diligence should paint a clear picture of how IT helps the Target run and whether there are any “deal breakers” that would cause the Acquirer to abort the transaction or to seek a price reduction (for instance, due to significant capital expenditure being required to upgrade IT systems).
1. Tax Compliance
The starting point of a tax due diligence exercise should include a detailed assessment in order to determine whether the Target presents any compliance risks – this may include a review of all relevant tax filings and details of any open/closed tax inquiries with the relevant authorities. Taxes that falling under such an assessment include:
Deciding to “expand via M&A” is not a strategy. M&A is instead a tool to use in pursuit of a goal, associated with a strategy, that can be leveraged to meet an objective (see below). Flying under the misconception that M&A is a strategy could result in poor decision-making, a lack of clarity and value-destroying transactions.
1. Governing Documents
A review of the Target’s governing/constitutional documents (e.g. Articles/Memorandum of Association, Charter, Shareholders' Agreement, etc.) should be conducted as part of the legal due diligence process. Such a review should result in assurance being gained over the fact that there are no “surprise” entities within the Target’s group or in the way in which the Target may be run post-transaction (for instance, how shares may be allotted or how contracts may be assigned).
Whether your organization is a serial acquirer or embarking on its first ever M&A transaction, preparation is key. Regardless of what camp your organization falls into, one “tool” that is essential when considering M&A is an “M&A Playbook.” But what exactly is an M&A Playbook – can you purchase one and what does it contain?