It has been said that the M&A process is similar to the stages of a marriage – the courtship, the proposal, the marriage ceremony and the honeymoon.
Why are some deals more successful than others? The answer may, in part, lie in the approach to the overseeing of the acquisition process in its early stages. Many acquisitions are regarded as a matter-of-fact process, where the transaction headlines - ex: "What is the Company Worth and Can We Get it for Less?” - overwhelm the more sensitive aspects of the deal. This may be particularly the case if the majority of the deal process is assigned to external advisors (investment bankers and lawyers) who work exclusively on getting deals across the finishing line. While this approach may be acceptable to a large blue-chip Target company, who has been through the M&A process before, it may prove unsettling for a smaller Target. Therefore, a more holistic approach to deal-making is required – where early-stage courtship is at the heart of it.
The courtship phase of an M&A deal is the time when two companies get to know each other before making the commitment to merge, or for one to acquire the other. The building of a relationship prior to a deal being transacted can benefit both companies in understanding each other’s operations, financial, strategic and cultural fit. Courtship is an important part of generating trust and building confidence, while serving to avoid any future conflicts further into the deal process owing to a lack of understanding built up in the early stages of the relationship.
This phase may be viewed as a supplementary due diligence phase where the “softer” aspects of the Target (such as culture, which cannot be communicated via a virtual data room) are discovered. Furthermore, the courtship phase is essential for both the acquirer and the Target to expedite future negotiations and collaboration so as to assist the post-integration phase of the deal. Essentially, the saying “a failure to prepare is preparation to fail” rings true in the context of M&A courtship.
M&A courtship should establish reasoning for the deal, make clear the strategy that the deal supports and the approach that will be taken when entering into a relationship with the Target. Allowing the Target partial involvement in the development of the strategy helps to promote a shared understanding of the strategy underpinning the deal and to make the Target feel valued and not just in a monetary sense.
The Pre-M&A Phase
The critical success factors pre-deal can be summarized as followed:
- Choice and Evaluation of the Target
- Valuation Considerations
- Communication Pre-deal
When the courtship phase commences the acquisitive company will have narrowed down their choice of Target. It is essential to identify any strategic and/or cultural fit between the acquirer and Target during this phase. The findings uncovered in this phase can facilitate the integration process post-deal and help in considerations pertaining to future leadership and in the ironing out of any cultural differences. Ultimately, taking the time to “court” the Target in the early stages of the deal will increase the chances of a successful M&A outcome.
The most successful acquirers will regard deal management as a core component of the M&A process. To do so they approach acquisitions with sensitivity and a well-established process, which has been proven over time. Such an acquirer will adopt a flexible stance to negotiating and will remain objective as the deal progresses. Furthermore, they will invest the time to coordinate the deal across the different advisors working on it – top management, lawyers, consultants and investment bankers – across the deal life-cycle.
It is natural that the management of a small Target having not gone though an M&A process before will be nervous about what lies ahead and even suspicious of the potential new owner. An understanding acquirer will use early stage negotiations to alleviate any nervousness of the Target and to foster a sense that both sides are working to arrive at a mutually attractive deal.
Understanding acquirers will also strive to help the managers of the Target realize the opportunities that could result from the new organization. It is therefore vital that the acquirer forges strong relationships with the Target from the first meeting with management and makes it a point to understand what the Target wants from the deal – both financially and in terms of business continuity, safeguarding of jobs, etc. The relationships built in these early stages will be needed later in the deal process when the stresses of the deal inevitably become apparent. Indeed, as the deal progresses through due diligence and towards closure the acquirer may become more demanding in the input they require from the Target’s management. A strong relationship built in the early days will help the acquirer and Target persist beyond these stresses.
Once the acquisitive company has accepted to move ahead with the deal, the due diligence process will commence. Due diligence should include consideration for future integration, leadership and the risks inherent with any cultural differences – factors which can be discovered during a successful courtship phase. The due diligence process will also be the most time consuming and least exciting part of deal's lifecycle (and possibly the most stressful). The relationship between acquirer and Target moves from the heady days of “early romance” and new love to the humdrum world of fact checking. Just like a relationship between two people this is the stage at which the bond between both parties is really tested.
It is not uncommon for top management to distance themselves from the due diligence process and to assign the task to management and external advisors such as accountants, lawyers and investment bankers. Doing so is dangerous, however. Statistics show that it is most likely an acquirer will wipe out deal value through a failed due diligence process than during any other stage in the deal process.
How To Live Happily Ever After
As mentioned previously, the relationship between the acquirer and the Target is perhaps the most important aspect for a deal to be overall successful. Valuation is the second priority. Finances aside, the success of a deal comes down to the chemistry between the acquirer and Target, the culture and how well the management teams of the acquirer and Target can work together. The Target will want assurances over how they will benefit if they proceed with the deal – access to greater expertise and additional distribution channels, for instance. This should be communicated during the courtship phase of the deal so that the Target is clear as to what they are entering into.
It is also vital to understand the needs of the seller and to understand who the key decision makers really are for a deal to be successful. An acquirer should not dwell on insignificant problems or issues during the courtship phase. Rather, the acquirer should make it clear to the Target that they want to buy them, provide an idea of price and communicate to the Target how they can contribute to the Target’s future success. For instance, what are the anticipated synergies? Will the employees of the Target be retained?
Communicating such issues is best achieved via a meeting with the CEO and the founders/key shareholders of the Target. During this meeting, past success stories and details of how similar smaller companies have been acquired and had their growth accelerated can be communicated to the Target. If the Target is a tech company it is likely they will want to be told how the acquirer will place their technology in the market with customers using it. Such a topic is best discussed during a face-to-face meeting.
Management meetings during the courtship phase provide the opportunity for the acquirer to see the management team in action and to ascertain what makes them “tick." The acquirer is making decisions to back the management team (one could argue particularly so in the instance of a PE deal) so it is imperative to have met with management pre-deal. Meetings also provide the opportunity to build rapport, trust and confidence. During these meetings the acquirer must strike a careful balance of asking insightful questions without probing too much. Admittedly, cross-border deals make it difficult to spend time with the management of the Target pre-deal – both geographically and culturally. However, for the cost of a plane ticket and a few days out of the office making a trip overseas can prove crucial further along in the deal process.
If an acquirer is targeting a family-owned Target, or a Target owned by the founding entrepreneur, it is important the acquirer realizes their concerns will be much broader than the deal outcome. The Target will be equally (or more) concerned about what will happen to the manufacturing base (if applicable), the employees and the management team. As much as the acquirer needs to get to know the Target, the Target needs to get to know the acquirer. Therefore, there cannot be too much information shared or too many relationships forged during the courtship phase.
During courtship, it is important that the acquirer demonstrates that they are bringing something beneficial to the Target. It is not the time for the acquirer to be self-centered. Rather, it is the time for the acquirer to demonstrate that they are about more than just the money. In the Target’s eyes the acquirer may be just one of many suitable fits for their operations and therefore, they will perceive chemistry, strength and transparency of relationships and future intentions for the Target in the same vein as the valuation.
For open discussions to be possible it is essential that confidentially is addressed. Confidentiality is an essential commitment to be maintained by the acquirer and Target during the courtship phase while discussions are perhaps most open. The degree of confidentiality may vary depending on the structure of the deal, but it typically covers the negotiations and information on the Target and its operations. Accordingly, any deal process will typically commence with the signing of a Confidentiality Agreement (CA) or Non-Disclose Agreement (NDA) by both the acquirer and the Target. Its purpose is to preserve all confidential information exchanged between the two parties.
Targets are always advised put a confidentiality agreement on the table and ensure a potential acquirer signs it prior to releasing any information. It is advisable that the agreement includes a non-solicitation provision so that employees of the Target cannot be contacted by the acquirer behind the scenes. Indeed, an acquirer may have direct conversations with employees of the Target and identify some as suitable for headhunting – this is especially important if the acquirer is a competitor of the Target and the deal does not close. Notwithstanding, even with a confidentially agreement in place it can often take a few meetings for a Target to be comfortable in sharing information with a potential acquirer.