by Tom Allen
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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?
A Playbook is, in essence, a set of M&A best practices that can be utilized to guide an organization through the complexities of a deal process so as to foster a successful transaction as efficiently as possible with maximum gains.
An M&A Playbook typically covers tools, templates, lists and processes spanning the entire transaction lifecycle – from developing an initial strategy and appraising target companies during M&A pipeline management to initiatives on post-merger integration (PMI) and long term value capture. Examples of Playbook content include Excel-based valuation templates, PowerPoint analysis workbooks and comprehensive due diligence checklists.
Getting started with M&A is a significant undertaking for any organization – for the uninitiated it is likely to involve a steep learning curve with a lot of ups and downs. If consideration is not given to an M&A Playbook before launching an M&A initiative, the M&A process (in addition to negotiating the transaction itself) will involve the organization compiling a Playbook on a “reactive” basis as the transaction progresses.
However, an M&A process (whether an organization is facing its first or fiftieth transaction) should not be borne out of trial and error. It should instead be compiled on a proactive basis, through judicious use of a Playbook. That way an organization can minimize the stress for all those involved in the transaction and maximize the chance of a successful outcome.
Not only does a Playbook define the guiding principles to follow during M&A activity – it also ensures that all parties are working towards the same goals. A Playbook can help manage expectations (from junior M&A analysts through to the Board), ensuring that no deliverable is overlooked and that deadlines are met.
Once an organization has at least one transaction under its belt, a Playbook can include best practices and lessons learned from the previous transaction(s). Moreover, it can highlight weaknesses in an organization’s M&A strategy, so that you can improve those areas going forward.
A Playbook should be updated on an on-going basis to ensure an organization is better prepared for each subsequent transaction it undertakes. It is notable that a Playbook is not a panacea to a successful transaction – indeed, some issues that crop up during a transaction cannot be solved with just a Playbook.
Rather, these situations will have to be resolved by management (in addition to any external advisors, if appointed). However, if a Playbook is being utilized it is likely that its contents (such as details on certain procedures) will help resolve any difficult situations more easily.
In terms of what a Playbook should contain this depends, to an extent, on the rationale behind the transaction. M&A activity typically falls under one (or a combination) of the following framework – with these categories dictating, to an extent, the contents of a Playbook:
- Scale – the acquirer seeks to achieve a greater presence in a particular market/sector and to achieve greater economies of scale (such as cost reductions or greater buying power arising from overall increased size);
- Scope – associated with where a company is well established in its current market but wishes to move in a new direction – for instance, via new entering markets, offering new products/services and/or exhibiting greater geographic range;
- Efficiency – an acquirer may seek an improvement in the performance of a target. This is one of the most commonly cited value-creating acquisition strategies, where an acquirer can buy a company and significantly reduce operating costs to improve margins and cash flow;
- Consolidation – an acquisition may be driven by the consolidation of highly fragmented markets, where competitors are too small to achieve economies of scale. This strategy is best adopted when an acquisitive group can realize considerable cost savings or achieve higher revenues than individual companies can through pursuing a “buy and build” strategy;
- R&D/Talent – in some sectors success depends on the latest product/technology or business intelligence. A company may acquire a rival to gain access to sector leading R&D activities, to consolidate R&D departments and/or to apply the output of R&D to a greater number of sales opportunities;
- Diversification – an acquisition may be driven by the desire to diversify products/services and/or sales channels (as part of an overall “de-risking” strategy), to create new opportunities and to build upon core competencies;
- Transformation – a transformational deal involves the acquisition of a company or division, with the objective of improving the offering to customers via greater expertise, new solutions and a greater range of products/services. Such a deal often has lasting effects on the companies involved.
It is important that all parties involved understand the foundational goals of the transaction. Furthermore, working towards a common goal and understanding the rationale for the transaction will help shape the Playbook in the initial stages of its development.
By way of example, if a very large, corporate organization is acquiring a smaller, creative target (or even a start-up), consideration should be given to the culture of the target and the way in which it is to be integrated into the acquiring organization. Said differently, if a Playbook is followed too strictly or “to the book” it could kill the very nature of the transaction and destroy the culture the acquirer was drawn to in the first place.
The point here is that a Playbook should not be viewed as a rigid set of rules to follow. Rather, a Playbook should provide the initial direction and momentum for a transaction. Once in motion, the transaction will need to be steered by the collective M&A knowledge and experience of management and potential external advisors.
Ultimately, every organization is different and will need to decide what is best contained in their own Playbook.
For instance, making use of comprehensive due diligence checklists within a Playbook (financial due diligence, commercial due diligence, legal due diligence, tax due diligence, HR due diligence, IT due diligence, etc.) on every transaction can ensure that an organization is evaluating targets in the same way each time – however, comprehensive checklists might not be appropriate to every transaction an organization undertakes.