Stepping up to a higher standard of measuring Buy and Sell side success is Imperative as Business Conditions Evolve.
Many are familiar with the term Post Merger Integration or PMI. While remaining important, the table stakes on acquisitions today are so high that one needs to step up to another mental model that being achieving Post-Acquisition Victory. Committing to managing the incremental accretion in enterprise value for example versus the more methodical integration and assimilation of the company. This article explores the critical success factors to truly achieve Post-Acquisition Victory for both Buyers and Sellers!
The pending acquisition of Twitter by Elon Musk brings to the forefront the critical question of how to achieve outstanding returns on investments that have very high risk and reward dimensions.
Investing $54 Billion in a company with a fundamental post acquisition investment thesis of evolving to be more of an open town square freedom of speech platform is not for the weak of heart. The external market(s) and internal cultural challenges create tremendous friction and inertia to change. I would not bet against Elon however as He has consistently achieved success under the most extreme conditions with an other- worldly knack for business genius. His motivation and resolve to achieve success will no doubt be intensified as the transaction entails using most of his Tesla equity as collateral for the necessary debt facilities.
Frothy M&A Market
PE and Strategic Acquirer valuations have increased steadily as the amount of financial capital increases while the pool of attractive acquisition candidates diminishes. This results in two pivotal challenges, overcoming a high initial invested position to achieve acceptable ROI and second, companies that are acquired at a lower state of maturity lacking critical success attributes such as the ability to scale effectively presenting higher investment risk.
Most owners and management of private businesses have an extreme sense of pride and responsibility to the business, colleagues and enterprise and societal value they created. Post-Acquisition Victory means perpetuation of their personal legacies.
Plan to Achieve Post Acquisition Success
Now becomes crucial to the viability of any investment as buy high with more intrinsic risk is more the rule than the exception.
Unfortunately post acquisition failure has often been the outcome. From my three decades of M&A experience the key drivers are:
- ARR (Annual Revenue Run Rate) – Decrease in growth rate or absolute decline in Revenue. Post deal, the company loses focus, key customer support and revenue momentum. Less Revenue blows up the acquirer’s financial model and can result in a death spiral of expense takeout contributing to more attrition.
- Bad Decisions – Let’s be honest. Post deal if any level of integration is involved the decisions as to which products, platforms, technologies, operating groups etc. are made by competing factions. Human nature is to defend one’s turf which is closely tied to having a job. Very few companies put in place the level of objective support, analysis, and incentives to arrive at the optimal decisions.
- Pre-Deal robust Risk Identification and Post Deal Risk Management – Systemic challenges such as the need to re-platform to have the technology leverage and scale to service larger customers or segue into adjacent markets require a realistic plan to succeed.
- Cultural Suffocation – Smaller companies that are acquired are often extremely innovative and agile. Post-acquisition, they may encounter debilitating head winds in the forms of large acquirer bureaucracies, protocols and the challenge of repetitive production and articulation of a dizzying array of financial sponsor KPI’s instead of focusing on the underlying business performance.
Victory is Attainable
I enjoyed a very healthy post acquisition environment with one of the companies I ran and monetized. The financial results post deal were impressive with large customer gains and advances in our Enterprise software and related product offerings. In contrast to other models the PE Sponsor and Strategic Portfolio Company acquirer were extremely fair, respectful, and objective. They valued our synergistic relationship and created an environment of open and honest dialogue where the right options could be explored, and ultimately best decisions made.
The Art of Success
Is just that an Art. There is a plethora of M&A PMI (Post Merger Integration) methodologies out there that are useful but the defining moment to achieve Post Acquisition Victory is more ethereal in nature as optimizing human behavior is the key to success. This is both a buy and a sell side activity that needs to be considered pre-deal and managed adroitly post-deal.
Kevin Fleming is a Partner with the Newport Board Group specializing in M&A, Business Advisory and Board Governance services. He has over 30 years of experience including CEO roles running and monetizing middle market companies and working directly for and with Fortune 1000 companies as clients.