“Everything’s so green!” – line by King Louis XVI from Mel Brook’s “History of the World”
Over the years, I have worked with many clients on dozens of acquisition transactions. When I think back to the early stages of any of these deals, it conjures up this line from “History of the World.” A potential deal was like a new love; everything looked fantastic and the benefits seemed to far outweigh any issues; leading to that often-used phrase “it’s a no brainer.” For my more strategic thinking clients, this was often the case. I can still picture a mosaic one of my clients created in the early years of his company, detailing product features he thought were required to capture the market. With a solid assessment of the company’s capabilities, he conveyed a clear vision as to what the company would develop and what they would acquire. This became one of many success stories. But what about the failures?
When a client would call, and indicate they were interested in acquiring a company for reasons such as the target company was available or they could be bigger with an acquisition, my antennae would always go up. I quite honestly rarely saw what I considered non-strategic deals for the sake of growth work. By the time those deals were done, they usually started to come undone as the expected returns quickly faded. So besides being poorly conceived, what caused these deals to fail? I can think of four reasons:
- Growth over culture. Money never trumps culture and nowhere is this truer than in the case of an acquisition. If the deal is not a good cultural fit, it will fail.
- Poor post transaction planning. The details on how you are going to operate post-deal is a major factor in its success. Broadly addressed as Post Merger Integration, poor execution in this phase is a major cause of deal disappointment.
- Unrealistic synergies. You can’t just eliminate bodies without contemplating the consequences. As to the market and customers, there were probably good reasons the two companies existed before the deal and thinking one can handle what the other did without a well vetted understanding is fool’s play.
- Seller’s remorse. An independent owner gets acquired and has the chance to bring his company to the next level as part of a larger organization. Sounds good in theory, but when an entrepreneur has not reported to others in a long time and now he must, it doesn’t always work. If there is an earn out involved, this often complicates the matter.
So, consider the tough stuff in the early stages of a deal when everything seems to be great. Ask the difficult questions and complete the full due diligence including what is going to happen when the honeymoon is over. With the right work, upfront you can avoid transaction failure and everything will look green – especially your bottom line.