COMMON RISKS IN M&A AND HOW TO MITIGATE THEM

Poorly planned and executed M&A transactions could introduce significant risk to both the buyer and the target shareholders.

These are the top three risks that I’ve come across, and common mitigation strategies.

Risk 1: Over-paying for the deal

How to Mitigate the Risk

• Think broadly about the strategic objectives and evaluate alternative paths to building the capability (e.g. partnership, building organically), before deciding to buy a business.

• Conduct a thoughtful valuation – either with the existing deal team or by bringing in outside experts.

• Factor in synergies, but be careful not to over-estimate them. And be cautious about paying the target for synergies that you (the buyer) is bringing to the synergies.

Risk 2: Inadequate Due Diligence

Poor due diligence can leave open minefields that can hurt the integration process and reduce the business value of the deal.

How to Mitigate the Risk

• Assemble the right team at the start of the deal (at the very latest before signing the LOI).

• Along with the business leads, make sure you have functional experts involved across the organization (e.g. sales and marketing, finance, HR, operations, legal, tax, accounting, IT, procurement, tax etc.).

• Pick a team that has prior experience with M&A deals and can separate real issues from trivial ones.

• Have a consistent escalation process to quickly surface issues to the deal team.

• Make sure that culture fit, management styles and the “soft side” is not ignored. Site visits, management team dinners, and actively focusing on this will help to fill out the complete picture.

Risk 3: Integration ShortfallsThe post-merger integration phase is generally the most challenging part (but often does not receive the focus required).Poor integration can lead to employee and customer turnover and the inability to achieve synergies.

How to Mitigate the Risk

• If you plan to do more than 2-3 acquisitions a year, build out an IMO (integration management office).

• The IMO should be comprised of a steering committee, strong project managers, and both business and functional leaders who have both the accountability and resources to execute successfully.

• Don’t lose the insights gained from the diligence process – ensure a smooth handoff to the integration team, passing along the context and risks captured pre-LOI.

• Build a comprehensive communication plan – including the customers, target and acquirer employees, vendors/suppliers and investors.

• Agree on a timeframe (typically every six months) to evaluate whether the deal synergies factored into the valuation and business case are being realized. And if not, bring those learnings back to the deal team to improve subsequent deals.