Successful M&A happens when buyers and sellers research compatibility in meaningful ways.
Here are the four critical questions that both acquiring and soon-to-be acquired companies should ask to prepare for a successful merger and acquisition.
In today's highly competitive business world, mergers and acquisitions (M&A) are increasingly common. While M&A is notoriously difficult to pull off without a hitch, in my experience helping four companies reach these transformative events, I've found that there are several key threads that weave a successful outcome for all parties involved. It all comes down to compatibility, specifically when considering the most salient points: strategy, technology, culture, and finances.
When preparing for M&A, both acquiring and soon-to-be-acquired companies alike should ask these four questions.
1. Is it strategic?
For M&A to go smoothly, there has to be a strategic purpose for both parties. While every company will have varied strategic goals it hopes to accomplish with a deal, many companies find themselves seeking M&A because they want to grow. Perhaps they have a particular stronghold in a given country or entire continent but need to develop that market share in a new region or attack a new customer segment.
If two companies that have this common strategic goal (but with different regional strengths) enter into a deal, both can capitalize on each other's resources to expand into their desired markets, setting the scene for successful M&A.
Make sure that the strategy for M&A is a win-win for both companies.
2. Is there technology overlap?
Following the theme of strategic moves, companies considering M&A should ensure there is not a significant overlap in their core technology offerings. It is common for buying and selling companies to be in the same line of business.
The key to success is to differentiate by market or segment. For example, if both companies are targeting the same verticals in small- and medium-sized businesses, there will be significant overlap. However, if the buying company focuses on small- and medium-sized business and the seller on larger, enterprise businesses, their technology overlap potentially will be complementary and mutually beneficial.
Do your due diligence to ensure any technology or product offerings add value rather than create unnecessary overlap, which then provides poor economics for the deal.
3. Is there cultural alignment?
Of all the criteria on the list, culture compatibility is perhaps the one that most organizations do not vet appropriately. I believe that about one-quarter of all unsuccessful M&A deals is due to culture mismatch.
When companies come together, employees face a new reality in their day-to-day work culture, often resulting in a difficult and prolonged adjustment period. This impacts business even if there is a strategic fit and beneficial technology extensions. Company culture is difficult to measure with hard metrics, especially as companies are incentivized to conceal less-than-ideal cultures during deals. Consider how employees evaluate a company before they join – dig into Glassdoor reviews. Sure, some reviews are merely promotional content, but as a whole, Glassdoor helps you see the truth behind the company.
Be sure you have a clear picture how company values play out in the day-to-day before adjoining your company.
4. Is it a financial win-win?
Finding balance when closing a deal is key to setting the tone for the shared path forward. More often than not, the selling company wants to maximize enterprise value while the buying company wants to minimize price. While everyone wants to end up with a little extra cash in their pocket, it's better to have balance than to win.
If the deal is unbalanced, employees on the losing side may enter into the new relationship feeling slighted and unenthusiastic about contributing to the joint company, an unfortuitous beginning that surely has an impact on productivity. In order to ensure a win for both sides, think about the accretive after the event performance before you think about a financial windfall.
Successful M&A happens when buyers and sellers research their compatibility in meaningful ways. In my experience, it takes compatibility across each and every one of the criteria described above to produce a successful result. Outside forces and opinions will certainly abound. Above all else, what's most important is that you're honest with yourself and can respond to each of these compatibility prompts before committing to such a significant transaction and relationship.