Before leaving on a journey it’s always useful to have a map to navigate your way from where you are to where you want to go. Hart Marx Advisors has identified five phases of the lifecycle of a merger, acquisition, or divestiture. We believe this will help you embark on this journey with greater confidence.
The measure of a successful transaction is determined by the amount and quality of planning that is executed for each of these M&A lifecycle phases: Pre-Deal Preparation and Evaluation of Transactional Assumptions, Due Diligence, Pre-Close Planning, Post-Close Planning, and Post-Close Execution.
It is not enough to just complete the deal according to financial goals. Making smart financial moves in and by itself, can still spell disaster after a deal is closed. A well-designed M&A strategy will identify why a deal is a profitable undertaking and help position it to be positive for all involved. Professional guidance and expertise early in this complex transaction, may be the smartest move your company can make.
Phase 1, Pre-Deal Preparation
In general terms, mergers and acquisitions receive mixed reviews in terms of their success. While you may hear about mergers and acquisitions that fail to achieve the buyers and sellers goals, there have been in fact many more instances of highly successful transactions involving organizations that have executed an intelligently designed M&A strategy.
Management that is disciplined in their approach and takes time to gather all the necessary information and implement a well thought-out plan, will end up with the most successful transactions. In preparing to divest or acquire, companies that intelligently design their needs in light of an honest and rational assessment of the marketplace, the potential candidates, and the banking and investing environment are the ones that are most efficient in the process and most likely to be satisfied with the end result. A study by Texas A&M University analyzed the acquisition history of Fortune 500 companies and drew several interesting conclusions.
First, the study established that in periods where there are shifts in the capital markets, i.e. in periods of high interest rates or when capital accumulation is difficult through external means, companies pursue mergers and acquisitions using internal capital, such as their own stock or existing cash flow. Conversely, when interest rates are low external leverage is often used to boost returns. Second, significant M&A activity is driven by external forces, such as changes in tax laws. Third, corporations undergo significant M&A activity when they can no longer accumulate capital internally at an adequate rate.
This study demonstrates that an inquiry into the strategic positions that your company faces is often dictated by forces external to the industry and/or the marketplace as you know it. Therefore, taking any action to buy or sell without fully understanding the dynamic complexity of the market and the industry in which you operate, could seriously impact your outcome; akin to operating from a position that the world is flat, not round. Areas of blindness may include being unaware of relevant tax strategy, foreign market alternatives, monetary policy implications or a shift in perspective on the economy.
Pre-deal preparation and evaluation is not just about unearthing potential issues in the transaction, but it is also about assessing one’s thinking. Consequently, pre-deal valuation requires not only an examination of the company’s financials and operational strengths and weaknesses, but also a keen analysis and understanding of the macro conditions both domestically and internationally that can impact your world. Hart Marx Advisors encourages clients to spend more time in the pre-deal due diligence phase than any other phase, because we know that a pound of planning is worth a ton of results.
Look for the next in our Blog Post series titled M&A Lifecycle Phase 2, Due Diligence