Mergers and aquisitions

Article by: Moshe Katz

CEO

MK Consulting, Management and Business Development Ltd.

September 2020

The Opportunity and the risks

An Acquisition or a Merger is probably the fastest and most available way to grow your business.

However, it should not be taken lightly as it is not free of risks and challenges:

- It is often expensive- we pay in advance for facilities and infrastructure put together for future performance.

o Even when it seems to be a good fit, it is never a 100% guaranteed success, as we must consider various elements such as bridging over cultural differences, handling market synergies aspects, various commercial risks, the challenges of integration, etc.

This process requires experienced and professional leadership to minimize risks and mistakes, for example:

- One unfortunate mistake can be missing good opportunities because of misunderstandings or thinking fixations, or

- Alternatively, potential deal mistakes due to lack of experience, high and unexpected expenses, lots of unknowns, unexpected roadblocks and often business risks with costumers, potential loss of sales and technologies.

Three Stages Process

· The Pre-deal Stage:

- Identifying potential businesses that match the acquiree's goals and targets.

- Sorting out the most relevant and beneficial partners

- Approaching and establishing connections to confirm an interest by the other business owners

- Preliminary discussions to evaluate the relevancy and the match of expectations

- Signing an NDA.

- Sharing data and initial evaluation

- Negotiations to draw the border lines of the deal

- LOI

· The Due Diligence process:

This stage requires more sophistication, gentle approach, combined with professionalism. The Due Diligence will usually incorporate a group of 4-5 teams:

- Financial team – collects, analyses and provides back up data to support or challenge the initial assumptions.

- Legal team - clarifies as much as possible the statutory, regulatory and pending issues statuses and tries to identify and clarify the problems we might inherit.

- Operation - Collects floor information, about the methods, technology, capex, environmental issues and more.

- Business overview - as a general statement – should provide the important background information, such as:

o Costumers- who are they? How robust are these commercial relationships? Where are the risks? What is the potential?

o Markets- How do they fit into our current strategy? Are they beneficial now or in the near future to our existing business? Is our existing business beneficial to them?

o Trends- Past and future

o Commercial risks- are we willing to risk our resources and reputation for this?

o Synergies- how well will the two organizations work together? Are the employees compatible – how good are the chances to make 2+2>4?

o Organization culture - Does it fit? Can it be easily integrated? Is it a well enough oiled machine?

All 4-5 teams eventually produce one comprehensive document to clarify the future of the process, should we choose to proceed.

· The Deal Execution:

- Re-negotiation and finalizing terms

- Preparation and circulation of legal documentation

- Closing - Authorities approvals, signatures, payment

Integrating two organizations into one entity - now real life begins

Incorporating two organizations into one homogenous organization requires meticulous planning in advance and activity robust enough to truly multiply the capabilities while remaining flexible enough to face the inevitable unknown hurdles.

This stage must be a continuation of a processes done correctly beforehand and based on detailed and accurate information accumulated and analyzed at previously presented processes.

When we try to incorporate a new organization into an existing one, we need to integrate different functional sectors of both businesses into one:

- Information systems

- Finance

- Sales and Marketing

- Purchasing

- Operations

- R&D

Why is it important to integrate these functions?

- Because information is essential to be able to manage the combined business (applies to Information Systems and Finance)

- Because there are advantages to size: we can sell more, at preferred commercial terms. We can improve our purchasing position and cost structure (applies to Sales and Marketing, Finance, Purchasing).

- Because we can optimize resources or in other words take advantage of the synergy and make it 2+2>4 (applies to Sales and Marketing, Operations, R&D)

The questions arise:

is it always possible?

- Absolutely, it IS always possible

Is it always necessary?

- Yes- it IS always necessary in order to maximize the potential benefits of the acquisition

How should the timetables Look like?

- It depends- the timetable may be immediate, gradual or delayed, depending on the organizational culture of both parties, the gap of cultures between the two and the complexity of the new operation: the number of costumers, the amount and complexity of products and of the Raw Materials and more.

However, there is a stipulation:

Regardless of all these, the information (financial and commercial) must flow in the language and formats the acquiring organization is familiar with. The data flow is critical to be able to manage the combined organization, and at least as important as managerial tools, a regular flow of information on a timely bases in a familiar and clear format helps a lot in building a mutual trust relationship.

Therefore, these managerial tools need to be structured before the closing, in parallel to other tasks at the Deal Execution stage in order to be available and applicable from day one.

Regarding the other functional units, the key in my opinion is the organizational cultures and their differences, especially that of the acquiring organization.

Let's evaluate for example what happens when we talk about a homogenous acquiring organization operating with robust procedures and methodologies. In this case there must be a plan for complete and quick integration- it will happen either way, whether this is the declared intention or not.

Such a process, when integrating 2 similar cultures (although probably different procedures and methods) is a natural and expected method, it may be a long process but we can expect relatively minimal and temporary interferences to the day to day operations.

What happens when such an organization integrates a flexible and diverse organization?

More often than not, the acquiring organization will implement its culture and methods in the acquired organization. We should expect that it will be a painful process with costs: loss of talents, sometimes giving up on certain customers and even sometimes giving up on business segments that "don't fit".

It's not the end of the world and as we said it is expected to happen. However, this losses and costs should be estimated and accounted in advance as additional acquisition costs and be part of the ROI calculations.

This is an example of how previous stages (Due Diligence for example) must be an integral part of the entire process – none of the stages or sub processes live on its own.

Bottom line

Acquisition is a multi-stage process where each step affects the one after it. The process holds great potential, but great risks as well. Not many organizations have the capabilities to coordinate such a process with the 4-5 (sometimes more) needed teams. We must keep in mind that the merger does not start with the due diligence nor does it end with the deal closing.