Mergers and Acquisitions Mistakes

Posted on July 19, 2010

Partnering with other companies is often essential, when one company just can’t reach their objectives on their own. But the world is littered with companies who “got married” only to find that the marriage did not at all reflect the dating experience. Learn how your corporate strategy should drive M&A, not the other way around.

Which causes more insomnia in the world of CEOs? Concern about sneak attack distractions or the “clobber you on the head” type of distractions? Personally, I have no idea, but the “clobber you on the head” versions sure are memorable. This distraction, M&A and Partnering Mistakes is definitely of the clobber variety. To this day, about ten years later I remember trying to be on vacation in Tahoe but having to deal with the acquisition I should have never, ever made.

M&A is an essential element in strategic planning and should be considered by every company. Likewise, connecting with other companies in some form of partnership can be a great lever to grow dramatically while staying focused on your core competency. The thinking, courting, hunting and closing on deals and high potential partners is fun and alluring too. Until you make a mistake.

My mistake was the #4 acquisition in a mini-rollup I did in the publishing firm I was running. Each of the first three acquisitions added significant breadth to my product offering as well as some scale to my operation. Each remained after the integration as independent brands under my corporate umbrella. Then the fourth seller appeared. She was really eager to sell—desperate in fact. Their product mix had some nice elements that would be additive, but not critical. But it was a small deal to pick up and seemed like it would be easy from every perspective. Surprise! After the deal closed I learned about some of the more special attributes of the seller’s psyche, learned just how broken systems can be, and learned what happens when the other party is really not aligned. After two years, I called it cash positive, but only if I didn’t count the hundreds of hours of my team’s and my time and frustration. Imagine what the opportunity cost would have been if a fifth ideal acquisition had come along, but I was too pre-occupied with this “stinker” of a deal to act on it. This event helped burn into my brain a favorite phrase that a strategic partner of mine loved to say: “There is no easy deal.”

Buying a company is more like adopting a child than buying a building. Making the purchase is just the beginning of a long relationship from which you cannot run. If the acquisition is significant, you may need to make it work, and most acquisitions absorb time, attention and resources in huge quantities. It’s just that the bad acquisitions require even more, and usually give no return for all the headaches.

Selling your company or a business unit of your company can also be a distraction. While shopping on the buy side takes up valuable executive time, selling is emotional, can become public when you least want it to be and can set expectations in your ownership group for getting rich (which may be dashed). Staying focused on running your business during the selling process is difficult. After the sale, the team that stays on with the new owner will be terribly distracted, will be worried for their jobs and will be wondering what the company will be like in a year.

Partnering with other companies is often essential, when one company just can’t reach their objectives on their own. But the world is littered with companies who “got married” to a partner only to find that the marriage did not at all reflect the dating experience. Just like the theme of this essay, partners often get distracted and don’t fulfill their part of the bargain. Key advocates for your partnership in the partner organization may leave or lose power. Depending on the nature of the partnership, moving on can be difficult, especially if you’ve become dependent on them or if the partnership makes you unsuitable for subsequent partners.

Strategies for Mitigation

Techniques to avoid mistakes in M&A and partnering could fill the pages of several books. But the one nugget that sits at the core of mitigating this distraction is that your corporate strategy should drive M&A & partnering. You should not act opportunistically. For an example of acting strategically, assume your corporate strategy dictates that you expand into direct distribution. In response, you develop a plan to build the distribution unit from scratch. You also develop an alternative plan to acquire a firm in the space, and last, you also develop a third option to partner with a firm(s). Each option is fleshed out, and as to the acquisitions option, a list of candidates is pulled together and reviewed at a high level. Top management then reviews the three options, and if they choose the acquisition path, negotiations with several companies begin, with the best fit prevailing. The rigor in this process helps make a better decision. But even if the acquisition turns into a mess, at least the expensive cleanup effort benefits a key strategic objective where the payoff of a success is likely to be high.

An example of an opportunistic approach is when your firm is approached by a company looking to sell, and you get excited. You identify lots of benefits. Buying this firm is not the very most important next move for your company’s growth, but it is a deal that you just can’t pass up. You don’t want to miss out, so you dive in. When there are problems with the deal, resources get poured into a non core area. Avoid opportunistic acquisitions and opportunistic partnering. There is no easy deal. I will admit that on rare occasions an opportunistic deal can appear perfect for you, and it might be. Luck does exist. But place the bar for quality and fit very, very high, knowing the massive risk for distraction, and knowing the tendency for the buyer’s passion for making a deal to override rational thinking.

Even in a strategic deal, do your homework thoroughly. I don’t just mean financial due diligence. Go well beyond that into operational due diligence, culture due diligence, customer and marketplace due diligence, and leadership due diligence. The goal is not to close the deal and avoid lawsuits. The goal is to have a permanent outcome that moves you forward on your strategy. All bad deals move you backwards.

Lastly, if you’re doing a strategic deal, and all the due diligence looks great, then be sure to listen to your intuition. If you have that sick feeling about the purchase, walk away.