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Mergers and Acquisitions

Challenges, Opportunities, and Best Practices


Andrew J. Sherman

Abstract: When companies seek to accelerate growth,


boost revenue, improve cash flow, achieve economies of
scale, or outmaneuver competitors, one strategy stands
out: mergers and acquisitions. Once the buy-versus-build
analysis is complete, thousands of small and mid-sized
companies enter into these complex deals every year,
resulting in significant benefits, but setbacks and legal
snarls along the way may complicate matters. ­Mergers
and Acquisitions: Challenges, Opportunities, and Best
­Practices provides a guide to navigate the winding and
twisting road that is M&A. This article will not only dis-
cuss the best practices for achieving a successful M&A
deal, but also discuss the pitfalls and challenges various
deals may present.

Keywords: best practices, business, business challenges,


communication, compliance, cross-border, deal
killers, efficiency, external growth, inorganic growth,
M&A, mergers and acquisitions, organic growth,
organizational growth, postclosing challenges, risk,
success

Andrew J. Sherman Over the past few decades, we have seen countless
(@AndrewJSherman) is a partner and
chair of the Corporate Department
examples of companies—Amazon, Facebook, Cisco,
­
in the Washington, D.C. office of Microsoft, and Google—that have grown dramatically
­
Seyfarth Shaw, co-chairs the firm’s and built revenues through aggressive acquisitions pro-
Global Franchising practice, and is grams. Seasoned executives and entrepreneurs have
a top-rated adjunct professor in the
always searched for efficient and profitable ways to
­
MBA and Executive MBA programs
at the University of Maryland and at ­increase revenues and gain market share. The t­ypical
Georgetown University Law Center. strategic growth options are as follows: organic,
He is the author of several books, ­inorganic, or by external means.
including Harvesting Intangible Assets, Examples of organic growth are hiring additional
Franchising & Licensing, The Crisis of
Disengagement, and his latest release,
salespeople, developing new products, and expanding
Mergers and Acquisitions from A to Z. geographically. The best example of inorganic growth
is an acquisition of another firm, something that is
­often done to gain access to a new product line. Finally,
­external revenue growth opportunities, including fran-
chising, licensing, joint ventures, strategic alliances,
and the ­ appointment of overseas distributors, are

© Business Expert Press 978-1-94897-630-5 (2018) Expert Insights


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Mergers and Acquisitions

available to grow companies as an alterna- the opportunity to increase profits; the need
tive to m ­ ergers and acquisitions (M&A) as to deploy key people or resources; and the
a growth engine. strategic fit between the buyer and seller’s
At the heart of all decisions regarding current operations.
M&A is a fundamental strategic question: In 2017, over 50,600 M&A transactions
Are we better off buying a new capabil- were announced, valuing over $3.5 t­rillion.
ity, market entry, customer base, ­earnings But these numbers do not tell the whole
­opportunity, and so on; attempting to build story as thousands of deals fail each year,
it ourselves; or partnering with third ­parties and not all deals are good. While n ­ obody
in an interdependent relationship? The ded- plans to enter into a bad deal, many
ication of financial and h ­ uman ­ resources well-intentioned entrepreneurs and busi-
­
to organize growth must be based on long- ness executives enter into M&A that they
term, sustainable value creation for the later regret. Classic mistakes include a lack
company’s stakeholders, but achieving this of a­ dequate planning, an overly aggressive
objective through growth may require a high timetable to closing, a failure to really look
level of patience and may result in some lost at possible postclosing integration prob-
opportunities. The allocation of resources to lems, and, worst of all, projecting synergies
M&A will tend to expedite the achievement to be archived that turn out to be illusory.
of growth objectives, but it also increases But what is synergy? The key premise of
the level of risk if deals are not structured synergy is that “the whole will be greater
and negotiated properly. Companies should than the sum of its parts.” But the quest for
consider several factors in striking the right synergy can be deceptive, especially if there
balance between organic growth and M&A, is inadequate communication between
including the competitiveness, fragmen- buyer and seller, a situation that usually
tation, and pace of the marketplace and leads to a misunderstanding regarding what
industry; ­access to and cost of capital; capa- the buyer is really buying and what the
bilities of management and advisory teams; seller is really selling. Every company says
strength and growth potential of current that it wants synergy when doing a deal, but
core ­competencies; volatility and loyalty of few take the time to d ­ evelop a transactional
distribution channels and customer base; team, draw up a joint mission statement of
degree to which speed to market and scale the ­objectives of the deal, or resolve post-
are critical to the business; and degree to closing o ­ perating or financial problems on a
which the industry is regulated. timely basis. We must work hard to improve
Companies buy or sell for a variety of rea- M&A failures to create postclosing value
sons, but typically the motivations are similar. rates e­ stimated as high as 80 percent.
Sellers are often motivated by the following: Deal killers come in all shapes, sizes,
desire to retire; lack of s­ uccessors; competi- and varieties, with different reasons, jus-
tion from business adversaries; ­inability to tifications, and rationalizations. They can
compete; lack of capital to grow; inadequate emanate from the buyer, the seller, or
distribution systems; elimination of p ­ ersonal any number of third parties, such as lend-
guarantees; inability to ­ diversify; age and ers, investors, key customers or suppliers,
health concerns; conflict among owners; ­professional advisers, or all of the afore-
or loss of key people or customers. Buyers, mentioned. Some deal killers are legitimate
on the other hand, are often ­motivated by some deals deserve to die, and some are
the following: d ­esire to grow; opportunity emotional, financial, or strategic in ­nature.
to ­diversify; value driven ­acquisition strat- They can be very costly to all parties to the
egies, opportunity to add new distribution transaction, especially when significant
­channels; gaining a­ ccess to new or emerging costs have already been incurred. And for
technologies; the elimination of competition; certain advisers and investment bankers,

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Mergers and Acquisitions

they mean not getting paid. Clearly, deal 2017, market conditions improved and then
killers inflict a lot of pain along their path strengthened, which together with more
of destruction of a transaction. robust valuations and project management
In troubled financial times, a deal killer tools helped keep more M&A transactions
can come as a shock and can be based on on track toward closing.
something as simple as a stark difference In M&A booms as well as in tight
in the mind-set of the parties or lender, or ­financial markets, most deal killers can be
even investors’ thoughts about the ­markets. put into one of five categories: (1) price
In strong and frothy economic times, deal and valuation, (2) terms and conditions,
killers will be rooted in greed and will o ­ ften (3)  ­allocation of risk, (4) third-party chal-
be based on disagreements and overin- lenges, and (5) cold feet due to oscillating
flated valuations. financial conditions.
Following the high-profile failure of
several buyouts between 2008 and 2010,
­
sellers resisted provisions that permit a Keeping Transactions on Track:
buyer, under certain conditions, to walk Avoiding Closing Deal Killers
away simply by paying a fee. But buy- and  Derailers
ers, who face their own challenges in se- The first step in keeping a transaction on
curing commitments from banks to fund track (and greatly increasing the chance of
deals, began pushing back. Many transac- avoiding deal killers) is to have strong com-
tions ­derailed in 2008 and 2009 because of munication and leadership by and among all
­factors such as deteriorating global finan- parties and key players to the transaction. As
cial market conditions, buyers developing in football, each team (e.g., buyer, seller, the
cold feet in the middle of the deal, seller source of capital, and so on) should a­ ppoint a
­remorse, disappointment caused by record quarterback who will be the point person for
low ­ valuations, or even an overall trans- communication and coordination. Too many
actional fatigue resulting from a loss of lines of ­communication will ­create confu-
­momentum among parties that are running sion and misunderstanding—­conditions that
out of steam. In 2008 through 2009, over ­allow a deal killer to pollinate. The more the
2,000 r­eported transactions derailed due ­quarterbacks ­coordinate, communicate, and
to market or other conditions and count- ­anticipate p­ roblems with the ­various mem-
bers of their team and promptly ­discuss key
less smaller- and mid-market unreported
issues with the quarterbacks of the other
transactions never made it to the closing
teams, the greater the chances that the
table despite the time, effort, and good in-
transaction can and will close.
tentions at the outset. Protection and risk
When a potential deal killer does arise,
allocation terms that hold significance in each quarterback should first diagnose the
deals are being more hotly contested. M&A source of the problem. Where is the issue
players seem content to remain on the coming from and what can be done to fix
bench rather than be on the playing field; it? A deal killer for one party may not be a
a ­notable number of them have retired deal killer for another party. The old adage
hurt. In some instances, an immediate “Where you stand often depends on where
surfacing of postclosing i­ntegration issues you sit” clearly applies here. For example,
involved posttransactional shareholder
­ a lender to a buyer coming in at a higher
value c­ reation challenges that killed what lending rate than anticipated may signifi-
would have been a deal to die for 2 years cantly alter the attractiveness of the trans-
ago. The volatility in the stock markets, one action from the buyer’s perspective but
of the major driving factors of M&A, has may be viewed as a nonissue by the seller.
further increased the uncertainties arising Once the source of the deal killer has
in the middle of the deal. In 2010 through been analyzed, the respective quarterback

© Business Expert Press 978-1-94897-630-5 (2018) Expert Insights


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