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The Institute for Mergers, Acquisitions, and Alliances (IMAA) places the number of US M&A transactions closed in 2017 at 15,100, which is a 12.2 percent increase from the previous year. As M&As (mergers and acquisitions) continue to become a thing, business magnate, investor, and philanthropist Moran Pober has built his fortune with M&A transactions. Moran, a former IDF soldier, is the founder of Acquisitions.com and a partner in WeKix.com and ABD Assets. Here is how Moran advises companies to go about M&A deals to make the best value from the transaction.
Communicate Quickly and Constantly
Businesses that keep communication quickly and continuously during the processing of M&A deals keep their focus better and reduce uncertainty among employees of the target company and customers as well. The movement of talent is a risk in most M&As, and that is why senior managers should be prepared to answer the “What happens to me?” because it is almost guaranteed that employees will ask it.
It is also important to note that speed is crucial during and after the merger transaction. When the bidding and negotiating period is prolonged, it brings along more risks of employee departures, information leakage, and competitors forestalling the deal.
Stay Focused on Investment Value
If an M&A deal goes above a company’s walk-away price, the company should be ready to decline the offer. Why would you enter into an auction? You are not meant to fall in love with a merger deal, either. As a CEO, you should always think like a financial investor. Put your emotions under control and avoid to destroy the value of an investment due to overconfidence.
The company that is acquiring must have a standalone value of the target firm as it is currently, and value with all the projected synergies added. The purchase price should be somewhere between the two valuations so that the target company’s shareholders also get a premium. However, most bidders overpay relative to the value with synergies. Businesses should ask how much it is worth to them and make a lesser offer.
Be Clear on the Deals
The positive reasons why companies get into M&A deals in the first place include growing a company’s product range, adding value to their manufacturing capabilities, widening its distribution, while cutting down its unit costs. There are, however, negative reasons. These include the intention to build an empire, boosting a CEO’s salary and perhaps salary, or risking a deal of sorts when it is impossible to quantify the advantages.
If you remember the 2000 merger of Time Warner and AOL, then that is an excellent example of a bad deal or one that was closed without any sound reason. If your memory can’t take you that far back, consider the 2011 acquisition of Autonomy by Hewlett-Packard for $11.1 billion. Without any rational financial justification, the merger was nothing but a waste of billions of dollars. They called the deal strategic, but everyone knows it was not.
Continuous Linking Before and After
Businesses should have an ongoing procedure linking the pre-deal stage, the transaction itself, and the period after that. Moreover, the senior executives of each company need to be involved since the beginning. Businesses that damage value in M&As mostly have different teams during and after the processing of the deal, and thus don’t plan the post-merger incorporation well.
The first due diligence is essential as it provides the rationale for the valuation and structure of the deal. Due diligence also allows businesses to know where the merged entity can multiply revenues or cut costs, what the possible risk factors are, and what roles the special management teams will play. If you take Brewers InBev and Anheuser-Busch, for instance, they were clear before their 2008 merger on the joint team that would manage the merged entity.
Avoid Using Investment Bankers For Valuation
Companies must have strong in-house valuation skills, from top management down. Although investment banks are suitable for roadshows and financing, and market regulators sometimes require public companies to hire banks in M&A deals, companies should not use them for negotiating an agreement or valuing. The reason is that investment banks get fees for closing the deal, regardless of whether or not it creates value for shareholders after it is done. It makes sense as a banker is never on the company’s side but the side of the deal.
If a company’s executives do not have excellent in-house valuation skills, they will put themselves in the hands of others and will eventually pay more than they should have. To better understand why you should not trust banks for valuation, take an example of Vodafone’s $180 billion acquisition of Mannesmann in 2000. That merger ended up in the loss of much money due to “erroneous” valuation by a bunch of investment banks. To avoid such losses, employees who are involved in giving estimates that affect the valuation must understand necessary valuation skills and also the principles of value creation through M&As. Else, they will not be able to do a proper job in figuring out their contribution to the deal’s success.
The success of an M&A success is a carefully planned and executed business process. Companies that have had effective merger deals have many senior executives who understand how M&A deals can create value. Such firms do not rely entirely on their finance departments and M&A teams, forgetting about all the other business managers who are involved in the deal, especially after it closes. You rarely find these firms looking for knowledge to master their craft from external advisers. They know what they are doing, and they do it right.