The M&A Process

Jerry Pisani
Jerry Pisani,
President and CEO of Stoneridge, Inc, retired. Associate, Automotive Resource Institute of the SAE.


Moving From Strategy to Implementation

The M&A process can be defined as consisting of four phases: strategy development, candidate screening, due diligence, and integration. In an earlier article (July 2007), I wrote about strategic intent being the first step in the process. I would like to continue the discussion of the M&A process in the interest of improving your likelihood of success. Defining best practices does not guarantee “world class” results but reaching your destination is more likely if you understand the route map.

Specifically, I would like to focus on due diligence and the integration plan because the acquisition process is becoming more complex. Acquisitions have evolved from a product line “bolt-on” or cost reduction driven vertical integration to bolder strategies that expand enterprise core competence and global reach. At the same time, regulatory and environmental issues have diverted managements’ attention from the core business objectives. In addition, shareholders’ expectations are higher in terms of growth, value created and how quickly accretion to earnings can be demonstrated.

Due diligence has traditionally been left to business planners, financial analysts and lawyers who verify the completeness of the data, develop a financial model and negotiate the terms and conditions of the acquisition. Today, we need a more extensive process and the requisite business skills resident on the acquisition team.

All post acquisition surveys reach the same conclusions; due diligence was inadequately planned and executed. Common findings:

  • The team lacked the expertise to analyze the acquisition’s business plan and question the assumption and projections or assess the potential risks.
  • Not enough weight was given to the compatibility of the two organizations, leading to turn-over, integration issues and delays in realizing projected synergies.
  • Buyer enthusiasm led to a lack of objectivity regarding customers’ response, growth projections, cost projections and potential synergies.
  • The time and talent was inadequate for the task.
  • A post acquisition plan was not in place before closing.

The objective is to expand the due diligence process to move beyond data collection and modeling to a complete business analysis. Depending on the complexity of the transaction, the focus should be on any and all aspects of the business being evaluated that will impact value creation:

Business Environment: An external view of the growth projections for the market and regions served and the stability of supplier and customer relationships.

Competitive Climate: Existing and emerging threats to the base business considering commercial and technical risks and including an objective analysis of the competitors.

Cultural Fit: The values and management style that define the business and its compatibility with the culture of the acquiring company.

Organizational Benchmarks: An assessment of the executive talent, marketing/sales capability, product strengths and weaknesses, business and manufacturing process capability.

Defining the scope of the project will indicate the resources that are required. It is common practice to under staff the due diligence team and to rely on personnel who can verify the strategic fit and review the completeness of the data but aren’t necessarily qualified to identify or quantify the synergies and won’t be accountable for getting to the expected post acquisition results. A common rationale is that operating personnel are too busy to be included, however, while consultants bring specialized expertise they too can not be held accountable for delivering the projected benefits.

A team of functional experts is needed and particularly the individual responsible for a successful integration must be included. If essential resources are not made available for a project of this importance, the acquiring company does not understand how shareholder value is created. Even if the objective was to acquire an autonomous business unit, a comprehensive business analysis is still the more rigorous and desirerable approach.

The acquisition team is charged with developing a strengths, weaknesses, opportunities and threats analysis for each aspect of the business outlined, in addition to the traditional due diligence data collection. The goal is to identify the tangible benefits, risks (potential deal breakers if any), and integration issues. Usually, the major issues will stand out; seller’s post-closing performance guarantees, expected new business awards, competitive issues, new product launches, potential integration problems, process deficiencies, and talent retention concerns. The team must review the data presented but also understand the sources of the data and its reliability.

The summary report should provide top management with a fact based analysis of the state of the business as well as provide:

  • Confirmation of alignment with the stated strategic intent.
  • Major sources of value creation.
  • Significant risks as well as risk mitigation suggestions.
  • Important information that has not been obtained.
  • A realistic forecast of sales and cash flow after tax for the next five years to calculate the present value for the business.
  • The integration plan and implementation schedule.
  • Any additional human resources or central services required but not included in the cost projections.

While these expectations are not surprising or innovative, all too often they are not assigned or reported formally. The acquisition process needs to be looked at as more than a one time event that the team can get through but rather as a fundamental business process that is documented and followed. If you’re already there, congratulations, you’re ahead of most of the competition!