Critical questions to ask before every M&A transaction

Critical questions to ask before every M&A transaction

It is necessary to ask critical questions before every M&A transaction. Mergers and acquisitions are invariably the top three options available for executives to accelerate their organization growth. At the same time M&A deals are risky and 65-75% of M&A transactions fail to create shareholder value. Worse, around 25% of the deals destroy value.
Many deals fail because companies are either not prepared or not experienced to handle complex situations. Many companies are not serial acquirers and do deals once every 2-3 years. As per McKinsey only 33% of firms have dedicated integration teams. As a result, many deals are high cost activities and face risk of losing their customers and employees.
Given that M&A deals have become a very regular phenomenon, firms should build a framework to manage deals.The framework should primarily evaluate a target company’s strategy, organization structure, technology and operations along with its culture.

Key Questions to be asked to assess prospective deals

Acquirers should have a list of key questions ready to not only assess prospective target companies, but also facilitate fruitful conversations with the target business leadership.
These questions will help companies plan for both positive and negative situations.

Critical question 1 – What is the M&A rationale

Let us start with strategy as companies need to have a clear vision of how the acquisition will create economic value along with the clear sense of the key challenges in the underlying transaction.
Key questions to be addressed include:

  1. What is the acquisition going to accomplish?Does it achieve strategic goals?
  2. What are the key source of value drivers in this acquisition? Is the acquisition going to provide additional assets or capabilities?
  3. Who will be the Integration lead for this deal and what is his KPP?
  4. Will the integration disrupt the core business activity?
  5. What are the biggest risks in pursuing this acquisition?
  6. Who is the deal sponsor for the transaction?

Critical question 2 – Deciding the final organization structure of combined entity

The combined organization structure needs to be devoid of any redundancies, but at the same time part of the business that needs to be distinct remain independent.
Roles needs to be decided based on merit and qualifications. The best people for each role needs to be selected.
Key questions to be addressed are:

  1. Which divisions should be integrated and which should function independently?
  2. Who are the individuals identified for top leadership positions?
  3. How to identify and retain talent?
  4. Are decisions made on merit or internal politics?
  5. Availability of skilled talent to run the new divisions that the deal will create.

Critical question 3 – Driving Synergies

IT generally can deliver 10-15% of cost savings during an integration. At the same time, due diligence of IT and systems are important to identify hidden costs.
Key questions to be asked are:

  1. Can systems be integrated smoothly?
  2. Are both entities compliant and meet industry standards in terms of technology?
  3. Can senior management advise on technical issues?
  4. Which IT systems are critical and needs to be integrated immediately?
  5. In case of multiple versions of systems used, which system needs to be included?

Critical question 4 – Culture

Identifying cultural issues and then resolving the same is very important. It is important for the leadership of both organizations to decide on the final cultural DNA of the combined entity.
Are both companies going to follow their own culture or would they build a newer version.Both firms need to work together to bridge any cultural gaps and issues that crops up during the integration.
Key questions to be asked include:

  1. Are both acquirer and target companies compatible in core values?
  2. Which elements of the culture will be retained and of which entity?
  3. Are time and resources allocated to understand the culture and day to day operations of each entity.For instance how meetings are conducted or what language is used to communicate similar concepts?

Conclusion

  • Acquirers need to have a basic checklist of critical questions to ask before every M&A transaction and decide whether to proceed forward.
  • These questions can also facilitate fruitful conversations between the acquirer and target founders.These conversations can help both entities in understanding each other.


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