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(originally published by Booz & Company)


The Top 10 M&A Fallacies and Self-Deceptions

2. “Any experienced negotiator can negotiate deals.” Executives often assume that all forms of negotiation are alike; thus, their commercial experience has prepared them for M&A deal making. Unfortunately, the auction-like nature of competitive deals can make mergers and acquisitions very different from negotiating a product launch or joint venture–related agreement.

For example, the acquiring management team may fall prey to a seller’s overoptimistic projections or their own synergy estimates. This is especially likely to happen when there are several competing would-be acquirers, and the team feels time pressure to complete due diligence and submit a bid. It is easy to lose sight of the fact that if the price and terms aren’t right, “winning” the deal can be worse than losing.

The answer is to think ahead of time about what you are willing to pay and to develop a true “walk-away” price. During negotiations, as you learn about the sellers’ motivations and as new options are suggested, this preparation can help you turn down any new arrangement that doesn’t give you what you need. Keep internal or external advisors in the loop to continuously check the value of the deal and provide advice on hard stops. You can also put measures in place that share some upside potential while still staying below the walk-away price. For example, you can prearrange a performance bonus for the sellers, to be awarded when agreed-upon financial milestones are reached. Be careful to make the terms explicit; even with good faith on both sides and well-thought-out milestones in place, it is possible to end up in a situation where targets are not met, and acrimony ensues.

3. “M&A performance is all in the numbers.” Many executives assume that if the financial arrangements are secure, the rest of the deal will follow. But all deals have two other significant factors to consider that are often not accounted for in the numbers: the human element and the need to develop the capabilities required to succeed in the new or merged business. This is especially important if the new business model is different from the company’s established model. A comprehensive due diligence process should take into account both the cultural and capability aspects of the deal.

Culture was a major potential hurdle when two large hotel and resort companies recently merged. One company had been founded by a hands-on entrepreneur who had always taken a data-driven, centralized approach to making major decisions (such as where to expand). The other company had been loosely cobbled together through past acquisitions, and left most expansion decisions to regional or local leaders. Before the merger was concluded, the senior leaders-to-be of the new entity conducted a survey of top executives across both organizations, and developed an action plan to counter the gaps in talent and skill that this survey revealed. The merger turned out to be a largely successful endeavor that brought two disparate organizational cultures into a cohesive brand and operating model.

In another case, the merger of capabilities had to be explicitly managed. A global operating company of a specialty materials group, which typically operated in business-to-business markets, acquired a maker of construction materials for consumers. Although the acquisition was relatively small, the president of the division made several trips to the acquired company’s remote headquarters and spent significant time learning about the capabilities it had, as well as those that would be needed to win in the acquisition’s market. This helped the acquiring company place the incoming team in the business unit that fit the team best.

4. “Information in the M&A process will naturally be kept confidential.” When middle- and low-level employees get wind of a possible acquisition, leaks are possible, and they can have major consequences. Confidentiality should be taken very seriously and enforced during the due diligence process; leaks can come from a variety of sources.

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  1. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): Guide to the meaning and value of coherence in strategy, with a chapter devoted to M&A principles that will produce a good fit between the two merging companies.
  2. Gerald Adolph and Justin Pettit, with Michael Sisk, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Describes the trends affecting M&A and the ongoing strategy that a company can use to become an effective serial acquirer.
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