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(originally published by Booz & Company)


The Top 10 M&A Fallacies and Self-Deceptions

A division of a global industrial concern was in the midst of negotiating a potential acquisition of a publicly traded company when a person on the diligence team leaked information about the deal to an outsider. Word spread, and the stock price of the target rose, significantly diminishing the deal’s attractiveness. The person who leaked was dismissed, and a new confidentiality policy was put in place: All corporate development staff, as well as leadership team members, had to sign global nondisclosure agreements (NDAs) explicitly agreeing to secrecy on each deal to which they were privy.

Other ways of enforcing confidentiality include extending the NDA requirements to administrative staff, highlighting the importance of confidentiality during key due diligence checkpoints, prohibiting e-mail about the deal, and instituting preannounced penalties for leaks and breaches. Sometimes, key components of the due diligence process can be outsourced to a third party to reduce internal communications. These extra steps help reinforce the importance of the rules, even when the staff is already aware of the guidelines for confidentiality.

5. “There’s time for detailed postmerger planning after the merger takes place.” This fallacy is a comforting assumption for executives trying to rapidly conclude a detailed acquisition (while maintaining all their other commitments). However, it rarely leads to good results. Unless you define a detailed merger integration plan before the submission of the binding bid, you risk losing the momentum that you need to drive change and integrate the companies. In larger deals, in which input is required from the target to properly plan the postmerger effort, or in situations in which information is not forthcoming (such as hostile takeovers or auctions), due diligence can still identify the biggest integration risks and help you make the go/no-go decision, set your offer price appropriately, and identify initial risk mitigation hypotheses.

Identify a postmerger integration team and a leader during due diligence, as soon as it is clear that a binding bid will be submitted. This will help you identify some of the key integration risks and issues, and the resources required for integration. It will also lay the groundwork for postmerger review processes and metrics that can help hold the integration and business leaders accountable.

Self-Deception vs. Reality

Self-deceptions are often more difficult to address than fallacies, since practitioners think that they are already following the best practices. Our experience suggests otherwise.

1. “Our company’s M&A process is strategy-led.” Corporate leaders generally understand the importance of having a clear growth strategy before venturing into deals. Nonetheless, even in a sophisticated company, strategic definition can be surprisingly incomplete. This leads to significant delays in conducting due diligence, or to a lack of preparation in responding to deals when they become available (for example, responding to a banker’s deal book).

At a large global industrial company, one division was very successful at getting internal approvals, whereas another division was not. Both divisions had good overall financial performance, but the successful division also paid specific attention to integrating its M&A plans with its organic growth strategy. The division leaders reviewed this cohesive combined strategy with the CEO every year. The result was a predisposition at the corporate level toward deals proposed by this division, even before they were presented. The other division had to go through an extensive analysis and approval process, especially for M&A deals involving adjacent or unfamiliar markets.

This is not just a matter of generating buy-in. Deals need to be generated with strategic intent, no matter how attractive the financials appear to be. This means that the acquired business should bring in capabilities that fit with the capabilities system of the larger company — or bring in new products and services for which the acquiring company’s capabilities system is relevant. Otherwise, a deal may put the core business at risk or drain attention, time, and resources. In particular, mergers and acquisitions should reinforce and help build the capabilities that distinguish the core business from its competition.

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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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