How to avoid being blindsided in M&ABuyers and sellers alike need to mind the gap as they prepare the deal.
In late 2018 Japan's Lixil Group announced that it had called off the €467 million ($535 million) sale of Permasteelisa, its 100%-owned Italian maker of curtain walls and interior systems, to China’s Grandland. The sale fell through primarily because the US Committee on Foreign Investment in the United States, an interagency body run by the US Treasury Department, which reviews certain deals to determine if they impact US national security, refused to approve it. This meant significant time and money wasted for both Lixil and Grandland.
No matter what the deal size, buyers and sellers can face unexpected bombshells when conducting mergers and acquisitions, particularly when doing cross-border deals. They can get blindsided when things go wrong or when issues surface both before and after a transaction closes. Sometimes these surprises are unavoidable, such as regulatory hurdles like the one faced by Lixil; in other cases, the adrenaline rush of doing the deal causes players to overlook important aspects of the buying or selling company.
“Very often businesses are under pressure to grow fast because of their shareholders — and that’s when mistakes happen,” said Ronny Grosman, co-founder and managing partner of Blackwood Capital Group, an M&A advisory firm based in London.
Often buyers, particularly small and medium-size companies, are not experienced in deal-making and consequently make classic blunders. They may wrongly determine a target’s value, for example.
“In the current environment, companies are worth a lot more money than traditional valuation techniques will show you,” said John Austin, CPA, co-founder of Austin Dale Group, an M&A advisory firm in Austin, Texas. Deals can take months or years to finalise and do not always happen. “It can take a long time, and sometimes they never find an ideal target,” said Bob Dale, also a co-founder of Austin Dale.
Acquirers may also fall short on due diligence, noted Nicola Barbini, a London-based senior director with operations and performance advisory firm Alvarez & Marsal. For instance, if an asset is particularly attractive to multiple buyers, an auction will ensue, prompting them to complete the transaction quickly in order to gain a competitive edge. This means they may be “rushing to get the deal done” without properly scrutinising the target and the fit. That sets off unexpected jolts later: Employees acquired may need more training, the quality of service in the target company may be poor, liabilities could be higher than anticipated, or the acquired business may be underinvested. “Often M&A has a set timetable and is very compressed, but it’s important not to take shortcuts and to do a full due diligence,” Barbini said.
Sellers can face their own surprises post-deal. They may not know the worth of their company, in part due to deferred revenue, and set too high a price. “We haven’t met an owner yet who realised the business was worth less than [they] originally thought,” Austin said. Sellers may be unprepared to sign a noncompete agreement, or they might offer too many warranties to the buyer, which comes back to haunt them later. And they are sometimes stunned when the acquirer destroys what they have built, Grosman said.
So how does a buyer or seller minimise the number of surprises that can occur? These deal experts offer the following tips:
Hire a specialist adviser. M&As are complex, and many business owners — whether buying or selling — are not adept at handling negotiation and other transaction details. “Small firms rely on their auditors or chartered accountants, which can be a good solution,” Barbini said. “But often they are not specialised and don’t have a global presence, and can’t advise on the workstream from an integrated approach.” In addition, independence rules will also limit the level of service an audit firm can provide to an audit client. Sellers in particular need to be careful, as they most often do not know the buyers. “They could be your customers or competitors, and if the deal doesn’t happen, you’ve soured your relationships,” Grosman noted. “You want to have an M&A adviser as a buffer.”
Be methodical. As a seller, do your best to understand valuations, the deal timeline, and how much work is involved to complete it, Dale said. Engage a CPA or other qualified accountant to help review your books. Categorise your contracts, employees, customers, vendors, and any potential issues like pending lawsuits, so you offer full disclosure. “If you’ve got a lawsuit or employee threatening a suit and the seller didn’t disclose it upfront, that’s bad for everybody and bad for the deal,” Austin said. Most importantly, inform your staff of the possible sale, as you will need their help with documentation. It is a “huge task producing all of the information the buyer needs to look at”, he said.
Evaluate thoroughly. As a buyer, perform exhaustive due diligence. Explore the financial, commercial, legal, and tax implications of the acquisition, and converse regularly with your advisers. Identify red flags early and do not ignore the most important thing you are buying: talent. Companies often “look at the numbers and forget that businesses are made of people”, Barbini said. If the companies do not mesh together well, key employees may leave post-acquisition, and synergies and cost savings may be affected. So before you complete the deal, spend time with executives at the target company. Have informal meetings or dinners “and try to understand the ‘off-the-record’ stories,” he said. “Understand the key personnel and key members of the management team that should be retained.”
Know the rules. Environmental, antitrust, and other governmental regulatory issues can surface and occasionally shut deals down after months or years of work. Know state, federal, national, and international regulations, and how they may impact a transaction, particularly cross border. Retain a local law firm to help navigate these regulatory issues, Dale advised.
Create a plan. One of the best ways to avoid M&A surprises, Barbini said, is to create a 100-day detailed integration plan before you complete the transaction. “Sometimes people say, ‘Let’s do the deal first and worry about integration later’,” Grosman added. But “the earlier you have a plan, the more you minimise risk”.
— Cheryl Meyer is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.