Avoiding Value Erosion: Secret #1
Talk Is Cheap: Value Erosion Secret #1
By Jack Prouty, Past President, M&A Leadership Council
Note: This article was developed in response to several issues raised by attendees of some recent M&A Leadership Council training seminars. A case study was presented in which the sell-side CEO was preventing the active interchange of information and the meeting with key personnel, until the transaction closed.
How often have you heard the phrase, “Talk is cheap”? Well, in the M&A world, “not talking” is expensive!
What do I mean by this? In the period between Day of Announcement and Date of Legal Close, the focus (as we teach in our public M&A training programs) has to be on business stabilization, joint integration planning and preparing for Day One. Business stabilization starts and ends with effective communications to the various stakeholders to address all of their “me” issues. Too often this is not done effectively, hence we begin seeing value erosion (lost productivity, reduced revenues, talent flight) right away.
However, another major activity that needs to take place prior to close is joint planning by the key management and functional leads from both organizations.
This essential activity has two objectives:
- First, to enable a much broader and deeper understanding of the business, which can usually occur once the deal has been announced. The need is to build a true understanding among the key players of the two businesses based on the similarities and differences between their companies: how they are organized and structured, their customer value proposition, their systems and processes, their values and culture, etc. How can you integrate the two businesses if you don’t first fully understand how they currently operate?
- Second, and just as important an objective as the first, is to begin building personal relationships and gain mutual respect for the value that each organization’s people bring to the combination. If we can jump-start the working together at this early stage, not only do we benefit in better integration planning, but we also increase the probability of retention of vital people and a reduction in the attitude of “us versus them.”
Given the value of these two important objectives, which help accelerate the pace of the integration and reduce business risks, I am surprised at the resistance we often hear (especially on the part of the CEO of the selling entity) regarding this joint sharing of information and planning until the deal has closed. Often, this resistance even includes basic communications to their employees to address issues and concerns. They try to blame this on legal constraints concerning gun-jumping, accessing proprietary information, and even privacy concerns (which is more of an issue in cross-border deals). However, much more information can be shared without violating the rules.
Now, regarding diligence information requests, I understand the resistance of the small, privately held owners and their concern about an onslaught of corporate folks descending on their limited staffs. The difficulty of due diligence demands for all sorts of information while the team has a business to run, though, is an addressable problem.
On the other hand, I have seen CEOs of very large companies raise the same barriers. If someone pushes back too much against reasonable requests regarding stakeholder communications and joint information sharing and planning prior to the close, it raises concerns that they either do not understand the critical success factors in effective M&A integration or they are worried that active information sharing may flush out issues and matters relating to the valuation of the business.
From my viewpoint as a former CFO, if my company is about to make a $400 million acquisition (including a premium over market) then I would want to launch the critical actions to fully understand this business and build relationships with the key personnel that are going to soon be my employees. I would also want to clarify where the business value and risks lie, and complete as much of the integration planning as possible before I have to wire the money to the sellers and take over the full responsibilities and liabilities of this business.
For you, as the person in the trenches managing the overall integration effort, the senior management of your company needs to be a strong advocate of this best practice taught at our seminars:
Carry out cross-company joint functional team on-boarding and training for “as is” business assessment and integration.
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