The Dirty Dozen of M&A

I was recently introduced to the concept of Human Factors. Put simply, this is the study of how people behave in relation to particular environments and situations. 

In 1993, Gordon Dupont came up with the concept of the ‘Dirty Dozen’ human factors while working for Transport Canada. These were the most common factors which could act as precursors to aircraft accidents or incidents.

When I saw the Dirty Dozen, it was clear that without any change, they were just as applicable to Mergers and Acquisitions. Just like aviation, any one factor can cause your deal to crash and burn. And just like aviation - you need to avoid that if at all possible!

Awareness of these factors brings its own benefit in being able to avoid them. However, elimination is better than awareness, so in this article I’m also suggesting a number of countermeasures which can be applied.

Note that these factors are not ranked or prioritised. Each has the potential to wreak havoc on your deals. 

For more information on success factors in Mergers & Acquisitions, download our guide to M&A Success for SMEs.

Lack of Communication

As with all business activities, communication is critical in M&A. In the pre-deal stage, clear communication on values, opportunities and risks should determine whether a deal is done. In Integration, poor communication is often cited as the most critical factor in integration failure and people impact.

An effective M&A management system should ensure that the right people see the right information. This may involve the use of an integrated M&A tool, collaboration utilities such as Slack, or simply ensuring that the right information is documented and shared effectively.

A clear Strategic Rationale for the deal should always be the basis for communication. This will also be the starting point for the communication plan, which is a key component of the overall Integration plan.

Complacency

When you’ve done a few deals, it’s easy to let a sense of complacency and self-satisfaction slip in. You will have seen common problems and developed approaches to deal with them.

However, every deal IS different, whether it’s the companies involved, people, environment or the general unknown. 

This is where an M&A Playbook can be useful for experienced and regular acquirers. The Playbook sets out the standards, approaches and templates to be used, but has the flexibility to be adapted to any new situation.

M&A Playbook

Lack of Knowledge

M&A is not 'Business as Usual' and many organisations do not have the body of knowledge to deliver deals successfully. This can be true at the both the organisation and individual levels. Experienced and effective general and functional managers are often thrown in at the deep end of M&A, without the experience or training to deliver this.

For inexperienced teams, it is easy to build an acquisition case on bad assumptions. They may miss sources of deal value and are likely underestimate the complexity, effort and risk involved.

For irregular acquirers, bringing in experienced consultants to bolster the core team will allow the business to focus on their areas of expertise. Legal, accounting and financing advisors are important. However, it is just as critical - if not more so - to bring in expertise on the end-to-end M&A process to support the delivery of deal value.

Experienced acquirers should consider codifying their knowledge in an M&A Playbook as described above.

Distraction

M&A can both distract and be subject to distraction. One critical risk that can destroy shareholder value, is that the deal distracts from the day-to-day running of the business. It is critical that the baseline of both the buyer and acquired business is maintained. However, the uncertainty following an acquisition can often often cause a lack of focus and dip in business performance.

Conversely, it is often the case that once a deal is concluded, the activities needed to deliver value are neglected. When this is the case, it is inevitable that the deal will fail to deliver shareholder value.

As you can imagine, it’s not uncommon for both distraction factors to be in place at the same time!

To counter these factors, a value case should be created with clear accountability for delivering each value driver. Maintaining ongoing business performance is a critical element of this value case. This can be summarised using a Deal-on-a-page, which can also support the communication plan:

M&A Deal On a Page

Lack of Teamwork

An acquisition is a complex undertaking with a need for clear governance. Even on the smallest deals, no one person can be responsible for the whole transaction. Within deal teams, a lack of clear role definition can mean that key information is mishandled or that accountability is not assigned.

The clear definition of M&A roles starts before the transaction, both with the leadership taking accountability for results, and throughout activities such as Due Diligence. Cross-functional team working is critical, and this requires strong leadership to coordinate these activities.

For Integration, good programme governance should be the standard. Delegation of activity for project delivery should be supported by functional workstreams, but accountability must remain with the business leaders.

Fatigue

The pre-deal phase of an acquisition can involve long days and nights while assessing and negotiating an agreement. Fatigue builds up, impacting concentration, memory and decision making ability. This will often also impact team working as irritability and irrationality becomes more common. 

The only true countermeasure for this is for deal teams to limit these excessive hours. However, where this is not possible (or realistic), teams must be aware of the signs and symptoms of fatigue. Leaders in particular must manage this within their teams and take action as needed.

Lack of Resources

M&A resources fall clearly into 3 categories - people, tools and money. 

Where people are limited, or the available people do not have the skills, experience or time, the quality of work and ability to deliver shareholder value will be impacted. 

People resource limitations can be alleviated by using skilled consultant or interim resources. Specialist M&A skills can be brought in or management freed-up to focus on delivering the acquisition.

Tools will include standard valuation models which avoid reinventing the wheel and calculation errors, while maintaining the financial standards of the organisation. Due Diligence checklists will ensure that the key information is captured during this phase. Similarly, a base integration plan will establish the core tasks required to execute the deal. Failing to have these in place will impact accurate valuation, risk management and deal delivery.

All of these can be held within an M&A Playbook to provide a base level of M&A resource. Using one of the enterprise M&A management applications may also help with the management of multiple concurrent deals.

Financial resources are also critical. The integration budget is often underestimated, but may run to 30% of the total deal value, especially if significant IT integration is required. This integration budget should be included as part of the overall deal value case.

Pressure

There can often be significant pressure to get a deal done. This pressure can come from senior management, but often will be self-directed. Managers initiating deals do not want to be seen to have wasted time or money on abandoned acquisitions. 

However, it is critical that only the right deals are done. For this reason, an effective deal pipeline process should be put in place to screen, assess and prioritise targets. This way, time and money is not wasted on deals which are not right for the company.

M&A Deal Funnel Pipeline

Companies should not be afraid to abandon a deal at the last moment. In the final stages of the transaction, there will often be reluctance to stop, even when things are clearly not right. Doing the wrong deal will cause many more problems later on, so it is much better to make the hard decision at this stage than deal with the consequences later.

Lack of Assertiveness

Another team factor is the ability of team members to express their opinion or expertise. In the M&A environment, ego and rank can be major factors in getting a deal through the process. 

Team members must be authorised, encouraged and willing to express their professional and expert opinions. Where this is not the case, value may be overestimated, risks played down and inappropriate deals approved.

Stress

The consequences of stress in the workplace are well known, and M&A can be a high stress, high pressure environment. Ongoing stress may cause personality and mood changes, impact concentration and memory and cause health problems. All clearly impact the ability of organisations to effectively plan and execute deals.

As with fatigue, this is dependent on M&A leaders recognising the symptoms of stress in their teams and themselves, and taking appropriate action.

Lack of Awareness

Where M&A teams work in isolation from the wider business, they can suffer from a singular focus on the task. This can result in tunnel vision, a partial view and limited awareness of the impact on the organisation. Stress and fatigue can exacerbate this situation.

This can be avoided by using mixed business and specialist teams. The ultimate accountability for a deal should sit with a business executive, who should impart a wider view to the team. Again, external advisors will bring valuable alternative points of view and additional knowledge.

Norms

Standard workplace practices can be developed over time and become embedded in the company culture. In M&A, these norms may be codified in an M&A playbook. However, a playbook should not be seen to be set in stone. 

The playbook should be a baseline for M&A planning, but customised for each deal - 30% to 50% will typically be different. It should also be regularly updated with lessons learned and the capture of these should be a critical activity in the wrap-up of each deal.