The 10 cardinal mistakes in cross-border M&A

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• Why many of the "perfect marriages" fail to live up to their expectations Here are 10 cardinal mistakes to be avoided in cross-border M&A transactions, i.e. why do mergers and acquisitions fail? 1. Deficient strategic agreement An M&A project can only succeed if the parties agree on common strategic goals. The precise determination of common processes, common views on the leadership perspective, and a common view of the organisation’s future are prerequisites to the start of the M&A process. It comes down on the agreement about why one sells and why the other one buys. The target must fit the buyer: both need a real founding business case and only if and when this projet fondateur has been set and exits, should the transaction management go ahead. The definition of the deals objectives must be clear, transparent and credible. You need a clear purpose: each deal must support a broader vision. 2. Stick to a transaction, even when workload and chances of success are out of balance An M&A project is strategic in reach and it ties up a lot of Company ressources. A cross-border M&A process can last over months. This should not push the Management team and key employees to take their eyes off the business – and off the clients - because of the inherent doubling of workload when you become engulfed in the implementation process on top of the day-to-day operations of your business. Approach this by way of delegating and be realistic in what you can achieve in terms of outcomes and timescales. But don’t let the momentum wane and the project to drag on with a domino effect of failed outcomes piling up. 3. Omission of sound business principles when determining the worth of the target Determination of the "right" price is often the most difficult task at hand. But a good price is always the consequence of good financial results and of a compelling business plan. A realistic valuation of the foreign target based on the achievable projections of a business plan which was established in common and has the backing of the Management is key. Even if the classic methods of comparable multiples and the discounted cash flow method are applied, one has to know the specific questions thrown up by cross-border deal valuation. Multiples can vary greatly – between Europe and the US for example. Which ones do you apply? The one from the home country or the one from the acquirer. Same question for the WACC: which one to use? You will need a lot of "market intelligence" in a competitive bidding auction. Your decision making processes will have to be able to match the rigorous analysis of the target with a flexible application of the acquirer’s investment criteria. 4. To overestimate synergies and the transaction’s upsides Three years of actual profits are worth more than 3 years of business plan. The success of a transaction depends as much from the past business evolution of the target as it does from its future growth development. Never be blinded by a well-written Information Memorandum. In order to guarantee a professionally-driven process, financial data should always be available – or requested - in IFRS format. Possible synergies should not be overweighed and measurable synergies should be in balance with eventual market-entry premiums. The correct price – the strategic price – will be a value within the context of the acquirer’s strategy. 5. Acting under time constraints or competitive pressure An M&A transcation is a process which is linked to a precise timing and compelling pace. One has to work quickly to close the deal. Only when shareholders and managers know their Company inside out will they be able to give a better picture in front of a potential acquirer. Because timing is everything. Once the process (operational plan) is underway, one must not confuse speed with precipitation. And if your competitors are also interested in acquiring the target you are looking at, then this is not a reason enough to up the price. An avoided auction is a good auction. 6. Act without pre-acquisition planning There is often a lack of emphasis on comprehensive planning. We have seen that deals are often subject to enormous pressure, conducted as they are under the watchful eyes of employees, customers, shareholders, the markets and the press. Do not jump to action. M&A planning means making the decisions that underpin the process (deal objectives, degree of integration, choice of advisors, speed of implementation, levels of employee participation, role of the target management in the new entity, integration of systems and employees, managing cultural differences). Put thought and preparation into pre-acquisition planning. Once you have a plan, follow it strictly: value will not only be lost without a detailed plan, but also any disruption can have a price, as it may lead to a decrease in value. So the question is: which steps are vital to assure acquiring success? 7. Forgetting the character of the target when implementing the transactions During the transaction phase all issues need to be put in the open, discussed and solved – with tact. The objectives of the transaction should never be left out of sight and their implementation monitored. The profile of the target has an impact on the structure of the deal. It would be better – broadly speaking - to offer a French Manager an earn-out, while a German Manager may be more motivated by keeping a minority holding. Always work towards a letter of intent as detailed as possible: the work of the lawyers will be facilitated. 8. Deciding not to gather due diligence on an acquisition target Even the best Sales Memorandum cannot replace a solid due diligence. Due diligence should be holistic in approach and not only address the financial indemnification of the target but also look at areas which could cause the deal to fail in the long run (strategic fit, financial information, cultural fit, structural fit, management fit). By way of doing this not only transaction success but also acquisition success may be guaranteed. Crossing borders often means reduced transparency. This has to be alleviated by a transparent monthly Controlling and a professional financial planning. And there are many more sources of information available which can supplement a Financial Due Diligence: personal experience, market knowledge, media, the negotiation process, industry contacts or pre-acquisition interviews. 9. Choosing the wrong advisors Two questions are key: which services are important to you in assuring that you make the deal and in ensuring that the acquisition is a success and who do you choose? Certain services are mandatory, a lot are now being fulfilled in-house. But each deal has his own facets – hence will necessitate more of some services versus others. There is a trend out there to hire aid in the implementation process. Because in the past, the individuals buying the business were not the individuals leading the implementation process. There was often a loss of continuity. A way to alleviate this is to choose an outside facilitator, a consultant able to work full-time on the project, who has the commensurate skill base, is up-to-date on the latest best practices for acquisition integration and who can span the acquisition process from planning right through to implementation. A good consultant should work very closely with senior management advising them on the process while ensuring the process reflects well on the acquirer and not the consultant. The consultant should be an implementation/integration specialist who also sits on the negotiation team. 10. To believe … that integration and dealing with cultural differences between the acquirer and target starts only once the contracts are signed Integration planning must start during the pre-acquisition planning phase and be put underway in the implementation phase. And a detailed integration plan must be ready at closing time. Integration should always be lead by the same managers than those who negotiated. Intensive and coordinated communication is key. Note: part of this article, written by Christian Lenz, was initially published by the Audit firm Coffra in their newsletter "Diagnostic" in November 2003