Is M&A a Vegas “Roll of the Dice”?
Honestly through pure accident, my involvement in M&A happened really early in my career. I was able to learn a lot about it, be in the middle of many deals, and see the good and bad of deals. In thinking about this, I realized I have been a part of a couple dozen transactions on all sides of the isle — seller, buyer & spin off’s. I get it, you may be reading this and saying, a couple dozen, we did that last year. I get it, I am not the most experienced for sure, but I certainly have been involved enough to know a good deal from a bad one and how the answer to that could take 5 minutes after the ink is dry or a few years later, but as a CFO you better know that answer before it is too late.
I will try not to name too many companies and specific situations because of confidentiality reasons, and will stay as high level as possible, but just apologizing ahead of time to anyone I offend. How good is a blog without some dirt. Grab your popcorn and let’s go.
I do have to kick off this discussion with my first introduction to M&A, which obviously I had nothing to do with but quickly had to learn what all this means. In Dec, 1998 I was a senior in college (yes I am that old, or that young depending on which side of the ledger you are on) and accepted my first job to start in May, 99 with Bank Boston as a Internal Auditor. In March they announced they were being acquired by Fleet. So I am a senior coasting in my last year of college thinking oh snap, did I just lose my job? I called the hiring manager and he must have thought I was an idiot as his words were, integration takes months, if not years, we still need you in May. So I went and searched “M&A & integration” and may have had a couple of beers thanking my lucky stars I didn’t need to show them my 2nd semester transcripts. I guess it is slightly ironic that once the integration of my department happened about a year after I started, they moved me out of Boston, gave me a longer commute and cut annual raises so I left, trust me they didn’t care, I became what I later learned, an overhead efficiency.
One of the first deals I was actually a part of was in the 2000/2001 timeframe and I think helped lead to the end of pooling of accounting. At that time, not just this particular one, but I would think other public companies were trending poor within a given quarter and had the opportunity to buy a balance sheet and not have to true things up to fair value. In this particular case, we acquired a bunch of unknowingly to me near useless assets that had future large balloon payments owed that would later cause us cash issues 6–12 months after the acquisition. So here I am, two integrations in and wondering why anyone would want to buy another company, M&A sucks.
Bring on the French to solve my problems. After a few years with little M&A activity, my career took me to a company that was in the midst of their earnout period when I was hired. I spent 11 years under this French public company where it seemed like all that was happening was M&A, some directly here in the states I was a part of and some just announced internationally that I learned some things about. Certainly directly involved in a dozen or so acquisitions, divestitures, sell-offs, buy-back, other transactions it became apparent what good and bad deals looked like. With anything, some were great deals, some were “ok” and some were, well, I wasn’t a fan of. However, in the end, I lead diligence teams on certain acquisitions, was in the middle of negotiations, learned so many deal structures, how to finance them, how to model them, when to walk away, how to connect with new teams, what makes an integration go from good to great and what makes one go from bad to worse, how do you factor in efficiencies in the future (Like moving someone to a different office young in their career), how do you factor in the need to increase overhead maybe in the future, what asset versus equity transactions are, how to raise funding, quality of earnings reviews, legal agreements, and on and on. All in all a tremendous learning experience for me.
2 great stories that sit in my head from this time period. Both good in the end but one the transaction happened and one it didn’t. Both happened because we put boots on the ground and both I was leading the diligence effort after an LOI was signed. The earlier one was a company in the UK that once we peeled back the covers, was not what we had thought. My recommendation to walk away was approved by the powers that be although they weren’t happy. Sorry didn’t want to waste your money, but wow, Manchester, UK is a beautiful place, thanks for sending me. The second one started as a services company but later turned into a software & services buy, completely changing what the APA would look like because their services were 100% wrapped around the software they had developed and if we were not a part of controlling that software in the future, it would be a huge risk. We worked to get it right and the papers were signed. That glass of wine tasted great upon signing and would say it was a success, great team effort.
Over the last 5 years in a couple different CFO positions, I was a part of closing about 6 more transactions and walked away from a many more, lessons learned along the way for sure. Certainly integration is easier the smaller a deal is, complexities come up the larger you are, but the model, with good assumptions, usually doesn’t lie.
Some Keys to Success: It is no secret, acquisitions fail because of poor diligence. This is not just financial diligence, but old-school handshake diligence. As we sit here during a pandemic, I would strongly recommend ownership on both sides still break bread in some way in front of each other. Culture is a huge key to success and sometimes only determined when the lights are off and people can be a bit more, themselves. Insist on meeting the second level of management as well, some owners look to sell as they want out sooner rather than later and you will be left with the #2–4 in charge now running that business unit. The owner is always hesitant to let the team know, but always better learn how that company operates. The other thing is, don’t outsource too much diligence. I realize some acquisitions are too large and need 3rd party support, I am all for this, but you as a C-Level Exec need to get your hands dirty, learn the culture, personally read through not just financials, but benefit packages, some contracts, customer details, cash flow, etc. In the end, CFO’s are leaned on to give their final opinion on the deal, that 3–5 year model better be tight, you better know their business and how it will integrate with yours and you need to stay involved heavily, if not lead, the integration. Your company’s culture needs to be stamped on their new employees and your presence is extremely important in the success of that transaction. Got to run, looking to close another deal. Hope I listen to myself.
