By Adriano Allegrini
Exploring a potential acquisition is an exciting time for organizations: get out of your day job, poke around other companies’ “secrets” and feel the camaraderie in the war room. This is likely as close as it gets to the exciting vision of “working” that we had as children. The stakes are high, decisions are being made at a fast and furious pace!
Yet it’s interesting that this environment breeds optimistic scenarios as it is a well-known fact that most acquisitions eventually fall short of the original acquisition cases. If you want to avoid contracting a bad case of acquisition “deal fever,” which can often lead to overpaying, stay abreast of a few common issues when evaluating a potential acquisition:
- Acquisitions are often incorrectly used as quick fixes for structural problems, or a way for management to buy time and reset their targets. This generates an internal bias to get the transaction done.
- The amount of effort necessary to move a transaction along generates inertia and inertia leads to bad deals. The longer you evaluate a deal and the more you invest in the transaction, the greater the “group think” momentum and the less likely someone at the table will point out problems. Raising concerns is often perceived as a vote for scrapping all the resources that have already been invested.
- Our own advisors can create external pressure to get a deal done. You should remember that your advisors’ incentives are not aligned with your company’s: bankers only get paid if a deal (any deal!) happens. Consultants want to help you integrate the new operation if a deal (any deal!) happens.
- Finally, our internal assessment of our capabilities and competencies and of the risks and complexity of integrating the acquisition can be too rosy. This can lead to many post-merger issues such as: inability to capture synergies, failure to integrate in a timely manner, inability to retain the acquired team, etc.
Managing these elements can be done by creating the appropriate level of counter-pressure:
- Combat the momentum and internal bias by encouraging your team to speak up and making sure everyone involved understands that it’s OK to walk away from the deal.
- Handle the external pressure by applying a healthy amount of skepticism to the advice you are receiving. Is this good for our company, for the deal, or both?
- Be systematic about looking into risks and downsides, sometimes even going as far as nominating a Devil’s Advocate or a counter-deal team.