Anticipating post-closing M&A surprises.

Author:Feldman, Joseph
Position:MERGERS & ACQUISITIONS

Here is a framework for corporate boards evaluating acquisitions. Post-closing surprises should be viewed as likely possibilities to be prepared for rather than presuming that surprises are simply avoidable through good diligence.

When management proposes an acquisition, the corporate directors' key roles as sounding board, risk manager and enterprise steward are put to the test. After all, many opportunities enabled by acquisitions may seem strategically compelling, decision timeframes may be truncated, and external advisers may convey more enthusiasm for how to get the deal done rather than whether to do so or what must be done after the closing. Inevitably, much is on the line.

Acquisition discussions reflexively focus on strategic fit and assessment of valuation, with "completion" of due diligence seen as a security blanket to comfort the envisioned scenario of success. However, our recent research suggests that addressing the inherent uncertainties of acquisitions might be enhanced through greater consideration of post-closing surprises. Specifically, post-closing surprises should be viewed as possibilities to be anticipated and prepared for, rather than presuming that surprises are simply avoidable through good diligence and strategic vision.

Our research has included interviews with nearly 100 company executives, corporate directors, and advisers. Consistently, they reported that post-closing surprises significantly impacting value expectations are more typically found outside of typical confirmatory due diligence areas. Overreliance on diligence checklists and a single financial projection may underemphasize important pre-closing preparations in areas with highest surprise risks. These especially include talent/organization, customer/ market, and integration-focused operations assessments. Of course, these critical areas fall directly within the scope of directors to support and challenge management as they seek growth and value through acquisitions.

Ask the basic questions

"Sometimes it's not about asking the tough questions ... sometimes it's about simply asking the basic questions." The sources of acquisition disappointment may be familiar, though that doesn't preclude missed opportunities for doing the basics well. Indeed, "sometimes it's about simply asking the basic questions" about the deal economics, integration planning, and preparation for post-closing surprises.

Perceived or real urgency to close a deal can also confound adequate focus on the basics. A housewares industry executive reflected on a deal with notable post-closing surprises, "More rigor would have helped. The acquirer was so enamored with owning the new company they looked for the 'best' in scenarios." And an information technology executive added: "One of the biggest mistakes acquirers make is they get emotionally attached to making the...

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