Reaping value from an acquisition: The five important rules

Most companies in the services business get to a point in their journey where they realize that the key to growth is to get a few large deals. Smaller contracts are good to provide a steady and diverse base of operation. But to achieve significant growth and momentum, services companies need to have one to two large jumps, every year. These jumps may come organically through a commercial contract of significant value, or inorganically with a corporate action like an acquisition or a merger.

Large deals, of any kind, can be double-edged swords. They lift the company operations to new heights but also can create significant flux and distraction within the organization – both in terms of the company’s operations, but also its basic culture and structure. Without careful handling, they can create so much disruption that they endanger the whole ship.

Preparing for the acquisition

When the deal is related to an inorganic move, then the implications are even larger. Information regarding an inorganic deal in the works, is usually limited to a small audience within the company – the Board, CEO, and CFO are usually involved, but beyond them, only a very small set of people are ‘in the know’. This means that once the rubber hits the road, the organization is left with very little time to prepare itself. Senior management within the business will look towards the CEO and CFO to guide them on how to deal with the transition and protect the culture and operations.

Unfortunately, senior leadership becomes too busy doing the negotiations for the acquisition. They do not take the time to step back and think about how they will guide the organization through the transition. As a result, after the deal is announced, managers get mixed messages from the leadership which causes confusion and consequently the organization loses momentum.

As an organization considering a large deal, it is important for the CEO to take the following steps.

1. Ensure there is a common consensus on the strategic rationale:

The primary role of the CEO and CFO is to set the direction and define the boundaries. Have a clear rationale for the need of the deal/acquisition, and what it brings to the table. Be aware of the boundary conditions beyond which the deal should not be done. Have a common view of what the ideal outcome would look like.

2. Have clarity on what the long-term objectives are

Ask what the company will gain post the deal, beyond just the increase in overall revenue.

Calculate the value of each opportunity and then reduce the overall number by a factor to account for internal inefficiencies.

3. Actively evaluate the risks:

Build scenarios that deviate – positively and negatively – from the planned outcomes. Both deviations are important. Identify the key inputs that have the greatest impact on the deal outcomes and run a sensitivity analysis for each. Identify who holds the contractual risk, and ensure the company is protected against the greatest risks. Consider the risk of cultural misalignment, especially when the entities in question are intended to be integrated together.

3. Create an outline of the 30, 60 and 100-day plans, ahead of deal announcement:

Use this plan to set the tone as soon as the deal is announced. Ensure that critical deal objectives are converted into milestone-based outcomes within the plans.

5. Invest in a resource that can take ownership of the deal-making process:

Appoint a talented manager from the ranks to manage the deal process. The ideal person should understand finance, but in a pinch. A good project manager with limited financial understanding is better than a finance expert who cannot drive the integration process effectively. Ensure the manager is senior enough to make decisions, but junior enough that they can be pulled out of their day job to focus on the acquisition full-time.

In conclusion…

Deal making is game-changing, and exciting. But behind the glamour of signing that multi-million-dollar contract, there is an immense amount of serious planning effort. Only those leaders who invest time and energy to do the thinking work can enable their organizations to reap above – average benefits.

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