A set of distinct steps defines the M&A transaction process, and each step requires a set specific leadership skills and behaviors.
— By Dave Desouza
There are not many business transactions more complicated than a merger and acquisition (M&A). Two or more business entities and assets are consolidated with the goal of creating higher financial value through synergies. The laborious M&A process would imply the result is sure to succeed, yet many fail to even make it to the finish line.
Failure usually comes down to leadership skills gaps. Leaders need to have the skills to successfully manage the steps in the M&A transaction process and beyond to integration. Myriad skills are needed through the steps, and leadership skills are first tier determinants of success.
Leadership Skills Gaps Can Derail M&A Process
McKinsey research found that approximately 10 percent of all large M&As are canceled. The reasons vary and include shareholders backing out and unexpected integration obstacles like changes in the laws.
Leaders cannot control all the factors that can derail an M&A, like new regulations. However, many reasons for M&A transactions collapsing are due to leadership failures. It could be valuation mistakes based on poorly developed projections, weak negotiation skills, insufficient direction from the C-suite, miscommunications, and/or lack of transparency with shareholders, to name just some of the more common reasons.
The M&A team makes or breaks the deal in most situations, and its members can include internal and external individuals who specialize in certain areas. Their skills are the primary determinants as to whether a viable M&A is completed. There are good deals that go bad because of the lack of expertise or lack of understanding on the part of the people leading the process.
Critical Skills at the Top
The first set of skills belong to the CEO and other C-suite executives. They are the people who see an opportunity and decide whether to assemble teams to pursue the transaction. Executives are also actively involved in selecting the right people for the teams and will work closely with an investment or initial team that has an early say in whether the deal is being done for the right reasons.
The executives and the investment committee will develop a strategy for the organization as a whole, while future teams will actually execute the plan.
One of the primary C-suite skills needed is the ability to be fully transparent. A risk of the initiation of a merger or acquisition is disruption of the company’s ability to remain productive. Employees and shareholders get nervous when transformational change is occurring.
McKinsey offered an example of a European oil-and-gas company that was acquiring a company in the same industry. Recognizing the shareholders would not necessarily understand the value of the acquisition, the executives kept both sets of shareholders fully informed throughout the process. There were real-time updates and frequent information publishing on its website.
Transparency is important to employees, too, who will be worried about things like their jobs, responsibilities, and even the need to move. Publishing information on a website can give employees insights into what is happening, too. The C-suite drives the organization’s culture by conveying the vision, and transparency is a crucial element.
One of the M&A risks is that leaders at all levels do not stay the course during what can be a lengthy process and after the deal is done.
The decision to start an M&A is based on data about growth opportunities in business lines. Data is collected and analyzed on markets, competition, synergies, talent pool, technologies, and a host of other factors. Data analysts and market researchers lay the foundation for the initial go-ahead and then are instrumental in providing the data and analytics used to identify potential M&A targets. The people selected for these roles must have deep skills in market research.
Developing the acquisition strategy, establishing the search criteria for potential targets based on a developed profile, and conducting the search companies that fit the profile are the first three critical steps.
The next step is acquisition planning of the top one or two targets identified. Employing effective communicators is crucial because the target companies may or may not be interested. The ability to clearly and succinctly summarize the proposed deal is a key skill. When a Letter of Intent is sent to a target company, along with the proposal, a dialogue is started.
The valuation step is considered to be one of the most critical steps in the M&A process. The targeted company provides the acquirer with financial information, and the valuation team evaluates the information to determine if the M&A is a good move. The financial analysis is only one step though. Other factors to consider through valuation models include culture fit, potential obstacles or market changes, alternatives for structuring the transactions, and so on.
Negotiations will take place, and only skillful negotiators will succeed. Negotiating skills include soft skills like communication, strategizing, persuading, active listening, getting and giving feedback, ability to capitalize on opportunities for compromise, and presentation. The art of negotiation also requires being able to use the valuation models to interpret changes in value due to negotiated factors.
Once the negotiations are done and there is agreement, due diligence is done. This is even more critical than the valuation because it focuses on financial and operational analysis before the final sales contract agreement.
Change Managers Needed at all Levels
The final step is integration, and this is where the change leaders are needed. People are often resistant to the change, confused, possibly lack confidence in management, and fear the unknown.
Effective managers are active listeners and communicate regularly, engage employee champions, develop a shared culture, and are good at addressing the technical issues of combining two workforces. The reality is that middle managers play a major role in ensuring a successful M&A before, during and after. They are visionaries, cheerleaders and motivators.
Leadership assessments are good tools because they can be customized to fit the position. Assessments can also address specific areas, like cultural alignment, change management skills, people skills, leadership behaviors, learning ability, decision-making, strategy development and specific skills. Tools include predictive behavioral assessments that can provide intelligence on the matching of positions to individual skills sets.
People Determine M&A End-to-End Success
It might be tempting to just rely on current decision-makers, but the M&A transaction demands special skills.
One of the M&A risks is that leaders at all levels do not stay the course during what can be a lengthy process and after the deal is done. Every leader involved in the M&A process needs the ability to adhere to strict implementation of the various steps while keeping the workforce engaged.
The financial and operational analyses, negotiation process, and due diligence are of enormous importance, but it could easily be all for naught if employees flounder and resent the change. M&As are a popular way to grow a business, but their success depends on people skills.