On Growth

12 Secrets to M&A Success

Begin with the end in mind and know what you want and need before you buy, based on your overall long-term growth strategy.

In the September issue I looked at the dark side of how not to take on an M&A project with my column, "Want Your M&A to Fail? Here's How." It identified some of the pitfalls that, in our experience, will generally get an M&A project off-track and often shelved.

This month I'm going after the brighter, glass-half-full side of the right way to approach and implement an M&A transaction. The brighter side starts with why you'd want to do an M&A in the first place. There are many smart, sound and strategic reasons for doing so. Among them are:

  • Access to new management or technical talent, to new intellectual property, and to new markets and customers

  • Improved earnings and sales stability

  • Growth in market share in the sectors in which you compete

  • Enhanced reputation in the marketplace or with stakeholders

  • Reduction of operating expenses, realizing economies of scale and of scope

  • Competitive insulation

  • Attracting, retaining and rewarding key employees

These are all good things indeed. So, with that established, let me offer a sampling of a dozen lessons that we've deposited in our intellectual M&A bank.

  1. Hire a Sherpa. Enlist the services of a guide (and yes, that would be us, or in the spirit of fellowship, companies like ours) with a proven track record in navigating the treacherous terrain of M&A.

  2. Know when you're ready for an M&A. Generally it's when your revenue is more than $5 million; you're growing at least 10 percent per year; you have a mix of 50/50 project/staff work; your business processes are well-defined; your business units are aligned; you're financially healthy with little long-term debt; you're successfully scaling the business organically now; and you're in a position to take a risk.

  3. Know what you can afford. As a rule of thumb, most IT services firms can buy companies about one-half their size and assimilate them comfortably. In most cases this size can be reasonably fundable through debt and cash flow. We've managed bigger deals where companies were buying firms of equal or even greater size, but these are more the exception to the rule. In some cases, more risk-tolerant executives will take on a larger acquisition if the selling company has solid retained earnings and a sufficient base of annuity income. Private equity and venture money is available for more aggressive acquisitions.

  4. Have a roadmap. Begin with the end in mind and know what you want and need before you buy, based on your overall long-term growth strategy.

  5. Bypass the "for sale" signs. Ferociously avoid those seductive, tempting but distressed tactical properties in favor of ferreting out those hidden "not for sale" gems. This means you're going to have to dig a little deeper and spend a little more time locating these pearls, but the wait and the work will be justified.

  6. Beware the "winner's curse." This means the excessive premium paid for a property, spurred on by the emotional and irrational exuberance of the "deal" that, down the road, wipes out any gain you hoped to achieve.

  7. Paint a vivid picture of the ideal prospect. Look for the company that fills the white space in your operation, and don't waver from this profile. This is the time to be realistic and specific.

  8. Don't buy capability. Buy opportunity; buy the future.

  9. Close enough is not enough. A perfect fit is enough.

  10. Know the valuations. Right now, prices are up about 10 percent versus a year ago, and this trend is likely to continue for the next couple of years.

  11. The real work comes after the courtship. It's not enough to close the deal and leave the integration to others. In fact, most of your blood, sweat and toil should be directed to your post-acquisition strategies and implementation.

  12. Be ready to walk away. This is the cardinal rule of all negotiations, and it applies to M&A as well. The best way to ready yourself for both the pursuit of an acquisition and the need to break away from one if necessary is to keep your emotions in check.

About the Author

Mike Harvath is CEO of Revenue Rocket Consulting Group, an IT services growth consultancy.