Deal or No Deal? Take this Test Before a Merger or Acquisition

When companies merge or acquire, stakeholders usually expect that the whole will be greater than the sum of its parts. Unfortunately, the facts tell a different story. One plus one does not equal three, and too often it moves shareholder returns to the wrong side of zero. A once-exceptional organization can quickly take a turn toward mediocrity, or worse.

Study after study puts the failure rate of mergers and acquisitions between 70 and 90 percent, which analysts have tried to explain by analyzing the characteristics of deals that worked and those that didn’t. That’s a start, but that only informs decision-makers about the features of the deals that caused them to fail or prevented failure. It doesn’t truly get to the core of the cause/effect relationships among planning, evaluating and integrating the Five Essential Traits for Successful M & A’s: vision, financial synergy, operations, culture, and talent. To understand how The Five Essential Traits for Successful M & A solve the puzzle, think of a deal you are considering. Then, score this deal from 1 to 4 for each of the statements below

Rank each on a scale of 1 to 4
1=Totally Disagree, 2=Disagree, 3=Agree, 4= Totally Agree

Vision

1. We have a clear strategic objective for doing this
2. Our desire to grow goes beyond cost-savings and defensive moves.
3. We clearly understand what is achievable in light of market and industry trends.
4. We have widespread agreement about our goals.
5. We have tied our short-term goals to our long-term vision.

Financial Synergy

1. We know how they make money.
2. We know how our investors will measure success of this deal.
3. We have a plan to make money quickly after the deal.
4. We have a clear picture of their financial situation.
5. We have a plan for integrating our financial systems.

Operations

1. We know what we have to do to retain their key customers.
2. Our business models are compatible.
3. We understand their competitive advantage and driving forces
4. We agree about how to integrate products and services.
5. We understand what our key customers will want from this deal.

Talent

1. We have set criteria for choosing which people will be chosen for the new organization.
2. We have a commitment from key players that they will stay.
3. We agree about how the new company will be run and by whom.
4. We have clear lines of accountability for each function.
5. We have developed a succession plan for key positions.

Culture

1. We agree about how each step of the deal will be communicated to employees and stakeholders.
2. We have decided how fast things will happen.
3. We have made a strong commitment to change.
4. We have seen evidence that we have compatible risk tolerance.
5. We see evidence that key decision-makers share core values.

90-100 – Deal

Congratulations! It’s a deal. Obviously you have done your due diligence and carefully analyzed both the pros and cons of going forward.

80-89 Maybe Deal

You probably feel pretty good about the opportunity and may be tempted to think you should go ahead. Before you take the plunge, however, think about the tendency of people to be over-confident. If you are over-confident by even 5%, what will that mean? You are far better off challenging yourself now than wishing you had done so later.

70-79 Risky Deal

At these levels you need a very good price to ensure you can address issues you aren’t seeing now. If you do a deal you know is risky and pay a “fair” price, it could be a disaster. Meanwhile, you’re tying up money that could have been used elsewhere.

Below 70 – No Deal

No explanation needed here. It is tempting when you’re “close” to start rationalizing away concerns. Some shores are reserved for shipwrecks. Don’t let it be yours.

Recent history has taught some hard lessons about M & A’s—one of the most salient being that many, if not most acquisitions should never have happened. The second lesson indicates that the first lesson might be moot if the parent had done more and better positioning for the acquisition. Only after senior leaders have aggregated the relevant data should they begin the arduous journey of setting criteria, considering targets, evaluating these targets vis-à-vis the criteria, and negotiating deals. Only then can they accurately answer the question, “Deal or no deal?”