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October 30, 2023 Expert’s Corner

M&A success: 4 ways companies can sidestep regulatory, emotional challenges

Paul Fenaroli

On paper, mergers and acquisitions look thrilling.

Diversification. Expansion. Cost savings and larger margins — in less time with fewer dollars.

The promise of M&A can be intoxicating. But here’s a sobering thought: 70% to 90% of mergers fail, according to the Harvard Business Review.

For enterprise companies, regulatory hurdles can knock down the pending merger. Reuters reports that the U.S. Justice Department and Federal Trade Commission have attempted to stop more than 20 mergers since January 2021.

For small to midsize firms, lack of preparation and purpose may kill the deal.

In theory, it’s a common belief that integration will decide which acquisitions move forward. But in practice, people are behind the numbers and processes.

Regardless of size, here are four ways to dramatically increase your chances at M&A success.

Begin at the end

Clarity is a great place to start.

Why are you pursuing a merger? This answer should serve as the North Star because it will impact everything that follows in the process.

While proper planning will be important, anticipation will be mission critical.

To advance the deal, think about the company’s building blocks in terms of resources and processes. Those two elements yield value and profit.

Developing a clear understanding of these variables will allow you to promote and defend the deal — or arrive at better terms.

How would the pending merger impact the marketplace? How would the acquisition improve your company’s performance?

Asking the tough, specific questions internally about what the end result will look like will help you anticipate opportunities to address.

In M&A deals, being strategic means beginning at the end because it will ensure that every step along the way is tied to the desired outcome.

Eliminate emotion

Your exit strategy should be mapped out during the prep stage. This scenario represents the bare minimum that you will accept in a negotiated agreement.

Otherwise, you will walk.

This simple tactic removes emotion from the deal. Typically, negotiations that drag on tend to motivate players to hang on to finalize the deal for the wrong reasons, which may not be a logical fit with your original plan.

As part of a more logical approach, you should develop a list of specific commitments that you could offer to regulators, or the other party.

These commitments should be specific, measurable, attainable and have a realistic time frame. Creating this list in advance will allow you to run the numbers and determine which items you can concede in the most cost-effective manner.

Game theory is a normal part of negotiations, which is a dance that revolves around give and take. Make sure you understand the value of each move before you take it.

Build trust

Trust is a special kind of currency leveraged during M&A negotiations. So, spend it wisely.

Open communications will go a long way toward building a relationship with the other side. From the very beginning, you will need to provide prompt, purposeful and intelligent responses.

Delaying a request could stir skepticism and trigger an unfavorable outcome. It’s not uncommon for parties to walk away at the onset if they have a bad “feeling,” which is often created from poor communications.

Anticipating inquiries is also imperative. As part of your preparation, you will need to envision the possible questions and pain points in advance, so you can quickly provide an advantageous solution.

To continue building trust — it’s a process — you will need timely financial statements, including monthly, quarterly and annual statements, to show them that your financial house is in order.

The worst thing that can happen is that they see something that surprises them.

Establishing open communications, built on transparency and honesty, is invaluable. In part, that means timely responses and organized financials.

Stack the deck

Take it from someone who played in the NFL, the teams with the best players tend to win.

In the M&A game, assemble a winning team of experts to increase your chances for success. A tax advisor and business consultant should be on the list. At least one consultant should be familiar with valuing companies in the target industry.

You will also need internal stakeholders, such as your chief finance officer and controller, to be part of your team. These employees, along with the chief operating officer, will be responsible for telling and supporting the story.

Collectively, your team will be accountable for building good faith and goodwill throughout the process. They will amplify the positive and address the challenging items directly to bolster the relationships that get the deal done.

Paul Fenaroli is an associate attorney at Pastore. He is based out of the law firm’s Stamford office.

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