Corporate executives are blunt in their advice to their counterparts on deals: prepare, prepare, prepare.
Chief financial officers interviewed by ansarada agree that a company should take a minimum of six months to prepare for an acquisition, and many companies prepare for much longer. For example, Dow Chemical chief executive Andrew Liveris said the company’s board had been examining a merger with DuPont for 10 years.
So how do you prepare your company for an acquisition?
Step one: think about the rationale of the acquisition
Why have you decided to buy a business? Perhaps you see an opportunity to help grow market share, buttress profit margins, or potentially save on costs because of synergies. Perhaps a competitor has a technology that could revolutionize the sector, or a great group of people that are able to do more with less and you want to buy their talent, processes or operations.
Whatever the reason, it must be rational and resonate not only the potential sellers, but also with your board, your shareholders and lenders, and when news hits of the acquisition bid, with your employees so it doesn’t damage morale.
Step two: assemble an internal deal team and hire an experienced M&A banker
A CEO or CFO needs to have an overview of the entire acquisition process. A team drawn from finance, human resources, legal and other important departments can be assembled if the CFO is in a large company. Often a large company will have made preparations together with investment bankers and or lawyers to execute an acquisition.
But in a smaller company, the CEO and CFO are often left to do the entire transaction themselves with an outside adviser. That’s why the choice of the right merger and acquisition banker is crucial.
M&A bankers, unlike chief executives or chief financial officers, specialize in M&A. That specialization, years of experience advising on deals, is crucial in reducing M&A mistakes to zero.
“You have got to make sure the adviser has done relevant, recent work in the market,” a CFO told ansarada when asked how they choose their M&A adviser. “Ultimately choosing an investment banker is about a personal connection.”
Questions a CFO could ask a prospective banker who wants to advise on a transaction.
- What relevant deals have you executed in the last two years?
- What deal relevant material can you show me?
- What have you learned from your unsuccessful deals?
- Explain your fee structure.
- What is your process for conducting due diligence?
- Who will be on your deal team, what role will they play and can I reach them 24/7?
- What makes you different from other investment banks?
- How much should I pay for a business?
- What structure would you use for the acquisition of a business?
Step three: know your data room
Data rooms are the center of M&A due diligence. But few CEOs or CFOs are experienced data room users. Bankers should know their way around a data room. After all, due diligence is what they do for a living.
Bankers should be skilled and help you negotiate through creating the filing structure of a data room. They can help post questions a corporate executive has during due diligence. The bankers should be able to efficiently track and collate answers from Q&A in the data room. Often an investment banking analyst is in charge of the data room set up, the filing structure and the input of documents.
“In a data room you want good document security protocols, password protection and the ability to easily extract Q&A,” says one CFO of a pharmaceuticals company who has also worked as an investment banker and private equity professional.
Thinking ahead to 2016
While 2015 will go down in the books as “the year of mega mergers,” it is likely that 2016 will see more middle-market and small-market growth. While the big players wrestle with regulators about how they plan to move forward, the less massive players will need to jockey for position in the shadow of the giants.
So companies in the mid-market range would be wise to review their position in the marketplace and whether they are a potential buyer or seller, and begin preparations accordingly. Meanwhile, M&A advisers had better keep those phones charged… you’ll get some calls this year.
Larry Fontillas, is managing director of the Americas for ansarada, a Sydney-based virtual data room provider with its U.S. headquarters in Chicago. Visit www.ansarada.com for information.
