Here today, gone tomorrow: 5 tips for preserving deal value

Buy-and-build strategies are popular with many private equity firms, but buyout groups could do more to preserve value when combining businesses, according to John Bogush, head of The Highland Group’s M&A practice.

Bolt-on acquisitions are the backbone of many portfolio company value creation programs. However, despite the promise inherent to mergers and acquisitions, most suffer a costly 10 percent to 20 percent decline in intrinsic value due to the uncertainty of change and the inability of companies to manage the change process effectively.

Value preservation (or erosion, depending on your point of view) activities play a significant role in the final outcome of virtually all business integrations. Unfortunately, the window for preserving value is relatively narrow: the most important period is the days immediately before and after deal announcement.  Here are five strategies companies should employ to help preserve value.

1.    Secure executive alignment before announcement – The executive team generally has a good understanding of why they are doing the deal. Unfortunately, in most cases, there are as many opinions as there are executives about how they will make the deal work. It is critical that the executive team achieve consensus and alignment concerning key integration value drivers and empower the organisation to take swift, appropriate action.

2.    Develop a comprehensive communication plan – Everyone knows that there’s no such thing as over-communication during a merger or acquisition, but almost everyone falls short in this department. Effective communication begets business stability. Employees and stakeholders will quickly fill any information voids with conjecture and rumours, which can lead to fear, confusion and business volatility. Your real intent for doing the deal is not as obvious as you think, so identify all of the affected constituencies and address them promptly, whether it’s good news or bad.

3.    Define critical day 1 close activities – The old adage is true: “You never get a second chance to make a first impression.” It can take years to recover from getting off on the wrong foot. Every function and every department should develop an administrative checklist for Day 1 close and the First 100 days and make every effort to execute them flawlessly.

4.    Retain key employees – There are many instances during a deal that key non-executive employees and, in some cases, entire employee groups, have little or no idea (officially or unofficially) of what is to become of them. Certainly, there are legal and practical limitations concerning the content and timing of the disclosure of certain information that restricts personal communication beyond the executive group, but the sooner you can answer the “what’s in it for me?” question, the better.

5.    Run the business during the transition with heightened discipline – On Day 1, you are legally one company, but in reality, you are now two distracted companies. It will take weeks, months or even years to achieve the final, integrated end-state, and you must plan accordingly. It is common for employees to adopt a “holding pattern” mentality, which typically does not bode well for day-to-day performance. Your competitors are likely ramping up their efforts to capitalize on your distraction and aggressively pursue your customers and top performers. It’s important that you redouble your efforts during the transition period to run the day-to-day business effectively. Companies that “wait for the dust to settle” usually don’t like what they see when it does.

Executive and investor expectations for emergent value, increased synergies and new business opportunities are why most deals get done. Companies that execute effectively in the days immediately before and after a deal will retain more of the value they hoped to generate through combining. Value is here today and gone tomorrow, so don’t delay.

John Bogush is head of The Highland Group’s M&A practice.