Avoiding M&A Surprises

M&A activity will be up in 2011. Low interest rates, significant cash on many firms’ balance sheets, and stock prices that are low enough to attract buyers but high enough to motivate sellers all reinforce that possibility.

When contemplating an acquisition, there are three questions you should ask to help your firm avoid disappointments and unpleasant surprises.

1. What would make the business environment appear quite different in five years? Even when due diligence indicates that the acquisition candidate’s prospects are positive and the future outlook appears rosy in a base case scenario, it makes sense to develop scenarios that are disruptive. If there is a disruptive scenario that some industry participant might exploit, you must think through its implications.
2. Is our firm the right firm? The questions here revolve about whether your firm can allow the acquisition to flourish—even if faced with unexpected challenges such as unforeseen competitive reactions. Consider whether or not your firm can bring competencies and resources to the table that will strengthen the acquisition and take the firm – combined or left alone-- to a higher level. We recommend taking an unprejudiced look at the possible firms that might acquire the company in question. When it isn’t obvious that your firm is the natural one, it probably isn’t a good idea to move forward.
3. What are the killer variables that will determine whether the acquisition plan succeeds or fails? These need to be understood, and the integration team must develop a monitoring plan that allows them to gain an early warning about problems that are emerging. This monitoring plan must also alert the integration team as to whether the base case forecast is unfolding or whether one of the disruptive scenarios is beginning to develop.

Blue Canyon Partners has developed a roster of critical questions that should be asked as part of a strategic due diligence process. Visit the Publications page of www.bluecanyonpartners.com to download Creating – Rather than Destroying – Value through Acquisitions.