High valuations for targets, poor operational due diligence, and fuzzy deal rationale are among the key reasons financial executives are concerned about overpaying for deals, according to Navigating the Risks of the Contemporary M&A Market, the 2016 Strategic Buyer Survey conducted by the Financial Executives Research Foundation (FERF) in collaboration with Crowe Horwath LLP.
Some of the study’s key findings:
- Overpaying for deals was viewed as the biggest risk in M&A.
- Successful integration was identified as the most overlooked risk area, and one of the biggest impediments to realizing a deal’s full value.
- Challenges related to securing the involvement, insight, and sustained focus from the operating team were a recurring concern for the pre- and post-close periods.
- Transition risks associated with people and culture also registered as leading concerns for domestic and international transactions alike.
- Limited M&A experience and availability of the internal team were highlighted as common issues. Despite these concerns, respondents weren’t quite sure when or how to bring in the necessary external help.
- Respondents pursuing cross-border deals cited local target identification, sales and marketing practices, and workforce transition as formidable challenges.
Unfocused Targeting
With respect to targeting activity, respondents indicated “fuzzy growth strategy or specific deal rationale” was the biggest risk factor. In addition, this emerged as one of the top risks cited in the survey as a whole.
Insufficient strategic clarity is a killer in many business contexts, but particularly in the competitive, high-stakes world of M&A. Without strategic clarity, companies often end up:
- Chasing too many targets
- Being more reactive than proactive
- Participating in a higher percentage of auctions than proprietary deals
- Overpaying
- Being less disciplined about post-close synergies and operating priorities
- Undermining post-close focus and accountability
The second-biggest risk, “current valuations,” likely contributed to the top risk of overpaying for deals. These top two concerns received nearly as many responses as the remaining five risks combined.
Risk Mitigation
Despite some risks, such as prevailing valuation multiples for a specific market, being environmental in nature, many challenges are within the control of the acquirer to vet pre-deal and to mitigate post-deal.
Some effective risk mitigation tactics include:
- Articulating a clear M&A strategy
- Adhering to a simple deal governance process to maintain targeting and valuation discipline
- Creating expectations for early operating-team involvement, focus, and post-close accountability
- Improving M&A execution readiness for internal resources (e.g., using an M&A playbook) as well as vetting and prequalifying external advisers
- Adhering to a conservative approach with respect to modeling and communicating commercial synergies
- Paying careful attention to people and culture issues, particularly for international deals
Proper preparation is the key in these areas, just as it is in many areas of M&A execution.
The survey examines insights on the risks inherent in contemporary M&A execution from 180 senior finance professionals from public, private, and not-for-profit domestic and international organizations. The average annual M&A activity of survey respondents included six targeted transactions, two due diligence completions, and one deal closed.
Download the study Navigating the Risks of the Contemporary M&A Market today.