p.A.I.R.

post #0003

october 5, 2022

Every acquisition or merger requires two parties, a “pair” if you will.

This pair is in many ways similar to that of an actual human couple coming together for the rest of their lives. It is a marriage. And, these merger-marriages often yield divorce or failure rates that match.

But, there are ways to increase the probability of success. Over time, I have developed an acronym that serves as a reminder, and useful tool, for both entrepreneurs being acquired as well as buyers seeking to improve the quality, economic outcomes and performance of their investments.

That acronym, is appropriately labeled “A.I.R.” Just as we need air to breathe, acquisitions need air to survive and thrive in generating long-term value!

A - Alignment

I - Integration

R - Rationale

It is worth highlighting that while I labeled this article “pAIR”, the p is lowercase for a reason. It stands for “price”, and it is lowercase because the price is actually the one element that does not play a leading role in determining the success of strategic acquisitions. Just as the engagement ring does not determine the success of any marriage! I am not saying that price or value does not matter, and will have plenty to discuss in future posts about negotiation & deal terms. Rather, just because you have received a large offer or paid a premium for a business will not lead to a path for realizing the expected and requisite long-term value. And, vice-versa!

To see what does drive returns, we must get back to AIR. How do we breathe air into acquisitions?

Think of each as a set of questions that you as CEO / founder or acquirer might ask of any life partner. Regardless of what side of the deal you are on, these are the north stars for driving all communication, transparency and clarity.

If you are selling your company, all of these should be answered before you get engaged. In deal-lingo, that would be prior to signing a term sheet or letter of intent (“LOI”). I will outline the full deal sequence in my next post, “what to expect, when.” For now, know that I am going to discuss these more so in the order of operational sequence for the most common lifecycle of a deal.

The best deal-makers in the world understand and profess that M&A is an art not science. I firmly believe that the best of the best, whether they call it AIR or something else, will realize that navigating the following three groups of strategic questions are foundational to the art of doing transformational M&A:

R- Rationale

If you read my first blog post, then this one is obvious. This is the “why?” behind the what any acquirer / target company is trying to achieve. The rationale should clearly articulate how the combination will create greater value than either party staying independent. Some questions (broad and tactical) to ask yourself and your potential partner in an acquisition:

⁃ why should we get married?

⁃ what specifically are we attempting to achieve together?

⁃ are we better off doing that together than without one another?

⁃ have we dated long enough, or do we even need to date?

⁃ why me and not someone else?

A- Alignment

These are the awkward questions that a newly dating couple might encounter. The ones that you have thought about and evolved as your company has grown. They are highly personal and unique to each company and founder. They are so unique, as are those in R & I, that I believe no acquirer should have a standard M&A playbook; every deal is as unique as the companies themselves. Even for serial acquirers, every deal is different and thus the ways in which they align with each company they acquire. Some ways to navigate that alignment together:

⁃ do we share a similar mission?

⁃ what is our vision of the future? both independently and together?

⁃ what inspires you?

⁃ do we have similar values, beliefs?

⁃ what are your biggest hopes, fears, dreams for being together, forever?

I - Integration

One uncommon belief that I practiced and encourage to this day is to involve integration discussions and planning early and often. Unfortunately, this is not the norm across the industry. For some reason or another, folks put off these conversations until it is too late, resulting in some disruptive, often trust-eroding moments during the deal process. Key questions to ask, including my favorite*:

⁃ *what will it take to win?

⁃ what is the operating plan for achieving our goals?

⁃ what do we need to believe in order to meet/exceed those goals?

⁃ who will we need to get there?

⁃ how much will we need to reinvest to meet those goals?

⁃ how will we measure success in the future 6-12-24 months? Long-term?

⁃ what might we do if we don’t meet those goals?

A short-hand answer to every single integration question, should actually be another question. Thus, I have starred it above. What will it take to win? or in tactical speak, What should we do together that will enable us to best achieve our goals?

If you are talking to an acquirer, you deserve an honest, transparent answer to each of the above questions (along with many more that will arise during your journey together). And, you should ask different stakeholders the same question to compare truths. This could be the only time you ever sell your business, and have worked really hard to build what you have done. You, your employees and your shareholders all deserve these answers. And, any acquirer should be willing and able to work hard to get you the answers together and ensure you feel comfortable with every single one! If they don’t, then I would be reluctant to proceed until you have them.

There are plenty of examples of failed acquisitions. I have found that the root cause for failure tends to be highly correlated with two principle drivers:

1. the acquiring companies strategy shifts away from the original thesis - in other words, the original R - Rationale is no longer valid. While there was once A - Alignment, there is now an investment that does not fit within the overall strategy of the company.

2. the individual(s) who served as the deal sponsor / owner / executive leave the company or business / product unit - in other words, the spouse/partner abandons the marriage. A big part of the I - Integration is now missing! All internal conviction is lost because there is no longer a champion or clear conviction for why the acquisition was pursued or completed in the first place, let alone the plans for integrating it successfully and generating long-term value.

There is no proven way to prevent such failures. These are similar to systemic risk, which cannot be diversified away. All acquirers and entrepreneurs face them. However, I have found that spending time together, getting clarity, breathing AIR together into an acquisition will yield greater value generation, maximize utility and ultimately lead to happier employees, investors and entrepreneurs.

I owe many of these learnings to being part of countless acquisitions, some more successful than others. I have to credit these learnings to the failed acquisitions as well as those who had mentored me along this journey. In fact, the learnings were the reward that made many other more successful outcomes possible.

As I alluded to earlier, I am going to provide visibility into what a “common” deal sequence looks like in my next post, and then deal terms to follow subsequently after that one. My hope is that these posts continue to provide greater visibility into what is often an opaque part of the tech world, navigating acquisitions.

If you are thinking about pursuing an acquisition, in the midst of one, or simply want to learn more by diving a bit deeper or getting more tactical with any of this, you can always reach out to me gary@kokua.ventures