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The Seven Cardinal Sins of M&A

by Howard S. Harris and Kirk Aubry

For those of you who aren’t overly religious or haven’t seen the movie Bedazzled (either the British original with Dudley Moore and Peter Cook or the American re-make with Brendan Fraser and Elizabeth Hurley), the seven cardinal sins are:



Avoiding these sins can significantly improve your M&A activities and enhance the possibility that your acquisition or strategic alliance will be successful. Let’s see how.

Pride

Pride usually pops up at decision-making time.  You are submitting your offer in an auction or you have just been told that your offer is too low. You are proud of all that your company has accomplished and of your stellar balance sheet, so you know deep in your heart that you can afford to pay more for this company.

Pride can make you stupid. Pricing discipline is one of the most important elements in successful deal making. As we all know, most acquisitions do not provide the return on investment that was calculated in the financial model. Paying more is not going to improve the performance post-Closing, but it will deteriorate return on investment. So, before you proudly go where no man has gone before, stop and think a while. Then be prudent.

Envy

Envy is what tends to get companies to invest in a market they know nothing about. You covet the returns that companies are making in another industry, and decide that the best thing to do with the cash your company has been generating is to go buy a company that can provide you with access to those higher returns. 

Every industry is hard, and the companies that are successful are not simply bumbling along – they really know what they are doing. It is easy to assume that the skill set you have developed to be successful in your industry will be sufficient to be successful in another industry – unfortunately, this is not always the case. 

So, if you are going to move into another industry, be sure you have spent a lot of time and energy exploring all aspects of the business in that market and ensuring that the resources of the combined business will be sufficient to enhance the performance of the company you are buying. 

Wrath (Anger)

What does wrath have to do with deals? More than you might think. It can come up in several different situations, and almost invariably causes problems.

Probably the most common situation where you see anger is in face-to-face negotiations. You are not being successful convincing the other side of the wisdom of your approach to solving a particular problem, so you get angry. Or, the other side pops a surprise on you at the last minute.  Appearing angry is a tried and true negotiating technique. Getting angry will make you stop thinking, and can easily result in antagonizing the other side or in a negotiating mistake, such as inadvertently disclosing information you would have preferred to keep to yourself. If you find yourself getting angry in a negotiation, call a break. Take a few minutes to cool down, and then get the negotiating team together to discuss the situation and plan your response. The good thing about anger is that it passes quickly.

Avarice

Avarice can cause you to keep buying companies when you should be digesting the ones you have already purchased. Greed makes you want to dominate the industry.  Avarice makes you stop thinking about anything other than growth or profits. In moderation, this is what drives the capitalist system. In excess, it leads to overextension and failure. 

So, don’t get greedy. Make sure you think about the effort required to integrate yet another acquisition before you send the team out. 

Sloth

Sloth can be a problem at any point in a deal, but it most often creates problems in due diligence. The due diligence process is designed to permit a buyer to thoroughly review all aspects of the target’s performance and historical practices in order to better understand the risks and benefits of owning the company. This is also the time that your operations experts should be gathering the information they require to plan for a smooth integration/transition process. Getting lazy in due diligence can often result in disastrous results post-Closing. 

Gluttony

Gluttony, in the deal sense, can occur in a couple of situations.

It sometimes happens when you are setting the purchase price. To make an acquisition, the buyer must pay a price that is perceived as fair by the sellers. A seller can get too greedy, and want a price that is simply too high for a business. If you do that, you will get to keep your business. 

On the other hand, the seller can be piggy, too. Often, this happens in negotiating the terms and conditions of the purchase. At the end of a successful transaction, both parties will be mutually unsatisfied with the deal, because each will have made important concessions that were required to make the transaction work. Greed can make you want to win every point, or at least every “money point.” Negotiations work best if there is some give-and-take.  If it’s all take, and no give, the other party may leave. This is why it is so important for the negotiating team to identify at the beginning of the discussions what points are negotiable and which, if any, are non-negotiable. You have to manage the discussions so you don’t finally get to your non-negotiable points without a few negotiable issues left on your side of the table to trade. 

Lust

Anything you find too appealing can become dangerous. This is the problem with lust in the deal sense. You become so enamored of a particular company or industry that you stop thinking.  You’ll pay any price or agree to any terms just to get your hands on that business.

The remedy here is to be sure that your negotiating team has at least one skeptic who will continue to ask hard questions. The role here is not to try to sabotage the negotiations or to prevent the transaction from occurring, but to be sure that the negotiating team carefully considers every concession from all sides prior to making trades. 

So, before you get too far down the path on that next deal take a minute to make sure you don’t fall for any of these “cardinal M&A sins”.