M&A deals are never easy and require rigorous planning. But despite complexities, there is a way to increase your chances of success. Let's learn how to engineer deals for success from Punit Minocha, Executive Vice President, Business and Corporate Development at Zscaler.
"To give a deal the best chance to succeed, we should give enough thought to what it would look like 12 to 18 months out." - Punit Minocha
According to Punit, executing deals is an art and science. The science is in the valuation part, where similar financial approaches are being used in every deal. However, the more difficult part, and what most people lack, is having the vision of what the acquired company will look like in the end.
The key to a successful deal is planning what the end state will look like early on in the process. This includes the buyer determining the type of integration they want as early as pre-LOI. Integration can disrupt business and could potentially destroy the value of the target company. The art is in identifying how much freedom the buyer should give to the acquired company to keep them growing and not choke them with all the processes and bureaucracies that come with a large organization.
If you are a large company buying a small company that is less than 30% of your size, then the risk of integrating is less, and you can do tuck-ins. But if the deal is more material and the target company is large enough, you should consider keeping it separate.
Creating that vision starts at pre-LOI. Usually, the CEO, CFO, and head of products brainstorm about the deal and work on what an LOI should look like. This usually involves creating the general deal terms, go-to-market strategies, and products.
You can't involve too many people, as the deal is not yet certain, and a lot of this conversation is hypothetical. The goal is to keep expectations in check while trying to make a deal happen. Emotions should never be a part of the deal.
To extract full value from the acquired company, you need to shape the business into its best version. You need to consider the target's size, product, industry, culture, etc. to plan the end state.
There are a lot of things that are not covered early in the process. Post-LOI is where the heavy lifting starts. This is where you involve different functions in order to try and solidify the initial vision. Regularly scheduled meetings are key to a successful diligence process.
When it comes to negotiating with the target CEO or other incoming employees, Punit believes that there are three elements that they care about; opportunity, environment, and compensation.
Aside from the obvious personal compensation that they expect to be the same or better, you must offer career advancement opportunities for them after the acquisition. People like to know they are not in a dead-end job. Also, they want to be surrounded by people they like and trust. If you give them these three things, people are more likely to stay post-close.
Having the overall vision of what the target company will look like, how the employees will thrive in the new environment, and how the functions will work together going forward are all crucial parts of your integration plan.
Communicating the new operating plan is going to be key to your success. Everyone must understand and be on board with the company's new direction and required additional investments. This includes internal and external parties.