How to Plan a Merger

Once, the most common way to grow a business was to hire talent and expand gradually. Today it’s more common to grow by acquiring other firms, and what used to be called “merger mania” is simply business as usual. After all, why grow organically when an acquisition can help you leapfrog into new markets with a fraction of the time and trouble?

If only it were that easy. While mergers and acquisitions — or “M&A” — are popular, they’re not always successful. Apart from such well-publicized disasters as the Daimler-Chrysler debacle or Time Warner’s failed acquisition of AOL, there have been thousands of smaller mergers where the value of the acquired firm was basically squat within a couple years. In fact, more than 50 percent of all mergers fail.

What differentiates the triumphs from the disasters? Three things: groundwork, negotiation, and execution. In this Crash Course, we’ll explain how to lay the foundation for an acquisition by intelligently assessing and evaluating potential acquisition candidates.

Things you will need:

• Sufficient assets (like cash on hand or company-held stock) to make an acquisition. In high-growth markets (like software), expect to pay two to five times the target’s yearly revenue. In more traditional markets, expect to pay five to ten times the target’s earnings before interest, taxes, and depreciation.
• About three months.
• War Room: A lockable conference room with lockable file cabinets — you don’t want the proposed acquisition to become public before you’re ready to make a deal.
• An Investment Banker: Acquisitions are complicated, so you’ll need financial expertise to assess whether it’s possible to make the acquisition and analyze its upsides and downsides.
• An Acquisitions Lawyer: Acquisitions often involve public stock, which is heavily regulated. Counsel can ensure that you don’t reveal something that could muff the deal or, worse, land you in jail.
• Modesty: It’s very easy to rationalize bad decision-making with the desire to be a big shot who gobbles up other companies. Before you begin an acquisition, make sure your ego isn’t in the driver’s seat.