M&A Fight Club: The First Rule of M&A Is…

Many of us have either read Chuck Palahniuk’s brilliant debut novel, “Fight Club,” or, more likely, have seen the David Fincher film adaptation of the same name starring Edward Norton and Brad Pitt. If you’re familiar with either, you know that the eponymous Fight Club has several crucial and oft-repeated rules.

I’d offer that the world of M&A has its own unique set of unspoken rules, which to the uninitiated, might seem just as secretive and “cliquish” as the crew in the basement of Lou’s Tavern.

What are they? What are the rules of this world that you “don’t know until you know”? What would Tyler Durden say?

1)????? The first rule of M&A is… You do not talk about M&A.

Limiting access to information before deal close is crucial. First, a deal is never closed until the ink is dry on the purchase agreement, and anything can happen in the course of diligence, discussions and regulatory reviews, right up until it’s finally signed. In fact, one would be wise to expect that something will happen, because it often will.

Leaks can erode trust, and carry the risk of exposing sensitive financial, proprietary, trade or customer data. Leaks can engender workplace toxicity and spook nervous employees, negatively impact stock prices and deal valuations, or worse—violate regulatory and legal parameters and kill the deal altogether.????????

2)????? The second rule of M&A is… You do NOT talk about M&A.

We hear you, Tyler! Most of us in M&A know we need to: Limit the number of people “under the tent,” and “in the know,” protect information behind firewalls and within virtual data rooms, to encrypt documents and data, restrict and monitor information access, educate employees and have a crisis plan at the ready.

However, not bringing in the right integration and functional experts during the LOI and diligence phase can also seriously impede your ability to seamlessly operate starting Day 1. It can also isolate employees and other critical stakeholders, including customers and partners, by not having experienced experts flesh out a coherent change and communications plan prior to close. And, crucially, it can negatively impact long-term value creation by not including the people responsible for value delivery in the identification of those synergy levers and value drivers. Overcommitting and underdelivering runs the very real risk of missed commitments, disappointing returns, and unhappy lenders and buyers.

3)????? Third rule of M&A: If someone says, “stop” or goes limp, taps out, the deal or integration is over.

Pre-close, the person who cries “uncle” might be the lender or buyer. It could be the seller who sees enough red flags to give them pause or make them feel like they can get a better valuation elsewhere. It might be a regulatory agency that decries, “monopolist!” It could be a sticky legal issue that proves too monumental. Expect anything. The best diligence, intentions, hard work and estimates may not be enough to save even a deal that seems a “sure thing.”

Post-close, like Tyler hopping on a plane to start a new fight club in another city, the corp dev guys have left the house on Paper Street and are off to their next deal. And now the hard work to create value really begins, and the integration team is on deck. This is often the same team that may have spent months (or more) in diligence and getting the deal closed. These people tend to have day jobs in addition to integration responsibilities. They are often tired and stressed and can feel overworked and underappreciated. Recognizing them publicly, rewarding them openly (financially or otherwise), giving them special breaks and even simply expressing your gratitude, goes a long way toward keeping your team motivated and engaged. The work must get done, and these are your champions who will pull it over the line. So, treat them accordingly before they truly tap out and you lose good team members.

4)????? Fourth rule: Only two guys to a deal.

Most deals that progress to an LOI phase will include an exclusivity clause, an agreement that prohibits a seller from negotiating with other potential buyers. This helps protect the considerable investment in diligence often put forth by both parties. While it’s not unusual for the exclusivity period to be extended to conduct additional diligence or while awaiting regulatory approvals, you have a real opportunity to maximize that time to nail down your integration hypothesis and sketch out an integration plan outline.

That integration plan will have a direct impact on your value drivers and the types and amounts of cost, revenue and financial synergies you might be able to achieve. This isn’t a waiting period. And you aren’t a sleepwalking Narrator awaiting Tyler’s next crazy move, but rather should take full advantage of every extra hour to flesh out plans, dive into validation of synergy numbers, understand potential optimization opportunities, and get your communications honed for Day 1.

5)????? Fifth rule: One integration at a time, fellas.

Big strategic buyers will argue that this point isn’t necessary, and they would be right to a certain extent. A larger company can have any number of deals in various stages running concurrently at a given time and be successful with many of them. However, the risk of running a large number of simultaneous deals (especially if they are transformational in nature) can be exhaustive change fatigue not only for the M&A project teams and functional leaders working on the deals, but also for parent company employees who often feel overwhelmed with the influx of messaging, new employees, product lines and sheer amount of changes imposed by yet another acquisition. When people are exhausted, focus can be lost, mistakes made, value eroded.

Mid-market and smaller companies run a much bigger risk of completely blowing the value of deal by pulling focus on optimal value delivery of the deal at hand. Not to mention losing focus on delivery of day-to-day operations. Companies would be wise to give themselves an appropriate runway to integrate, realize synergies and truly deliver on the deal value before rushing into the next big fight.

6)????? Sixth rule: No shirts, no shoes.

Many companies chose to buy a company and leave it as a standalone, unintegrated business. This can make sense if a) a financial buyer acquires the company to operate it as a single, standalone entity, b) the acquired business is in an adjacent, but not directly affiliated, market segment, and c) some will say to preserve a unique culture.

I would argue that far too many companies leave “all their clothes on,” failing to integrate and take advantage of shared services, economies of scale, joint selling and go-to-market opportunities, or other opportunities to leverage one another’s strengths. And yes, there are instances where it isn’t necessary to integrate, but many companies do this out of wariness of the integration costs, fear of integration failure, or simply lack of expertise or bandwidth to pull off a successful integration.

My question to you is this: This is likely one of the largest investments your company will make in its history. Do you really want to risk losing the entire value of the deal because of a short-term expense or lack of in-house expertise? Consider losing the shirts and shoes of duplicative costs and inefficiencies and see what happens when you’ve shed a little weight.

7)????? Seventh rule: Integrations will go on as long as they have to.

I’m often asked: What’s the length of a typical integration? My answer, just like many things in M&A, is “it depends.” Standard integrations often range from nine to 24 months. The true answer is that an integration lasts until the last facility is vacated, the last system ported over, the last product integrated, the last function fully transitioned.

However, a study in the “Journal of Business and Industrial Marketing” (2020) showed that post-merger integration (PMI) speed and duration are directly correlated to merger success. The more succinct the PMI timeframe, the greater likelihood of achieving projected value drivers. The study states that “companies that integrate too slowly face many threats, especially concerning the three key constituencies (employees, customers and technology innovation), preventing them from achieving the back-office synergies that are usually vital to the merger strategy.” So, take your time at your own peril, as teams lose focus, costs to achieve synergies rise and the ability to track those synergies greatly decreases over time.

8)????? And the eighth and final rule: If this is your first M&A deal, you have to fight.

Now, for all the ways we M&A folks might get roughed up on a deal, after all the nicks, bruises and scars, most of us wouldn’t trade it for anything. That said, I’d venture to say that many M&A professionals I’ve met did not choose this profession out of university or as their first-choice career. Many of us are “volun-told” for a “fun little project” or so-called “opportunity to expand our skill set.” And we fall into this racket sometimes kicking and screaming.

But for those of us who step into the ring and embrace the fight, it can be one of the most challenging, knowledge-expanding, enriching and rewarding career paths. I often tell people that I don’t know of many other professions or roles outside of M&A Integration (my primary area of focus) where I have the unique opportunity to intimately understand every single part of an organization—strategy and leadership, legal and regulatory, sales and marketing, manufacturing and supply chain, IT and security, human resources, research and development, operations, finance and accounting, customer service and experience, procurement. We learn about every aspect, where every dollar goes, how every employee contributes. It’s a rare vantage point. ?

So, M&A fighters: While you are not your job or how much money you have in the bank or the car you drive or the contents of your wallet, you are responsible for delivering on the value of the deals you close and integrate.

I am Jack’s Merger. I either create value or destroy it. Don’t be the predator posing as a house pet. Instead, realign your perceptions, follow the M&A Fight Club rules and be the hero of your next deal.

Stacy Hendricks is CEO / Principal of Amplify Global Consulting, a management consulting firm specializing in results-driven merger integration, restructuring and turnarounds, performance optimization, and helping companies navigate challenging transformations. Find us at www.amplifyglobalconsulting.com.