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Resources for Sound Business Decisions.™

The Mindful Dealmaker and Successful Business Purchases

Mindfulness means being awake, alert, aware, attentive and actually seeing what you are doing and what is going on around you. A “mindful” dealmaker is simply one who approaches the transaction, in sum and in parts, with mindfulness. It means paying attention to the big picture, understanding the continuity of events that brought the transaction into focus, relentless stalking of the truth and executing with speed and precision. A mindful dealmaker is diligent, but a diligent dealmaker may not be mindful.

On a personal level, any activity in which we are mindful, present and aware is going to be more fulfilling. On an organizational level, the payoff of mindfulness is the maximization of opportunity and the management of risk. Mindful dealmakers have more satisfaction from the dealmaking activity, enjoy the anticipated fruits of their labors and have fewer “surprises” after the deal closes.

Unfortunately, mindful dealmakers and mindful dealmaking may be the exception and not the rule. Otherwise, why would there be so many industry studies estimating that between 50% and 80% of mergers fail to deliver the anticipated benefits or unlock shareholder values? A significant number of deals are reported to actually erode shareholder value. It is no fun being a disappointed dealmaker.

Doing Deals That Deliver: Mindful dealmakers do deals that deliver the anticipated values and benefits. Mindful dealmakers make good deals because they make good decisions throughout and beyond the process of doing the deal.

As used here, mindful dealmaker refers to both the organization and the individual members thereof. The qualities of a mindful dealmaker can be possessed by an individual or in the aggregate by the M&A team or organization.

This article was written for the corporate acquirer whether strategic or financial. However, the principles herein should be of value to the advisors, I-bankers, accountants and other professionals who advise and assist the buyer in their quest for making mindful deals.

In an effort to promote the attitude of mindful dealmaking, MoneySoft has developed a list of twelve characteristics of the mindful dealmaker. This list is not intended to be all-inclusive. It is based upon experience, research and observation of the acquisition marketplace. It is presented to stimulate thought and discussion and hopefully provide a fresh perspective to the vital strategic activity of mergers and acquisitions.

Clear Goals and Steadfast Focus: Goals define the direction of an enterprise. Focus keeps the enterprise on course. Define your financial and strategic objectives before entering the acquisition arena. To wander into the acquisition arena without the aegis of clear objectives is to needlessly place yourself at risk. Clarity is power and focus magnifies power. The mindful dealmaker marshals his power to achieve the intended purpose, a deal that delivers.

Approach Buying a Business as a Process: A business transaction has a beginning and an end. The transaction begins with the opening of discussions and ends with the signing of agreements and the exchange of consideration. An acquisition or merger is a process that includes a transaction, but it is not just a transaction.

The process begins with the thinking that leads to the formulation of clear goals and continues until the acquired company has been fully integrated and all anticipated economic benefits obtained with the minimum of surprises. Knowing that the art of M&A begins after the closing, the mindful dealmaker diligently tends to the planting while considering the cultivation and eventual harvest as well.

People and Their Values and Culture Matter: Tangible and intangible assets may change hands, but people are the essential ingredient in any value-chain. People sell companies, buy companies and advise the parties. People work within the target and acquiring companies. People provide goods and services to the company. People use the goods or services provided by the company. All of the assumptions about the performance of the business are based upon the decisions and actions of people in the future. The mindful dealmaker preserves value by tending to relationships. If a relationship cannot be maintained, it is severed quickly and as gracefully as possible. By shifting the focus from fear to the task at hand and opportunity presented by the deal, a mindful dealmaker reaps the fruits of human endeavor.

Communicate Effectively: The life-blood of human endeavor is communication. There are many people with an interest in the outcome of an acquisition. They have questions, concerns and information needs. Insufficient communication fosters hearsay, gossip, speculation and the adoption of defensive positions. This is counterproductive. Silence almost always communicates the wrong message. Driven by clear purpose and steadfast focus, the mindful dealmaker is a clear and effective communicator. Lines of communication are opened and maintained between the principals in the deal, advisors, staff, employees and funding sources. Communications are frequent, relevant and congruent. Words have power. They can soften or harden hearts, open or close doors, create confidence or fear, inspire or discourage, inform or mislead and unite or divide. In the final analysis, the meaning drawn from words is what has been communicated, regardless of the words used. The mindful dealmaker chooses words carefully and listens to make sure that the message communicated is the one intended.

Relentlessly Stalk The Truth: An acquisition is a significant business event. The stakes are high for all parties. It is only natural that they will try to present themselves and the “facts” in the best available light. This is called spin. Spin is readily available, but highly unreliable. Information can also be withheld for both legitimate and dubious reasons. A trade secret that would compromise a company’s competitive position will be closely guarded. It goes against human nature to disclose facts that hurts one’s self-interest. Sometimes the presenters of information don’t fully understand what is being requested or the ramifications of what’s provided.

The mindful dealmaker relentlessly stalks the truth to find what is beyond the spin, locate what is hidden and get beyond people’s assumptions and understandings. Due diligence is a part of stalking the truth. To stalk the truth means to follow the path of a question until you have its answer. It is also about knowing which questions to follow. It’s about seeing and listening with mind and heart. By relentlessly stalking the truth, the mindful dealmaker gets answers for what is answerable and discovers the limitations of knowledge. The result is that better decisions are made, assumptions are understood and risks are addressed.

Do the Math or Risk Taking a Bath: A report by Andersen Consulting cited a surprising reason for disappointing results in M&A transactions: objective financial evaluation analysis was not performed. This is the equivalent of drawing plans in the sand. Corporate decisions and actions produce a result. In the absence of reporting shenanigans, the company’s financial statements reflect the effect of actions and decisions. The effect of these actions and decisions may carry over to the owner. The present and past will serve as a springboard for changes under new ownership. They will exert a powerful influence. Lack of linkage between the present performance and future expectations is a sign of hasty thinking and suggests that troubles may follow. The mindful dealmaker studies the numbers and the business decisions behind each and every line item. To do otherwise is to enter the arena blindfolded. All advantage will be lost.

The mindful dealmaker looks at the past, present and future, knowing that if you can’t measure it, you can’t manage it. Assumptions are identified, deal terms considered and results projected. An analytical framework provides a firm foundation for smart decision making. Smart decisions lead to right action. In this way, the mindful dealmaker creates a roadmap to success.

Know the Value of What is Being Purchased (even if over-paying): Another reason for disappointing M&A results is paying an excess premium-paying too much for the company. The mindful dealmaker knows that value is in the eye of the beholder and tears are in the eyes of those who overpay. A business should provide a future economic benefit. The value of that benefit can be estimated based upon the return after the cost of money and taxes. The return must exceed the after-tax cost of capital and provide a reward for the risk taken. The mindful dealmaker is painfully aware that the higher the purchase multiple, the thinner the margin for error. If the asset is absolutely vital and overpayment necessary, it should be a conscious decision made being mindful of the risks involved.

Sometimes words like synergy can be used to justify paying too much. Measure the expected dollar savings or revenue enhancement attributable to synergy before agreeing to pay a premium for them. Synergy is a seductive word. Here again the mindful dealmaker does the math to make sure that he is buying more than a word.

Manage Pressure, Stress and Tension: The structure of the final transaction will reflect the party’s response to pressure, handling of stress and resolution of tension. Pressure is created by boundaries such as time, money, manpower and knowledge. A deadline creates pressure. So does a take-it-or-leave-it negotiating posture. Pressure causes things to bend or break. It can break a deadlock or break-off discussions. Pressure can be applied or removed. The mindful dealmaker responds to pressure with clear purpose, steadfast focus and resourcefulness.

Tension is created when the parties have opposing or contending needs or interests. It can exist between members of the dealmaking team (i.e., the deal’s sponsor versus the devil’s advocate). Tension will also exist between opposing sides in the negotiations, their advisors and capital markets. The mindful dealmaker resolves tension by first identifying the underlying needs, discussing them and finding viable alternatives that meet the needs of the parties involved.

Stress is a response to pressure and tension. It usually increases with uncertainty. It triggers the “fight or flight” response. People can respond by becoming aggressive or withdrawn. Left uncontrolled, stress diffuses focus and inhibits creative thought, making it difficult to handle the pressure and resolve the tension. Some individuals have a heroic response to stress. Stress can be experienced by the dealmakers and all of the parties related to the deal. Expecting a stress-free environment only increases the level of stress. The mindful dealmaker expects stress, assesses its level, pauses and reflects before responding and finds way to break the pattern so that it doesn’t drain energy and focus.

Cultivate a Negotiating Atmosphere That Favors The Desired Outcome: Negotiation is the changing of a relationship to meet needs. The perceived ability of the mindful dealmaker to satisfy needs is a source of power and influence. The mindful dealmaker projects this power. Personal negotiating styles may vary. Trust may or may not exist between the parties. Personalities may attract or repel. Such is the nature of business transactions. The mindful dealmaker remains aware of the goal and steadfast in focus. Communications are maintained, critical information is discovered, problems are solved and gamesmanship avoided. The mindful dealmaker sets the climate, direction and content of negotiations through his role in them.

Use Professional Counsel to Add Value: Acquisitions are complex, detailed and time-consuming. There are many risks and perils that await the ill informed. Help is needed and readily available. It is foolish to keep the counsel of “yes-men.” Experienced, objective counsel is a necessity. It may be expensive, but the cost is negligible compared to the troubles that follow a poorly crafted transaction. It is also foolish to abdicate to one’s advisors. The mindful dealmaker does not ask his counsel what to do. Instead he asks them to educate him on the alternatives, opportunities, risks and means to handle them to achieve a deal that delivers.

Develop Specialized Skill and Resources: The mindful dealmaker obtains the tools of the trade. Armed with a network of contacts and productivity tools, the mindful dealmaker enters the arena well prepared. He apprehends the needs of his organization, its capabilities and limitations. His database contains sources for deal flow, funding sources, various professionals and sources of business information. A network is developed and maintained-ready when needed. Productivity tools are obtained and put into practice. Procedures and standards are established. When a deal opportunity is seized upon, there is no question on how to proceed. The mindful dealmaker is prepared, ready to spring into action with poise and clarity of focus.

Learn From Each Deal: Every deal is a learning opportunity. Learning takes place while the deal is being made and continues beyond the closing. Mistakes will be made, insights gained and new techniques developed. After an appropriate time, an inquiry is made into the efficacy of the post-deal integration plan and the performance of the company. Strategies will need to be reviewed, underlying assumptions refined, policies changed and systems upgraded to correct deficiencies and build upon strengths. By cleaving to what works and learning from what doesn’t, the mindful dealmaker creates a stronger foundation for success.

Being mindful may seem self-evident. However, given the dismal success rate for M&A, a good dose of mindfulness may be just what the doctor ordered. The choice seems obvious. Be a mindful dealmaker or risk ending up like the emperor in the story of the Emperor’s New Clothes.