M&A thought leadership: Frontloading makes sense in M&A processes
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Failing early is cheap
We know from software engineering and design thinking that failing early in the process is cheaper than failing in later stages. We adapt this thinking to the M&A process and care for ensuring merger integration success during due diligence. I call this frontloading.
Successful integration and synergies as an objective in all phases of the M&A process.
So, why are we doing frontloading? Frontloading is driven by the objective to prepare and run a successful merger integration project. All detectable risks, efforts and obstacles are identified and taken care of during due diligence already. These risks, efforts and obstacles relate to the target and the acquirer, too.
Mitigations or eliminations for risks are planned or executed during due diligence. Merger integration efforts are being estimated and planned. Any obstacles we could run into during merger integration are being identified and elimination or mitigations are planned. Examples for obstacles are missing resources or missing budgets for merger integration. While missing resources could be mitigated by leveraging additional resources or adaptation of the merger integration plan, missing budgets could be planned for already during due diligence.
Effects of frontloading
There are several positive effects of frontloading for the operations of mergers and acquisitions business:
A more realistic evaluation if the merger makes sense at all. Clarity on adverse topics like risk and obstacles completes the managerial view to take an informed decision about a merger. Frontloading increases the ability to get a complete and holistic view of the planned merger and merger integration.
A more appropriate expectation setting with executives monitoring the merger integration. When the executives approve the merger, they know about the potential risks, issues and obstacles that were or were not mitigated.
More realistic integration plans and integration speeds. When you know what to do in merger integration and you have enough capacity and ability to integrate quickly, all is fine. If this is not the case, you risk failing during merger integration or creating bad integration decisions and results. Frontloading helps to avoid some of these adverse events.
a clearer picture of risks and mitigations earlier in the process.
Less bumping into obstacles. Let us be clear. Nobody likes to run into a roadblock like missing budgets and losing momentum of integration efforts. This is why we care for identifying and eliminating obstacles. Are we able to eliminate all roadblocks in merger integration? Definitely not. But we reduce the sheer number of obstacles and we can dedicate more of our time and attention to the remaining obstacles.
As a consequence, all companies should adopt frontloading in due diligence, no matter if the deal is an asset deal or a share deal, if the target is a public company or not.
How well does that resonate with you? Please let me know your thoughts.
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Academic sources on bias during target search in mergers and acquisitions
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Many mergers fail. So, we must make sure to avoid failure. One potential cause of failure of mergers certainly are biases that are occuring when executing tasks within the M&A process. Let us have a look what academia says about this topic for the task “Finding potential targets“.
Biases from literature
Availability bias [BaDa24]: The availability bias describes our tendency to use information that comes to mind quickly and easily when making decisions about the future. This limits the view and might lead to omission of promising target companies.
Distance bias [BaDa24]: This is the tendency to favor people,information,artifacts who are closer to us in time and space. Often, companies that are known to the buyer are preferred, which might lead to suboptimal outcomes.
Overconfidence effect [Dais19]: Tendency to overly trust one's own capability to make correct decisions. People tend to overrate their abilities and skills as decision makers. Overconfidence can lead to disastrous outcomes.
Winner's curse [Dais19]: "The phenomenon known as the Winner's curse can manifest in auctions with common values, where bidders share a similar post-auction value for an item but possess varying pre-auction private signals regarding this value. The victorious bidder is typically the one with the most optimistic assessment of the asset, leading to a tendency to overestimate its worth and consequently pay more than necessary.
Endowment effect [Dais19]:the phenomenon known as the endowment effect, or divestiture aversion, shows that individuals tend to prefer keeping possession of an item they already own rather than obtaining the same item if they do not currently own it.
Hindsight bias [Dais19]:Tendency to view past events as being predictable. Especially in experienced acquirers this can be a problem. Statements like “We have done this before, we can manage any acquisition“ does not represent a realistic view on the complexity and inpredictability of acquisitions.
Confirmation bias [EvZa12]:Tendency to search for or interpret information in a way that confirms one''s preconceptions, and discredit information that does not support the initial opinion. This is related to the concept of cognitive dissonance, in that individuals may reduce inconsistency by searching for information which reconfirms their views.
So, during one of the first tasks of the M&A process, many potential biases are present, which can lead to suboptimal outcomes of target search. The first step to avoid these is to be aware of these biases. The second step is to always check if assumptions, statements, beliefs are realistic.
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Literature
[BaDa24] Bauer, F., Dao, M.A., Target Screening: a key strategic success factor for acquisitions. In: King, D.R., Meglio, O., A research agenda for mergers and acquisitions, Edward Elgar Publishing, Cheltenham, 2024, pp. 41-64
[Dais19] Daisuke, A., Behavioral analysis of mergers and acquisitions decisions. Corporate Board: role, duties and composition, 2019. doi: 10.22495/CBV15I3ART1
[EvZa12] Evaristo, J.R., Zaheer, S., Reducing Cognitive Bias in Assessing Combination Potential in M&As. Advances in Mergers and Acquisitions, vol.11, 2012, pp. 123-137. doi: 10.1108/S1479-361X(2012)0000011009
[Gar+10] Garbuio, M., Lovallo, D., Horn, J., Overcoming biases in M&A: A process perspective. 2010. doi: 10.1108/S1479-361X(2010)0000009007
[Kroo23] Kroon, D.P., Falling Prey to Bias? The Influence of Advisors on the Manifestation of Cognitive Biases in the Pre-M&A Phase of Organizations. Group & Organization Management, 2023. doi: 10.1177/10596011231171455
Will a shortage of M&A experts push automation in M&A processes?
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Mergers and acquisitions (M&A) transactions entail intricate negotiations, thorough due diligence, and the amalgamation of various systems and procedures. Historically, these responsibilities have been managed by experienced professionals possessing substantial expertise in M&A. Nevertheless, the escalating volume and complexity of M&A transactions have resulted in a deficit of such specialists, rendering it progressively arduous to identify suitable talent.
The scarcity of M&A professionals has induced organizations to explore novel approaches for enhancing efficiency and efficacy within their activities. Given the persisting vacancies in key roles, firms are progressively looking towards automation as a strategic instrument for refining and optimizing their procedures.
Through the utilization of technology, companies can automate numerous facets of the M&A process. For example, advanced data analytics tools can facilitate the due diligence process by swiftly and accurately scrutinizing extensive data sets to pinpoint potential risks and opportunities. Similarly, automation can streamline financial modeling and forecasts, diminishing the dependency on manual computations and enhancing precision.
Automation not only heightens efficiency but also alleviates the risks associated with human oversight. M&A transactions are intricate and demand meticulous attention to detail. Manual procedures are susceptible to errors and omissions, which can yield significant ramifications. Conversely, automation diminishes the probability of errors, ensuring a smoother and mistake-free M&A process.
Moreover, automation enables the swift execution of M&A transactions. By automating repetitive tasks, companies can expedite the overall process, thereby seizing market opportunities more effectively and maintaining a competitive edge.
It is imperative to recognize that while automation can optimize efficiency and mitigate risks, it should not be perceived as a substitute for M&A professionals. Rather, it should be regarded as a supplementary tool that enhances the competencies of experts in the field. Human expertise, intuition, and negotiation prowess remain indispensable in the realm of M&A.
In conclusion, the deficit of M&A professionals might expedite the adoption of automation in M&A operations. It is increasingly evident that organizations must devise innovative solutions to bridge the talent gap in this domain. Automation provides a means to streamline processes, boost efficiency, and minimize risks. Through the integration of technology alongside expert knowledge, companies can navigate the intricate landscape of M&A with greater dexterity and triumph.
M&A Target search innovation: part 3: a tale of 3 tools (MADiscover)
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At the recent M&A Summit in Munich i was asked to present my view on automation for target search, so i created a series of blogs. This is the second part covering three tools. It´s about which tools automate which parts of target search. The three tools are Palturai, Valu8 and MADiscover. Here is the information about MADiscover.
MADiscover delivers a service consisting of search and selection of companies in an iterative process based on strategic criteria without compromises. So, customers cannot access or use the tool without the service.
Unique selling point
MA Discover formally analyzes strategy and definition of strategic criteria for target search. Strategic criteria are important, so MADiscover allows for analyzing companies based on both, strategic and financial criteria.
This is one of the few tools that combine buyer acquisition strategy formalization with iterative search for targets.
Use of technology in the tool
MA Discover is only offered as a service. Machine learning is not used. Automatic language processing (NLP) is used. Advanced Analytics are used. Customer access to the tool is not possible. Analytics are used. Advanced analytics are included. Search function exists. Semantic search is provided.
The automation is shown in the next figure
So, the tool automates the following actions
Task Embedded M&A Strategy
The tool automates the following actions
Analyze the existing strategy and identify strengths and weaknesses: partially automated.
Analyze the existing portfolio of business models: partially automated.
Analyse future business models: not automated.
Analyse future strategy: not automated.
Identify the strategy changes and fields of action to act upon: partially automated.
Create an action plan how to adress strategic fields of action: not automated.
Define requirements for whitespaces for acquisition: partially automated.
Task Finding potential targets
The tool automates the following actions
Define selection criteria and market: partially automated.
Scan sources for potential targets: fully automated.
Review companies to join the longlist: partially automated.
Define the longlist of targets: partially automated.
Task Evaluation of the fit of a target
The tool automates the following actions
Check strategic fit of the target: partially automated.
Check business model fit of the target: not automated.
Check if the target´s operational model fits: not automated.
Check if the resource model of the target fits: not automated.
Check if the ecosystem of the target fits: not automated.
Check if the culture of the target fits: not automated.
Select primary target for acquisition: partially automated.
Task Processing the long and short list
The tool automates the following actions
Process the longlist: partially automated.
Process the shortlist: partially automated.
Create indicative valuations: not automated.
Eliminate target candidates: partially automated.
Approve shortlist: not automated.
Stay tuned for more content on how tools can automate M&A. Here are the links to other parts of this blog series:
Part 1: technologies for target search
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