Mergers & Acquisitions is a big topic, too big to cover in just one blog entry, so I will use the next three to give an overview of my views on the process. There are entire textbooks written on smaller parts of the process so my blogs will have to be, by definition, more top level. They will contain advice I have learned during my career actually considering and doing M&A.

Before an M&A transaction happens, you need to decide to do it. This phase of deciding if you want to do one is what I call the “why”” phase. You should be clear in the reasons and decision to do the transaction and there should be reasonable consensus within the senior management team. Some transactions require shareholder approval and you have to convincingly explain to them why it is a good idea.

The general reasons to do an M&A transaction is to save time or cost or both by buying from an external party instead of building it yourself. The best transactions are planned and executed as part of your over all strategic plan. Many are opportunistic and not part of your formal plan but become available and you decide to act on them. The opportunistic nature of many transactions means that you always need to be flexible and able to move quickly. This is why adequate staffing with the right people is important. If you have little to no ability to flex or change your work staff’s work plans, then you will find it almost impossible to take advantage of the good M&A opportunities that come your way.

A simple summary of the rule of this thinking is that your company should be more valuable after doing the M&A transaction than before it did it. You save cost or time or both. You get bigger and enjoy economies of scale or risk diversification or both. Or you get smaller and more focussed and can use what you were paid for the asset you sold to grow faster in the business you kept. In all ways, you need to increase shareholder value.

Opportunistic M&A is also a reason why it is hard to maintain good work/life balance as a CFO. If the transaction is significant, you probably will be leading it. M&A takes a lot of detailed effort and that will be on top of your other duties. You can and hopefully will delegate a lot of the work, but M&A is something where the little details can make or break a deal, so you will be spending time getting to know all the little details you can think of.

The reasons why you would do an M&A should be thought about in advance. Whether within your existing business or to go into a new business, you should have thought about what you want to do. You need to know the cost and timing of expansion in your existing business well as you will need to use that information when evaluating additional opportunities. The decision to enter into a new business needs even more thought in advance and an opportunist M&A will not give you enough time when it appears. Running the business always takes more time than you want it to, but you need to make time to think and discuss strategic options in advance with the other senior management and your own staff. If you have built the right team, your staff will be key in this forward thinking process. Of course, your peers in the senior management team will also be a good resource. Finance will bear a lot of the analysis burden when it comes to numbers and valuations, but the functional leaders will have to execute after any acquisition and they probably know the market better than your staff will.

A typical M&A transaction will cost more than doing it yourselves. Every once and a while this is not true, but my experience says that in any process, especially if competitive, you will pay a premium. Sometimes you have an advantage that the seller does not have in that you can deliver or complete or have a less expensive distribution system than they do, and that means they undervalue an asset compared to you. It still is likely to be cheaper if you do it yourself.

The cost advantage fades quickly when you are buying a product you already do not have or buying access to a market you have never been in before. Developing and marketing a new product can be quite expensive and you typically learn a lot of expensive lessons during development and crossing to manufacturing. Entering a new market is easy to mess up and even if you do succeed, it normally takes quite a long time to do it.

I can give three examples from my own past. If one of my former businesses sold a large laminate business as it was felt that we did not have a competitive advantage there and bought a sputtering target business. The company was already selling chemicals into fabs, and those chemicals interacted with aluminum on the wafers, but the sputtering target business was new. It was a large company and we could have learned the process to refine and cast the aluminum properly, but we would have had to win customers from scratch.

In another business I worked in, a semiconductor business, we looked at several different targets that would have moved us into a completely new area making products we already did not. It is a several year process to design, validate, tape out, validate again and then go into mass production. Most semiconductors today are part of an established system (PC, cell phones, automobiles, etc.) that all have standard operating systems that are used. You not only need to get the product right, you need to get the software right that allows your new product to work well and that is very difficult. The design cycles for cars and telecommunication infrastructure is quite slow and conservative, so breaking into those markets can be a long and expensive process.

Solar projects can take 2-3 years to develop and acquiring land and a spot on the list for interconnecting can also take years. We certainly could have developed projects for less cost than buying them (and in many cases we already had), but you cannot roll back the clock. If it takes years for others to develop something, you are unlikely to be able to do it in months. So balanced and well done project acquisition can be a very good strategy.

Another good reason to make acquisitions is if the market has rewarded you (or luckily bestowed upon you is often the reason) a superior and unsupportable valuation. Maybe you are one of the few public companies in your market and you have a public currency that others do not. If you do have this excessive valuation, you can execute a “roll-up” strategy and acquire companies that actually are accretive to you at your outsized valuation even though you are paying a fair market price. It is well known that such a roll-up strategy always eventually fails and the excessive valuation is lost, usually when you get too large or when your industry loses favor. However, until that happens, and it can take years, you can generate significant value for your shareholders. You need to make good acquisitions in a well disciplined manner, but it can work. When it stops working, you have gained significant size and scale and the normal fix while you are out of favor is cutting admin expenses and realizing more synergies. You may never get the same lofty valuation as in the past as Wall Street rarely makes the same mistake with the same company, but you probably would not be as large or high valued if you had not taken advantage of your circumstances.

Some bad reasons to do M&A (acquiring) are the need to get bigger or you will be acquired or because you have too much cash at low returns. Your job is to deliver shareholder value and forcing M&A just to be bigger and a harder target to acquire does not deliver value. You need to make an honest assessment and decide if spending your available resources (cash or dilution) will deliver more return than just being acquired at a premium. If you have too much cash, a dividend or share buyback is almost certainly better than bad M&A choices.

Another bad reason to do M&A is the thrill of the process. Some people just love doing deals and have trouble saying no to any deal that comes their way. You need to keep an open mind and not reject everything, but doing deals simply for the process and thrill of doing them is a bad reason and not responsible for shareholders.

Vertical M&A – buying your suppliers, can be very tricky. It is highly unlikely that your competitors will continue to buy from the supplier you buy. That needs to be factored into the reasoning of why you want to purchase a supplier. Buying a customer gets you closer to the end market for your products but it also puts you into competition with your other customers and also needs more careful consideration.

For most companies, early stage investments into technology ideas or start-up businesses is not a good idea. I know the returns that companies like Google and Facebook have delivered look tempting and if you have an active R&D group, you probably will be pitched new technology companies that are working on something new and exciting that can really help you. Keep an open mind and at least have your R&D head take a quick look, but these are bad ideas for several reasons. First, if you are being pitched these as part of a process and they had investors that are trying to get out, then the idea is probably not working out and they are not advertising why. There may be some value, but probably not. The other reason is that you probably are not an investment fund. If you get a chance to, try and meet a notable venture capital leader and talk to them. We always hear about the home runs but the reality is that for every huge success there are many that fail. An honest VC will tell you that they are better at selecting winners than average, but that they do invest in a lot of companies that do not work out and they lose much or all their investment. If they did not like the company, they would not have invested, so they obviously felt that there was a chance, but that chance does not come through in most cases. You are not an investment fund and the market rarely rewards you for a home run every once and a while that is not part of your core business.

I have been focusing on the active process where you buy (or merge with) an asset or business. However, M&A might be to make the decision to sell a product or business you own and divest. If this is well timed, and at a good value, you can receive much needed cash to grow the areas of your business that you believe. You have much more promise in. It is very common for a management team, especially a very successful team, to think they can fix any problem. This needs to be fought against just like the belief that you can buy and fix any business. On a regular basis you need to look at your products and decide if they are all worth continuing. If not, then a mature management team will consider selling the business as a viable choice.

M&A within your existing business is a more simple analysis. You should understand the risks and opportunities well, and the make vs. buy analysis should be more straightforward. The synergies will be more obvious and it will be easier to come to a fair value. M&A away from your existing business is much harder as you will not have the knowledge and experience to know as well as your existing business.

You need to be able to articulate the reasons for doing the transaction clearly with the risks and rewards simply explained. I find that the ability to simply but still accurately explain a transaction is a sign that it is well understood. Your explanation needs to consider the process and possible outcomes after an acquisition is done and what would be the consequences if you did not do it and a competitor did.

One final thought is that your initial evaluation process can benefit from a designated “devil’s advocate”. That would be someone who is assigned to argue against the transaction. Most leaders are optimistic as part of their basic personality and that sometimes leads to over eagerness and a desire to do something even if not doing anything is the better course. You can partially correct for that bias by building in a counter weight into the initial evaluation process. If the deal is good, someone strongly arguing not to do it should not stop it and will make the eventual reasoning on why to do it even stronger.