Merger and acquisition activity is on the rise, and many expect this trend to continue. Whether your organization is a serial acquirer or pursuing its first transaction in years, you need to be prepared. One tool that is an essential guide for many organizations is an “M&A playbook.” So, should you build or buy an M&A playbook? And how exactly should you plan to use it?
An M&A playbook is a published set of best practices that guides your organization through the complexity of M&A processes to execute a successful transaction. It includes a set of tools, templates and processes applicable to activities ranging from initial strategy to integration planning to long-term value capture.
“Going through a merger or acquisition for the first time involves a steep learning curve, and you quickly realize the value of previous experience,” says Brian Kemper, IT Program Director at Hospira, a pharmaceutical and medical device organization with more than 15,000 employees. “The first time we executed a transaction, we didn’t have the benefit of tools, templates, or formal processes. So our first playbook was an exercise in researching best practices in the industry, and documenting and consolidating our experiences in one place.”
In addition to providing a road map, it also helps keep everyone involved on the same page. Every transaction involves a wide array of stakeholders. The playbook, therefore, is an important tool for setting and managing expectations across that group of stakeholders – ensuring that everyone understands the deliverables for which each team is responsible. For example, some large organizations may have upwards of 50 different project managers working on an integration, so a mechanism that creates consistency and common understanding of processes and purpose is essential.
Lastly, the playbook should also incorporate lessons learned – and particularly the “hard” lessons – from previous transactions. As such, it becomes a living document that your organization updates after each transaction. “We update our playbook every time we complete a transaction,” says Kemper. “We include all the ‘gotchas’ from previous deals, so we’re better prepared for the next one.”
You often hear that 70 percent of deals fail to achieve their strategic and financial objectives. So, an M&A playbook can be the “secret sauce” that ensures you’re one of the 30 percent who get it right, right? Wrong.
Many buyers mistakenly view the M&A playbook as a cookbook – full of recipes that produce that secret sauce for a successful transaction. But blindly following a playbook can be disastrous. Rather, look at the playbook as a resource for getting you from ground zero to a 50 to 60-percent threshold. From there, you need to blend in your team’s prior M&A experience, as well as careful consideration for the unique elements of the transaction. Think of it this way: Anyone can read a book on how to fly a plane, but to actually fly a plane you need practice in the air – just like you need “on-the-job” training for completing a transaction. Never assume your playbook is a substitute for experience and knowledge.
“The playbook is a key element of our M&A arsenal, but there are certain situations where the playbook will not have guidelines on what to do,” says Hospira’s Kemper. “Our most important, highly visible transactions all have unique planning requirements and considerations.”
The lesson here is that every organization should decide what makes sense for its own M&A strategy. For Hospira, scripting repeatable parts of the M&A process (particularly diligence) has allowed it to evaluate targets more efficiently. Accordingly, over one third of its playbook focuses on diligence, and the organization uses that section to varying degrees in every deal.
In the life science industry, particularly, there is no cookie-cutter approach to handling the pharma and medical device regulatory aspects of a deal. Integration and other implications will depend on the product, regional regulations (e.g., FDA) and leadership’s risk tolerance. Playbooks provide a “checklist.” Experience provides the direction.
An M&A playbook can shine a light on serious gaps in your M&A strategy.
What do you expect to gain from the transaction? Generally, there are seven possible investment theses for M&A transactions:
Context is extremely important for a successful transaction. In some cases, that context doesn’t exist, and teams may feel like they are going through the motions without understanding what drove the deal in the first place. Worse yet, they are not provided a clear picture of the investment thesis and the value the stakeholders are expecting to realize. For example, what does an acquisition for “strategic reasons” mean? Decisions will vary greatly depending on whether you want to consolidate, scale or diversify, so it’s important that teams can rally behind that common goal.
Certain theses come with particular challenges. For example, if the goal of your transaction is innovation, you could be risking time and money. Simply integrating people, processes and systems doesn’t ensure innovative intellectual property; you need the brains behind that intellectual property – and knowledge transfer is tough. You also need to ensure a culture of innovation that continues to foster and grow the idea. Acquiring an innovative product is one thing; taking it to market successfully is quite another thing. A large company acquiring a start up with a promising product could inadvertently restrict that product’s path to market by presenting new cultural barriers—policies and procedures that stifle creativity, long decision-making processes that cause delays and too much of the corporate “heavy-hand.” All too often, we’ve seen a larger company’s influence kill the very culture that made a start up so innovative. The lesson learned is that, in some cases, it may be beneficial to allow an acquired a greater level of operational freedom rather than fully integrating it into the acquirer’s operations – regardless of what the playbook dictates.
You’re ready to create (or revise) your playbook. Where do you start?
Through trial and error, you’ve learned many lessons—and these should become part of your playbook. But, you can also benefit from others’ lessons learned. Here are a few we’ve picked up along the way in our transaction work:
Perform an independent integration assessment: Hire an external partner to assess your last transaction. An objective analysis can help identify gaps in your process, gain candid feedback from integration teams and highlight potential areas for improvement.
Understand the risks when acquiring small businesses: Many small businesses are not Sarbanes-Oxley compliant. “Some organizations haven’t segregated financial responsibilities,” says Kemper. “When we plan a transaction, we focus on financial controls as well as on how to mitigate compliance risks starting on Day 1. That’s a key part of our integration strategy.”
Some businesses have no processes in place to prevent write-ups, have insecure systems or may not be required to have financial controls (e.g., a business located outside of the U.S.). Any financial liabilities become yours on Day 1, so plan accordingly.
Be realistic about regulatory compliance: Almost all life sciences organizations present some quality or compliance risks. Solving for all of these on Day 1 may not be feasible. On the other hand, waiting to find a business that is 100-percent “clean” might result in no possibility of a completed transaction. Instead, focus on how to minimize risk. Put a plan in place to remediate compliance issues to show a “good faith” effort—but understand that some of these changes are significant and may take time. Build that into your 90-day (and beyond) plan, and show this plan to the regulators—proactively. They can read the papers. They know you did a transaction and can come in for an inspection “loaded for bear.” Informing regulators of your compliance plan can save you headaches down the road.
Create accountability: There’s nothing worse than an M&A team on autopilot. Successful acquirers name a single point of responsibility for each key area of diligence and post-close integration (e.g., IT, finance, HR, etc.). Spreading responsibility across too many people is a sure way to guarantee that no one is responsible. Don’t allow employees to “pass the buck.” Their marching orders should be to achieve the pro forma deal synergies that “sold” the deal to your board.
Don’t be afraid to dream big (but understand it may not happen overnight): “I would love a well-documented systems architecture for our whole IT environment, including system interfaces as well as cost of ownership information,” says Kemper. It may take time to put together, but it can yield significant rewards in planning for future transactions.
Don’t fall into the trap of information overload. Include research, context, tools and templates in your playbook. Articulate the goals of the transaction up front and then give your teams guidelines on how and when to use the playbook to support those goals. Don’t create dense content that users can’t digest. If they don’t understand it or it is too cumbersome, they won’t use it. Change management and adoption is key – not just for the business you acquire but for your own teams as well.
If you are creating or revising an existing M&A playbook, an even better name for this living document might be your M&A “storybook.” Successful transactions are the result of strong M&A managers who ask good questions, learn as they go and add their success stories to the playbook for the benefit of future users.