Mid-Market M&A Takes Two to Tango: Know Your Dance Partner

Nov. 12, 2020, 9:00 AM

It is widely believed that human capital ranks among the most important factors in the success or failure of merging two companies. A Harvard Business Review study estimated that 70% to 90% of all M&A transactions failed to achieve strategic and financial objectives, and the failures most often are related to issues such as incompatible cultures, management styles, poor motivation, loss of key talent, lack of communication, diminished trust, and uncertainty of long-term goals.

With so much at stake—especially in middle-market M&A deals—it is important to consider strategies to avoid these failures.

Too often, companies treat a middle-market M&A deal as a single transaction, focusing solely on the acquisition: a single moment often marked by the closing date and measured using quantitative factors. It is after the closing date, however, that the financial successes or shortcomings of the combined organizations are measured by the buyer and employees. This is when HR-related tasks are implemented and business plans, strategies, and projections are defined.

While quantitative metrics and measures are important in the success of mergers, there is an often-overlooked, but equally important, qualitative factor underlying the success of a merger: the transition and blending of employees and the cultures that comprise the to-be-combined organizations.

In this way, successful M&A transactions are not unlike a choreographed dance: it takes two to successfully tango.

Selecting a Suitable Dance Partner

The early stages of any proposed transaction will likely involve a host of buy-side and sell-side advisers—all of whom will have been assigned a very narrow and specific set of tasks. Rarely does any adviser give attention to one of the most pivotal questions of all: Are the buyer and seller entities culturally aligned?

While historically categorized as a “non-financial risk,” cultural alignment may be the key to success. It is a main determinant for employee retention and performance pre-, mid-, and post- M&A transactions, because corporate culture encompasses the beliefs and assumptions shared by members of an organization, and influences all areas of group life.

The way leaders behave, the decision-making processes in place, as well as communication styles, all fall within the purview of a buyer’s and seller’s respective corporate cultures, and the parties’ alignment on such matters are pivotal to a successful merger or acquisition.

Nothing better demonstrates this principle than a recent health-care transaction in which we were involved. Our client, the buyer, was exploring the acquisition of a large physician practice group. During the preliminary stages of the due diligence process, the client ascertained that the target company’s billing practices were far more aggressive than those of its own, and that, post-closing, such billing methodologies would be unacceptable within the context of the combined organization’s ongoing operations.

The target company’s management did not agree, and the issue was simply too material for the parties to overcome. Our client walked away from the transaction and, shortly thereafter, acquired a competitor of the initial target whose billing practices more closely mirrored its own.

Some things are simply not meant to be, and middle-market M&A transactions are no different. If all signs point towards incompatibility on material issues so intrinsic to the buyer and seller organizations as corporate culture, they should cut their losses and part ways.

Clear Communication of a Feasible Strategy

After having identified a suitable dance partner during the very early phase of a proposed M&A transaction, embarking on a clear communication effort with all stakeholders is the next key step. Advisers should view the M&A process as an opportunity to reveal weaknesses and untapped opportunities within the newly formed organization and create strategies to address and resolve these issues through this open communication.

There’s bound to be confusion in the weeks preceding and following any proposed merger, and employees of both sides will want answers. Change—no matter how large or small—precipitates fear, uncertainty, and resistance. This is when buy-side and sell-side advisers alike can shine—setting the stage and guiding employees through each act so they fully understand, and ultimately, accept and embrace what’s happening, why it’s happening, and their roles in the future success of the new company.

We once represented a private equity fund in its acquisition of a leading provider of correctional health-care services. The target company comprised thousands of employees situated in more than a dozen states nationwide, and there was a great deal of unease about the pending transaction.

Only after dozens of multi-hour conference calls, in-person meetings, and explanatory presentations were we able to gain the trust of the target’s key stakeholders and begin implementing the buyer’s and seller’s shared vision for the future success of the combined organization. Communicating with all team members is essential to winning their trust, and trust is key to the success of any business.

A successful middle market M&A transaction—like an award-winning dance performance—requires the identification of suitable partners, clear communication among all key stakeholders regarding expectations and outcomes, flawless execution, and a smooth and seamless transition off the stage. All of these aspects are supported when human capital is considered and corporate cultures are aligned.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Theodore I. Blum is managing shareholder of Greenberg Traurig’s Atlanta office and chair of the firm’s Atlanta corporate practice. He leads and advises a team with strategic business, legal, and market experience. He also manages and closes complex transactions, and provides counsel on day-to-day operations.

Ian K. Neubauer is an associate in Greenberg Traurig’s Atlanta office. He manages and closes complex transactions, while providing advice on the day-to-day operations of companies of all types and sizes.

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