A 'successful' M&A deal - What does it really mean?

In the complex world of mergers and acquisitions (M&A), defining and tracking success is a nuanced challenge. In our roles as M&A advisors, we are often asked how ‘successful’ our previous deals have been and how to best guarantee success for our clients. However, success in this field is multifaceted due to the very nature of the multitude of M&A outcomes, making it difficult to categorise them in simple terms of success or failure.

In this article, we explore the idea of success further and consider why tracking success is as difficult a challenge as defining it in the first place.

Success in the deal

One fundamental reason for the complexity of defining success lies in the myriad factors influencing the trajectory of M&A deals. From unexpected changes in ownership decisions to external market forces impacting valuations, a variety of scenarios can unfold. For instance, a business might face an adverse change such as the loss of a major contract, the passing away of an owner, or significant leadership team changes, all of which can alter the course of a deal.

However, even in instances where a sale or fundraising mandate proves challenging, these challenges do not necessarily equate to failure. Factors like a buyer pulling out of the deal for strategic reasons or owners changing their minds can lead us to devising alternative solutions. Successful outcomes might manifest in deferring a sale, selling only part of the business to management or an external investor, or even taking an unexpected turn such as buying the other party’s interest in a company instead of selling to them.

Examples

Knowing when to pause

To provide a real-world example of what we mean, for a number of years we advised a distribution logistics business. Initially considering a sale, the market testing and valuation benchmarking work we did with them led to a recommendation to pause the sale process while we provided them with ongoing exit planning support which saw us highlighting the key value drivers leading the business to review its operations and make investments that sought to widen their customer base. Subsequently, the company went on to sell at a significantly higher enterprise valuation after a strategic business overhaul.

In a separate but similar example, we recently paused the sale earlier last year of another client, due to prevailing macro-economic concerns and market conditions, which once again highlights the importance of strategic timing. This period of reflection and our ongoing support role has resulted in the founders deciding to sell the company to an all employee ownership trust (EOT) demonstrating the adaptability needed in the dynamic landscape of M&A. In both examples above, a pause post going to market could be viewed as a ‘failure’. However, when the detail is considered you can see that it was not a failure but, instead, a rational and commercial decision to pause the process (as seen in the first example) led to greater ‘success’ in the future.

Changing the deal structure

We have also experienced instances where the right answer and the best chance of ‘success’ for the business and its stakeholders after pausing an M&A process is not to restart it. During the COVID-19 period, we saw many business owners who were considering exit turn to alternative exit structures and mechanisms, including selling to an Employee Ownership Trust (EOT), exit via Management Buyout (MBO) or continuing to stay in and grow the business until an optimal exit value is more achievable. In the continued uncertainty that capital and M&A markets have experienced even since the pandemic, these alternative exit routes have continued to grow in popularity.

The role of advisors

In a third and final example, and one that we see regularly, regards the role of advisors. Clients will often find themselves hearing similar claims from multiple advisors— extensive experience, market expertise, boundless networks and success stories. It can be hard for a client to decipher which advisor will get them the ‘best’ deal. When deciding where to seek advice, what truly defines success is not just in the advisors’ Personal Best speed of closing a deal. Rather than opting for expeditiousness and promising a quick deal from within their networks, the role of an advisor in an M&A process should be a meticulous attention to detail and delving into nuances, ensuring a transaction that not only meets immediate goals but also lays the groundwork for long-term success.

Success post-deal

Another aspect of ‘success’ to consider is not only the achievement of a successful sale or acquisition, it is also in what follows afterwards. It is not often that an exiting party receives 100% of their consideration paid in cash upfront on the day of completion. What is more common is for some of the consideration to be tied up in deferred consideration or in, what is known as, an ‘earn-out’ which is where an agreed proportion of the value of the sale of the business is contingent on the business achieving certain performance goals post-acquisition.

Therefore, while a business may have ‘successfully’ exited for an announced value to a credible acquirer, success continues to be measured post-event.

Measurement of success post deal can be complex due to the lack of reporting requirements. At Companies House, there will be evidence of the change in control and, potentially, a charge registered by any funder. However, there is no requirement to file the transaction terms. The financial statements of the buyer will show some information on the acquisition (depending on the type of accounts filed) but there is unlikely to be any significant disclosure after this first set of accounts.

The methods used to value a company can also disguise the success or otherwise of a transaction. If an announcement is made it will typically use the Enterprise Value as the largest number in the valuation chain, whereas the transaction will be based on an Equity Value (adjusted for net debt/ surplus cash and normalised working capital), but the actual consideration the vendor receives could be different still due to the split between day one consideration, options, deferred or earn out payments and even shares in the acquirer. Given the range of values these different aspects produce, success could me measured against each and different stakeholders will have different perspectives.

Summary

The challenge of defining and tracking success in mergers and acquisitions is inherently complex, influenced by a multitude of factors and unexpected turns. Success is not always about the conventional metrics but often involves navigating unforeseen circumstances. Ultimately, success will vary depending on each circumstance, and tracking it will depend on the level of publicly available information; what may appear like a success on the surface may actually be better defined as a failure when we consider the future performance of the exited business, the consideration paid and the experience for other stakeholders of the business (such as employees and customers) who may have suffered through poor post-deal integration, which failed to deliver expected shareholder value enhancement.

At Price Bailey, we are experienced M&A lead advisors. Our years of experience combined with our privileged access to national and international deal data spanning all industries positions us well to be able to support you in understanding what ‘success’ in a deal really means. Whether that is looking at the rate of successful deals in your industry over recent periods, in order to understand when may be the right time to consider exit, or if it is assisting in defining what a ‘successful’ exit would look like for you and designing a strategic plan that supports your achievement of that exit, contact our team using the form below and we’d be happy to start an exploratory conversation with you.