Why many M&A deals leave money on the table

I was working for a multinational company and was responsible for the sale of the French business to a group of investors.

The investors carried out the usual due diligence, looking at contracts, physical assets, inventory and so on. Eventually, after a lot of posturing, the deal was agreed. The price was based on a formula which included an earnings multiple – but it became clear that the real purpose of the due diligence was to look for hidden liabilities or unidentified risks.

The company employed 48 people and had an experienced senior management team. In most of its history of five years of trading, it had not been profitable and so there was probably an assumption that that team was not as effective as it might have been. Little effort was made to retain or motivate the senior management to stay with the new parent.

The assumption could have been wrong: as the French operation of a global business, from my perspective they were sub-scale and constrained by regulation for most of their history. Poor performance may not have been the consequence of bad management.

By the third month after merger, 20% of the staff had left including three of the most senior managers. That was a problem, not just because of the cost of staff turnover. In my view, the narrow approach to the acquisition and the loss of senior executives together meant that much of the hidden value of the business was not protected and was subsequently lost.

What was this value? Let’s look at what the business had. Under the heading of people, it had some real experts in the buying habits of both major French customers and of the international market. The tacit, or unwritten knowledge of these people was considerable but was not investigated, assessed or captured. The skills of the people were not considered either, in terms of transferable skills or unique skills.

Finally, the personality fit of people for new roles was also overlooked. Think of an excellent customer service manager with great problem-solving skills who can work across international boundaries. Now try finding another in a hurry.

Internal processes can also be hidden assets. Whether in innovation, product management, sales or service delivery, it is much easier to modify a working end-to-end process than to design and implement one. Getting IT systems and manual process elements working together is an even harder thing to do quickly.

Intellectual Property is also often massively under-valued and was in this case. This is not because investors don’t value IP but rather because their definition is too narrow. IP may also not feature strongly in the valuation, but there is another reason.

Unless the acquired business is a research-based business, then the people aspects of the acquisition are often thought of too simplistically and as either the Board, in which case the question is mostly about severance terms, or resources, in which case the acquirer needs enough to keep the business running. Rarely is the human value to the new business taken into account; and yet this is the key to everything else.

In the example of the French company the target had unused trademarks, it had IT systems (and evaluation insights), critical knowledge of the international market, especially in Europe, and people poorly utilised in their current roles. All of this was hidden value and was not assessed or managed. Instead it was lost in the rush to impose the acquirer’s culture and values.

Although my example is French, the problems are commonplace in the UK and elsewhere. An over-simplified understanding of a target company can result in money wasted. But taking time to value the hidden assets, that don't necessarily feature on the balance sheet, can pay significant dividends.