By Jeff Levinson*, Vice President and General Counsel, NetScout Systems,Inc., and Chair of ACC's Law Department Management Committee
Scanning examples of "ten rules" can lead you down many paths. I thought it useful to highlight a few of the more important rule sets I came across before getting to the Ten Rules for Mergers and Acquisitions Success, a set of practices I gleaned from several years of experience and most recently three completed acquisitions (two overseas) over six months this past year.
One compelling example of the importance of rules can be found in the top three of the ten rules for safe gun handling
#1 Always keep the gun pointed in a safe direction
#2 Always keep your finger off the trigger until ready to shoot
#3 Always keep the gun unloaded until ready to use rules that make sure you are aware, focused, and careful, applying the same deliberate approach each and every time you pick up a firearm.
Likewise, M&A transactions require close attention to process rules, a deliberate approach that will make sure you cover key success factors and don't shoot yourself in the foot, so to speak. While mergers and acquisitions do not equate to life and death events, success in M&A will have a deep impact on many stakeholders, including you, so you will want to keep the ten rules in mind.
A few additional examples of rules sets that can also apply to M&A transactions are set forth below (I'm abbreviating the list with just the first three examples from each):
|Thomas Jefferson's ten rules||Wisconsin Court System ten rules for jurors||Warren Buffet's ten rules on investing|
|1. Never put off 'til tomorrow what you can do today.||1. Listen carefully and observe.||1. Reinvest your profits.|
|2. Never trouble another for what you can do yourself.||2. Keep an open mind.||2. Be willing to be different.|
|3. Never spend your money before you have it.||3. Control your emotions.||3. Never suck your thumb.|
Call it best practices, practice pointers, or top ten rules, to survive in the M&A arena you should keep in mind these ten rules.
Rule 1: Pick the Right Team
When all else fails, following the first rule, Pick the Right Team, will give you a fighting chance, a margin of safety even if you make a mistake on the other rules. The M&A team requires legal leadership but also requires teamwork finance, tax, sales, R&D, manufacturing, marketing, HR, and IT. Virtually every department will, sometime during the process, need to help with diligence or integration planning. Make sure that you or your business development lead have invited the right people to sit at the table. While the entire team may not need to be involved when you're negotiating the letter of intent, they will need to be up to speed when due diligence begins.
Another key person we have found worth her weight in gold (during the three transactions our company completed in about six months this year) was a project manager. This person helped us organize meetings, track "action items" from diligence through integration, develop timelines, follow up with different groups, and provide continuity. Even if your company does not have project management experience in house, designating someone as a project manager or deal coordinator will smooth the transaction mechanics allowing counsel to focus on other pertinent deal-related legal matters.
Developing internal expertise within the legal team is another key area for M&A success and for employee growth and job satisfaction. For example, one person on our legal team now manages all the legal-related employment issues, from employment agreements and benefits to local employment law compliance and reporting structures. Another handles both customer contract review and the follow-on integration of the target's sales contract process. Another delves into the compliance issues, including export control and anti-bribery. Dividing up responsibility in this manner not only allows team members to develop their skills and gain valuable experience, but it also frees up some of your time as team members begin to develop the tools necessary to manage certain aspects of the transactions.
Rule 2: Set the Right Expectation
Throughout the process, you will have conversations with many stakeholders, some of whom set your compensation. It is important to be realistic about the pace and goals of the transaction and what concessions and demands will arise. You should talk with your CEO about the realistic time between the letter of intent and close, depending on the level of diligence required (which can vary depending on the type of deal), and expected difficulty of the purchase agreement negotiations. (Outside counsel is your friend here.) You should make sure that the head of sales understands any major customer contract or sales pipeline problems. The engineering team should understand what it will take to integrate the product, and, looking back at Rule 1, if you have them on the diligence team you will already be one step ahead here. The CFO should be made aware of any unusual legal fees, such as for outside antitrust experts, tax advisors, or local counsel. Your finance/tax team should understand the structure of the deal to make certain the right people have a full understanding of any tax obligations and how those obligations should be factored into the negotiation.
Rule 3: Begin With the End in Mind
Look to understand how you are going to integrate the business. This is the look before you leap or the "always keep the gun unloaded until ready to use" rule. If you consider integration at the start and you should start integration planning soon after you start diligence you will know what demands are non-negotiable in the purchase agreement and what issues you can concede. You will know what areas of diligence are most important and what you can de-emphasize. In a technology acquisition, for example, you will scrub the IP and de-emphasize manufacturing that you will be bringing in-house. You will avoid problems post-closing if you plan ahead.
Rule 4: Know Your Organization and Speak Up
Understand your company's business goals in general as well as those specific to the transaction. For example, let's take a transaction in which you are acquiring a number of different technologies. If you find during internal discussions that one technology does not mesh with your product team's strategy, can you jettison that revenue stream? Does that change the valuation? Do you still need to pay at the high end of the valuation to secure the deal? Did anyone else in the organization consider the technology an important part of the deal? Did the Board consider that technology a key strategic reason to approve the deal? If you understand corporate strategy and got involved early in the deal you can help make the assessments and judgments on how to handle the issues.
It is important to recognize that you are a business lawyer, not just a lawyer. You have a voice use it. In some companies, you may lead the transaction. In others, you may be one of a team, led by the business development person or CFO. No matter where you sit, you have an obligation to share your best thinking on all aspects of the deal, not just "legal" issues. Some of that comes with experience, some with subject matter expertise, and some with applying common sense. Ask questions. Step up.
Rule 5: Coordinate With Other Teams
Even if you are not leading the deal internally, you will almost certainly take a lead role in coordinating outside staff, not only outside counsel but also possibly local counsel, auditors, tax experts, and bankers. You will need to help make sure product, manufacturing, R&D, finance (accounting, tax, benefits, valuation, insurance), HR, and marketing all get their say but also understand the process and timetable. In coordinating the teams, you are making sure responsibility is properly allocated and regular meetings held (why the project manager role is helpful) to coordinate effort and review issues, among all stakeholders along the chain.
Rule 6 Conduct Balanced Diligence
Conducting due diligence requires a balance between thoroughness and speed. You cannot afford to rush through diligence and miss a material risk. At the same time, it is important to realize you will not have time to review and understand every possible aspect of the target's business. Focus on the main risks for your company and ask the right questions. Make sure you understand the target business and where you need to mitigate risk, insure against problems, or write into the purchase agreement appropriate representations and warranties, holdbacks, indemnifications, escrow, or even a purchase price adjustment. An earnout may be appropriate where diligence or other contractual provisions cannot provide sufficient comfort, such as where a substantial portion of the target's value is based on an unproven product or technology still under development. In coordinating with the other internal teams, make sure each leader approves moving forward with the transaction. If there are open items as you go through diligence, make sure they get attention early on so as not to hold up the deal. And a reminder: use the diligence team for integration if possible.
Rule 7 The Need for Speed
Understand the need to push ahead as quickly as possible, whether you are the acquirer or the target. Generate momentum. Your CEO is right you need to have urgency in getting to close. (You still need to conduct reasonable diligence, Rule 6, and set the right expectation with the CEO, Rule 2.)
To achieve speed, you will have to build trust with the other side. At the start, they may not trust your motives. You will be placing demands on them with your diligence requests and in some areas taking a hard line in the purchase agreement negotiations, so you need to be careful about how you treat the other side and focus on what is important. Early concessions on points you do not care about will gain you credibility. Where there might be difficult negotiations, understand and respect the other side's goals. For small companies, you might need to help them out, guiding them through your view of a tax issue or patent negotiation. Doing so will save you time. In-person meetings between principals from each side will help build good communication and a foundation for trust, as well as provide a forum for resolution of the tough issues that inevitably arise.
Finally, plan ahead when you might have long lead times, such as with contract consents, government approvals, capital raising disclosures, stockholder approval, or compliance reviews.
Rule 8: Manage Risk Appropriately
Apply judgment to risk management. Set the expectations early, and, more important, keep senior management informed. You will be balancing scope and depth of diligence against the speed to close. You can address some risks in the purchase agreement, but other times you will need to take on risk. Here is where judgment is critical as is management buy in risk aversion does not lead to business success.
You will also need to know when to (recommend to) pull the plug on a deal when it has become way too overvalued (although overpaying may be justified), when a diligence item cannot be fixed or mitigated or indemnified or purchase price adjusted, or when you have a seller not really willing to sell or complete the deal.
Rule 9: Take Care of Blocking and Tackling
Take care of basic blocking and tackling. You need to complete the M&A documentation, purchase agreement, consents, regulatory filings, integration planning, and transition plans. You cannot lose sight of the details. For example, you should be planning how you will take the new business operations through the entire quote to cash process, what contracts customers will use, what technology will be retained, and what role the target employees will hold post-close. It is important not to lose your focus on these items as the deal progresses.
Rule 10: Pay Attention to Fit
Will the merging businesses fit well together or will adjustments need to be made? Cultural differences show up in overseas deals where the other company might suspect the U.S. company's approach and fear U.S.-style litigation (making it important to build trust - Rule 7). Culture and fit also come to the forefront in domestic deals for those common East Coast - West Coast transactions. Understanding and addressing cultural variations during the diligence and negotiation processes will help you establish a successful integration that accommodates both parties.
At the end, once you have closed the transaction, take a moment to celebrate the hard work. M&A deals require intensity. Your management team has made demands on many members of the organization, some of whom are asked to support the deal while also working their "day job." It is great to be able to recognize and reward the entire deal team afterward.
My thanks to Elliot Mark of Northern Power Systems and Nicole Nguyen of NetScout for their comments on a draft of this paper.
The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.