The Riskiest Day

Mark Herndon headshot
By Mark Herndon
Chairman, M&A Leadership Council
Jun 15, 2016

What’s the riskiest day in the life of every deal? We are often asked this, and the answer may surprise you. I’ll be the first to acknowledge there are some diverse opinions on this question, depending on which part of the “M&A elephant” you are looking at. Whatever your personal opinion, however, be careful, because as the old saying goes, “bad news often comes in threes.”

"These are career-limiting, brand-damaging risks that are often very difficult or impossible to fully recover from.”

My viewpoint is that the following three M&A lifecycle milestones stand out as the hands-down winners as “the riskiest days of all.” This week’s downloadable resource, The Riskiest Days in Every M&A Deal, summarizes our experiences on this important topic.

1.   Announcement Day:  Most experienced acquirers know to watch out for announcement day risks, including adverse share-price impact, market risk and competitor risk. Multiple studies and buyer’s personal experiences have consistently demonstrated the tendency for analysts to discount the deal’s value proposition or the buyer’s poor acquisition history. When combined with the impact of merger arbitrage trades and the general consensus on the difficulty of achieving announcement day financial results, the downward share-price pressure often persists long past announcement day.

Some studies have indicated that the share price continues to lag non-acquiring peer companies more than one year post-closing. An interesting study published by Accounting Today suggests that this initial share-price pressure may sometimes cause management teams to be overly aggressive in providing earnings guidance on deal value-capture objectives and thus lead to financial restatements.

Other often overlooked factors to be concerned with at announcement day are the inevitable competitive strikes on your key accounts and key talent. One major client of mine was fond of saying that their best market share expansion strategy was to wait in the wings for a competitor to announce an acquisition, then immediately launch an all-out assault to exploit the period where “nobody seemed to know anything about anything.” (Note: for additional information on value erosion starting on the day of announcement, see Bridging the Gap.)

2.   Day 1:  This key milestone makes the list of riskiest days for many obvious reasons, but first and foremost because of the inherent organizational risks, leadership credibility risks and high likelihood of causing long-term perception damage due to setting off cultural flashpoints.

First, let’s define terms. We define Day 1 as the first day of the buyer’s operational control, post-closing. Day 1 typically occurs on the first day following legal closing. We’ll cover more insights for executing an effective Day 1 in future issues, but for now, beware the following risks: Day 1 often causes an organization to freeze due to the uncertainties caused by ambiguous communications, loosely defined transitional operating protocols, and generally poorly planned and executed decision-making and governance processes needed to guide the newly acquired business prior to full operational cut-over.

3.   Operational Cut-Over:  This milestone day makes my list of riskiest days because, frankly, customers won’t forgive your mistakes. When the time comes to cut-over the operating processes from target to buyer or to the revised “to-be” processes, you’ve simply got to get this right. Customers expect seamless service from both buyer and seller during the entire deal lifecycle (announcement, closing, Day 1, first 100 days, etc.), and if they don’t get that, they defect.

Unfortunately, acquirers usually tend to take their eye off the ball at the most crucial periods in an integration process due to an internal-only focus. Fallout of messing up at this critical juncture can quickly destroy whatever anticipated benefits were contemplated for months. Just ask anybody who tried to fly United/Continental during the first few days and weeks following system go-live of their combined reservation, ticketing and frequent flyer systems in mid-2012. These types of results aren’t just negative synergies. These are career-limiting, brand-damaging risks that are often very difficult or impossible to fully recover from. (Note: for more information on stabilizing the business during integration, see S-3 Integration: Stabilize the Business.)

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