Navigating M&A from due diligence to deal closure, according to four experts
A successful merger or acquisition can be a rewarding process, but it can also be fraught with challenges. From managing shareholders to completing due diligence, there are many moments when things might go wrong.
To find out how to successfully navigate the M&A process, corporate finance advisers Moore Kingston Smith and UKTN brought together four business leaders with experience buying or selling a tech company.
During the session, held at Moore Kingston Smith’s London office, the audience was taken through key stages of an M&A and heard tips for ensuring the deal goes smoothly – and what to do if things don’t go to plan.
The conversation emphasised the importance of cultural alignment, effective communication, and putting people first.
The panel also discussed the challenges of managing stakeholder expectations, working with advisors and timing the market. Here’s what the panellists had to say.
Timing the market
Rising interest and inflationary pressures have created a challenging macroeconomic environment over the last few years. This has had an impact on M&A activity, particularly at the “mega deal” level, said Nick Thompson, partner at Moore Kingston Smith.
Thompson said there has been “a lot of uncertainty” in the economy but ultimately “you can’t influence it”. Therefore, he says, the best approach for businesses is to be “continuously prepared for opportune moments” rather than waiting and hoping for the market to improve.
In the face of macroeconomic headwinds, M&A activity in the UK IT services sector is robust and resilient. According to the Moore Kingston Smith Q2 M&A report, 151 deals have been completed in the last quarter, a small dip from the previous quarter, but still very active.
Dominic Ward, CEO of data centre company Verne, said businesses should approach M&A strategy at the macro, micro and company level and ensure each of those strategies are consistent with the business’s long-term goals.
This will ensure companies are well-positioned for “taking advantage of the market cycles at a more macro industry level” while “always having to deal with the ongoing company challenges which hit you every single day without fail”.
One example of pushing ahead with an M&A despite external macroeconomic factors is The Adaptavist Group’s acquisition of Rodzoum in December 2022 – the only example of a UK business acquiring a Ukrainian firm since the war broke out.
“We started the due diligence process and then the war began,” said Ruth Collett, CMO at The Adaptavist Group, a family of digital transformation companies. “And then we sort of sat there for a while and thought ‘what do we do now?’”
The Adaptavist Group proceeded with the deal because it didn’t change the underlying fundamentals, Collett said, and the company could “see the long game”.
Collett, who has been involved with six acquisitions since joining The Adaptavist Group three years ago, added: “The synergies were there, and they didn’t stop being there.”
Finding the right deal partner
While price is an essential component of an M&A deal, it also comes down to culture, customers and trust, according to the panel.
“From our point of view, if the culture fits, the customers fit, if the products fit, it’s always the right time for us to buy,” said Mark Simons, managing director of Prime Networks, a managed services firm that has made five bolt-on acquisitions in recent years.
Collett said that each deal can come with a different focus, from skills and capabilities to regional expansion to customer alignment.
“But I would say the most important thing that we’re looking at is the people,” Collett said, adding that The Adaptavist Group takes “quite a long time” getting to know the people at acquisition targets. This includes lots of meetings during the due diligence stage with leadership and staff.
Prioritising people during an M&A was echoed by Simons, who said that “culture is crucial”.
“We put the people ahead of the customers actually – just about – but definitely ahead because… we can suffer the loss of a few customers more than we can suffer the loss of half a team – that would be absolutely catastrophic,” he explained.
For Thompson, who has advised on many M&A deals in the IT managed services sector, being open with the deal partner from the offset will ensure a smooth relationship.
“Trust goes a long way in negotiations,” said Thompson.
And for companies that are not fully transparent, the truth will almost always out.
“Sometimes gut feel really does start to take over during those early conversations,” Thompson said.
Due diligence and advisers
The due diligence process typically begins early in the M&A process and continues throughout.
Tax is one of the big issues, according to Thompson. This can be mitigated in advance with regular “tax health checks” – crucially by external providers who can take a more objective view.
Other common due diligence issues can relate to contractors and vendors. Approaching the process with an open mind without emotions can help, said Thompson.
“Don’t go into due diligence thinking there’s no problems,” he said. “There’s always due diligence problems. Don’t get offended by them, that’s the key thing.”
For founders in particular – who often have a particularly close attachment to their company – it’s important to stay level-headed and heed the words of advisors.
“We’re acutely aware that we don’t know what we don’t know,” said Simons. “So an advisor is very, very important.”
Shareholder strategy
Every M&A deal is different, not least because of the varying permutations of shareholder structure.
Ward, who oversaw the sale of Verne to private investment house Ardian for a total of $575m, has experienced both ends of the scale during his time in tech and private equity.
He gives the example of a badly drafted cap table with more than 200 individual EIS investors being a challenge to get all the shareholders to consent on the deal. “It was way worse than herding cats,” he said.
While a dominant shareholder can be smoother, it can cause problems if they get involved in “every single minutiae” of the deal.
“There are just so many little idiosyncrasies you need to think about there,” Ward explained.
“But the one thing that I would say without doubt – it doesn’t matter whether it’s a small, early-stage startup thinking about early rounds, or whether it’s a bigger business, or scaling up in growth, or even exiting – shareholder management is critical, and the main way to solve that is constant communication.”
Managing stakeholders
Shareholders are not the only stakeholders involved in an M&A. Partners, customers, suppliers and, of course, employees must be notified.
But when is the right time to do that? How much information do you share? And who do you share it with?
According to Ward, it’s a “fine balance” due to the sensitivities around an M&A transaction.
It’s important to have an executive team you can trust, he said. “You’ve got to be very careful about the people who you choose to know everything,” Ward explained. “But I do think it’s important you share those important decisions with the company.”
The panel noted that it was important to have consistent messaging and ensure there was the correct hierarchy of information flow.
“You’ve got to not get people too excited at the wrong time,” Collett said. “So that can take some careful consideration.”
When the deal is done, that’s when you need to “get your communications planning head on”, from employees to customers to suppliers to partners, Collett said.
A big part of this messaging should be explaining the “why” and the benefits of the deal.
Deal completion
Once an M&A deal has completed, that’s when the real work starts. It’s important to maintain momentum post-acquisition and not prematurely pop the champagne bottle, the panel agreed.
“I think the first thing to do is make sure that you are starting to bring everyone together, not just as people, but actually ways of working,” said Collett.
This requires thinking “beyond the team”, Collett said, by looking at systems and processes.
“Are these businesses going to be able to actually work as one business?” Collett said.
For Thompson, businesses should be flexible at this stage and change their communications if needed. “Listen to the feedback,” he said.
Simons said businesses should focus on the people first during the transition period by finding the right roles for people in the organisation.
He added that the acquiring side should find out who the leaders are at the new business and make them “feel wanted, needed and important” as this trickles down to the rest of the company and its customers.
Simons recommends prioritising the back office first before making changes to the front-facing part of the business. But ultimately, it will take time for an acquired business to be fully integrated.
This is particularly true of culture, according to Ward, as people are usually accustomed to a certain style or leadership expectations.
And this means accepting some employee attrition. “You’re not going to keep everyone,” Ward said.
“But you’ve got to also look long term about the fit for those people and what you’re trying to achieve,” he explains. “And if they don’t agree with where the business is heading, it’s right for the business that you find people to do.”
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In partnership with UKTN.