Transition During Transaction

When making a large acquisition the CEO, CFO and integration team leader (and one or more related divisional heads) should make a firm commitment to see the integration process through. If you are part of the decision to take the risk, you owe it to the organization to stick around and make the return.

Escher Sky and Water IThat means:

  1. Making a commitment (either as a personal ethic or a stated intention) of at least one year post-closing; and
  2. Living by that commitment despite other opportunities that might arise.

Whose job is it to ensure that these commitments are made? The CEO, plain and simple.

The Merger Verger Recommends:

As the transaction team is closing in on making a formal bid for a transformational acquisition, the CEO should call together the appropriate parties and say something like this:

We are about to make an investment that could open great new doors for our company but will also expose it to great new risk. Success will require the dedication, focus and time of this team in particular. For that reason, I am making a pledge to you and to the company that I will not seek or accept other opportunities that might come my way for at least one year following closing. I ask each of you to do the same. If we can’t make that pledge than we need to rethink our intentions for this deal.

Look, the Merger Verger understands that there is no loyalty any more and even that “shit happens.” But at the outset of a deal that has the potential to create or destroy enormous amounts of shareholder value, double-checking that there is an emotional (if not legal) commitment to standing by the risk should be a cornerstone of any “GO” decision.Cornerstone Setting
About the Art

  • Top: Sky and Water I by M.C. Escher, woodcut, 1938 (17.25″ x 17.25″)
  • Bottom: Laying the cornerstone of the main Boston Public Library building in Copley Square, Charles Follen McKim architect, 1895

Is Big Riskier than Many?

The Wall Street Journal is reporting today that the flow of mega-mergers – deals over $1 billion – is at its lowest level in four years.  In board rooms across the country CEOs are shedding their bravado and doing smaller deals and bolt-ons and other things that can be more easily brought into the fold.  Risk is out.

But what really makes an acquisition risky?  Seems to me that from a practical perspective deals have two kinds of risk:

  • Investment risk → Assuming all goes according to plan, am I paying the right amount of money for this company?
  • Execution risk → Having paid the right amount, am I responding in a way that will enable me to achieve the intended objectives (and thus the returns)?

It is axiomatic that by reducing the amount of capital put at risk one reduces the overall investment risk.  (Even The Merger Verger can figure that out.)  But I can also figure out that smaller deal size generally means smaller upside potential. 

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