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DUE DILIGENCE
Management Teams
by Jack Bradley
Recent press reports speculate that M&A activity will continue to increase over the next six to 12 months. Future deal activity will be characterized by longer negotiations caused in part by meticulous due-diligence work. This is an opportune time for buyers to review and upgrade their existing diligence procedures.
One area that often needs extra emphasis is an accurate assessment of how the combined entity will be managed post-closing. The financial merits of an acquisition will only be realized when management successfully executes on the combined entities’ strategic plan. To maximize the odds of success, buyers need to expand the scope of human-resources diligence to include a detailed and critical review of the management resources of both the buyer and the seller. Once this analysis is completed, buyer and seller can more confidently design the management reporting structure of the merged entity.
A successful acquirer must have empirically driven assessments of the strengths and weaknesses of its existing management team before contemplating a major transaction. In assessing the transaction’s impact on the buyer’s organization, one must identify the challenges that could surface over the next 12 to 24 months to impede the integration of the two entities. A scorecard can be designed to try to rank the critical success factors for each management function, and it can be used to facilitate internal discussions among senior managers involved in the merger decision-making. The target company’s managers should be viewed as a vibrant talent pool that can be used to augment weaknesses in the buyer’s management team and to help address future succession issues.
As part of designing the post-closing reporting structure, the buyer needs to accurately assess if its existing management team has the skills to manage a larger organization. It is important to distinguish between resource constraints and skill-based constraints. Resource constraints may be temporary and related to specific integration activities. They can often be addressed by hiring outside professionals. The more critical analysis centers on skill-based constraints. Senior management must honestly assess the capabilities of their existing direct reports and determine if the skills of these managers will allow them to be effective in a larger organization. As an example, a highly competent and technically sound CFO may not have the skills necessary to take on a more strategic financial role and may not be able to effectively delegate to a strong controller.
Most buyers of private companies face special challenges. Since private-company ownership is usually concentrated among the seller’s senior management, the sudden creation of wealth and liquidity generated by a sale can cause even the most ambitious people to rethink their priorities. This can sometimes be addressed by having the sellers retain a significant amount of equity to assure the alignment of economic interests. However, when the sellers will have no prospective post-closing ownership interest, a buyer needs to have candid and direct conversations with the seller’s management about future intentions. Both buyer and seller might be reticent about broaching the subject, but a thorough understanding of the seller’s post-closing motivation will avoid a painful mismatch of expectations.
Buyers who take the time to carefully address the more sensitive aspects of human-resources due diligence will best position their companies to maximize the potential benefits of the transaction. But acquirers who avoid making difficult management decisions during the diligence process, or who accept unconventional reporting structures to accommodate individual managers, are quite likely to run into significant difficulties after the ink is dry.
Jack Bradley is president of Bingham Strategic Advisors LLC, a subsidiary business of Bingham McCutchen LLP. He has more than 23 years of experience in commercial and investment banking.
[PRINTER FRIENDLY VERSION]
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