The world of mergers and acquisitions (M&A) is starting to heat up. The $3 trillion of investible capital that has been waiting to be deployed is slowly starting to find its way out the private equity, venture capital and founder family funds.

This is evidenced by deals such as these:

• Home Depot will acquire SRS Distribution in a deal valued at approximately $18.25 billion, including debt.
• Texas oil and natural gas firm Diamondback Energy has acquired its privately owned competitor, Endeavor Energy, in a deal valued at approximately $26 billion.
• Chip design software maker Synopsys has acquired Ansys in a $35 billion cash-and-stock deal.
• The merger of Capital One Financial Corp. and Discover Financial Services will bring together two of America´s largest credit card companies in an all-stock transaction valued at $35.3 billion.
• ConocoPhillips will acquire Burlington Resources in a deal valued at $35.6 billion.

What This Means for the Security Industry

What does all this have to do with our industry? Having spent the last 25 years in the security industry’s M&A deal world, representing both buyers and sellers, we have never seen such excitement tied to what could be the largest “gold rush” of deals that should happen over the next three to five years.

Given all that, I wanted to spend a little time on not only what it takes to succeed but also the pitfalls to avoid as revealed by failed M&A deals.

For additional insight, I turned to Scott Davis, my son and the chief growth officer of Prophet, a leading consulting firm focused on helping companies grow and transform, including a big focus on M&A.

Over a pizza, I asked Scott to share some of his wisdom on M&A. What follows is an edited transcript featuring a few of the many questions with which I challenged Scott.

Ron Davis: What are some of the things your clients wish they had known before the M&A deal that they’re now trying to figure out, post-deal?

Scott Davis: It has never been more critical to get post-M&A value creation right. We consistently see companies leave value on the table and fail to reach their goal for value realization, or they don’t reach it in time or back away and hedge due to a lack of confidence in the investment thesis.

In the end, closing these gaps is critical to the deal’s success.

Ron Davis: What are your recommendations on how best to start to close the gaps in an M&A?

Scott Davis: We have had countless external reports that have revealed three crucial, yet often overlooked, “value busters” that executives must address to successfully achieve the value of the deal.

The first gap we see is that too many companies leave the sales force and other customer-facing leaders out of the loop. For practical and legal reasons, deal teams typically operate in secrecy. This leads to scrambling across the organization when a deal nears announcement.

Marketing, communications and talent teams are often totally disconnected, and they’re sometimes pissed that they are out of the loop. This causes tons of inefficiencies across brand changes, go-to-market strategies, talent integration plans and other critical success factors. 

Ron Davis: What do you recommend to your clients in M&A to help overcome this first gap?

Scott Davis: It’s a pretty straightforward recommendation. It’s unnecessary to complicate the M&A process by adding members to the team during due diligence.

Instead, build a new step or action within your deal playbook to cascade out need-to-know information from the core deal team directly to operating teams when moving toward close.

This will help everyone immerse themselves in the deal opportunity and get to greater accountability earlier in the process.

Ron Davis: What is the second gap you have identified?

Scott Davis: The second gap is one of the largest that we see, and it seems so obvious to us, in that there are too many deals without a strong story of value. Just because deal teams and capital committees understand the value-creation thesis, it doesn’t mean that the deal has a value story.

Ultimately, every audience affected by the deal will need to know how this deal is adding value for them. Yet, internal and external stakeholders often receive quite different versions of the story, if they hear any story at all.

Instead of amplifying the impact of the deal through a compelling narrative, different stakeholders are too often left to make assumptions on the “why and what” of the deal.

Ron Davis: It seems like this would be the very first part of any deal that either the buyer or the seller would want to get down on a piece of paper. I’m not sure how deals go forward without a story of value.

Scott Davis: Exactly! One M&A leader we know very well underscored it this way: “If the deal story aligns the organization and everyone impacted by the deal, it gives them the fuel to change, doing the hard work to realize the value at the core of the deal premise.”

Ron Davis: OK, my guess is that you have a sound recommendation on what to do to address this issue of the value story. What is it?

Scott Davis: There are many ways to get at this, but I try to identify an expert — usually from the marketing, brand, investor relations or communications team — to develop their unique story of value as early as possible.

In this instance, marketing might personalize the core story for customers, while investor relations might develop messaging aligned to what investors are looking for.

The communications team might tweak the message for partners, and human resources might build a North Star narrative for employees.

Although each message might be slightly customized for the intended audience, each must ladder up to leadership’s overarching story of value to drive alignment across all stakeholders.  

Ron Davis: What is the third gap that you see?

Scott Davis: To be frank, this third one is the most corrosive to deals, especially in the services sector, where so much of the value is tied up in the talent, the human capital, and the expertise and cultures developed.

I have seen all of that destroyed overnight if not carefully managed. 

Ron Davis: Isn’t keeping the talent together an M&A deal-maker and the opposite of a deal-breaker?

Scott Davis: You have that right. But, too often, there is a focus on cost out as the first order of business.

Although it’s critical to capture value by addressing internal synergies post-close, it’s also important to de-risk the integration plan by recognizing the unique cultural and talent contributions the acquired team brings. The team most likely brings to the table new capabilities and hard-to-hire-for skill sets. 

Ron Davis: What a missed opportunity to not take advantage of galvanizing the employee base with a new reason to believe, tied to the story of value we discussed above.

Scott Davis: Several M&A leaders we talked with could not agree with you more. In fact, they echoed your point by saying, “If the primary driver of value is something tangible, the culture is overlooked, because it is hard to value.”

They also spoke to the importance of HR leaning in, as their insights can be critical to understanding what employment shifts will resonate within a company. 

Ron Davis: What is your recommendation here? This one feels so obvious but is also so undervalued.

Scott Davis: One way that we’ve helped companies through this is by recommending they build an employee chapter into their pre-deal playbook to maximize the human-capital assets acquired in the deal.

In fact, Apple does just this, as they are looking to acquire top talent, in addition to the technology they are acquiring. To Apple, a smart playbook starts and ends with retaining the employee base. 

Ron Davis: Do you see all this applying to our security sector as much as the other sectors you have mentioned in this conversation?

Scott Davis: There is no category or industry that is immune from these three common roadblocks to successful M&A deals.

To put it a different way, if you do the opposite of these roadblocks and, instead, think of each of the three I mentioned as accelerators for M&A success, I think each would get more attention earlier in the deal discussions. Then, both sides will maximize the chances of walking away happy with the deal they just got.

Postscript: Thank you to Scott for his valuable insights on M&A activity today. I truly hope that some of that $3 trillion in investible capital mentioned earlier flows into our industry!

If you enjoyed this article and want to receive more valuable industry content like this, click here to sign up for our FREE digital newsletters!

Related Content