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M&A: If You Always Do What You’ve Done, You’ll Only Get What You’ve Got

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The recently released Aite/NFP white Paper “Alpha Acquisitions: Maximizing the Return on your Practice Investment” analyzes post-acquisition success among 100 financial advisor transactions. The paper introduces the term “alpha acquisitions” to describe transactions resulting in “highly-satisfied” principals who say they would do their transaction again. The study also identified a middle tier (45%) of “near-alpha’ principals who were “satisfied” and would “probably” do the deal again, the remaining 30% or “non-alpha” were not satisfied and would not do the deal again.

The fact that 75% of deals result in something less than “highly-satisfied” principals should be of great concern, and spur changes in how deals are designed, closed, and implemented.

There were many differentiators between the “alphas” and the remaining practices, but one that caught our eye was that the non-alpha group named “agreeing on a future vision with the seller” as their second-most cited “post-acquisition challenge,” just behind client retention (with which there is likely a strong correlation).  “Agreeing on a future vision with the seller” is not even among the top seven challenges for the “alpha” acquisitions.  These results indicate that working on the relationship between buyer and seller needs to be thoroughly and systematically addressed pre-merger. Many in the M&A world consider these issues to be “deal support,” but these responses indicate that it is a key driver of success, or failure.

In fact, “Don’t Rush into a Deal” is the first of the five principles outlined in the report in order to increase the chances of making an “alpha acquisition.”  The findings indicated that “alpha acquirers” take significantly longer, on average, to find a firm to purchase. Only about a third finds the right fit in under two years.  For non-alpha advisors, 70% found their acquisition targets more quickly, within two years. A related finding was that though “alphas” took longer to choose a target firm, they were then much quicker in implementing, indicating that by doing the work up front, implementation went much more smoothly.

Currently, investment bankers have little to gain by slowing down the process or by looking back at the success of their deals, and valuations, in terms of the longer-term satisfaction of the principals.  As more data becomes available regarding post-acquisition success, dealmakers who encourage firms to do more cultural due diligence, including on the shared vision of buyers and sellers, will be able to differentiate themselves as catalysts for more successful deals.

It may be inevitable that as greater recognition is given to the qualitative drivers of success in mergers and acquisitions the focus will shift from the transactional, commissioned, deals that currently dominate the market toward a more comprehensive process aimed at longer-term success in the merged firm.  Much like the investment advisory industry has moved from transactional engagement with clients to compensation aligned with long-term success in reaching client goals, such a transformation within the M&A world would be a positive force for greater shared success.

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