Optimizing mergers and acquisitions: planning for success

In their book, How Big Things Get Done: The Surprising Factors That Determine the Fate of Every Project; from Home Renovations to Space Exploration and Everything in Between, authors Bent Flyvberg, an Oxford University professor and a renowned world authority on mega-project management, and Dan Gardner, a journalist and the author of the New York Times best-sellers Risk, Future Babble, and Superforecasting, identify certain science-based principles that enhance a project’s likelihood of success.

While their findings stem primarily from the study of mega-projects such as skyscraper construction and film production, the authors contend that they also apply to smaller-scale projects and merger-and-acquisition (M&A) transactions.

As M&A lawyers, we always seek new ways to optimize our practices and methods so as to deliver the greatest possible value to our clients. To that end, we examine how certain science-based principles that favour project success are taken into account (or not) in the methods employed by M&A professionals.

This exercise is of particular importance in the current economic context, where M&A transaction costs are on the rise, notably due to high interest rates. In light of this reality, parties involved in M&A transactions and their advisors must adopt best practices to raise the probability that transactions go through (closing certainty), within target time frames and budgeted transaction costs.

Taking the Time to Think to Facilitate Quick Action

To gain a full understanding of the first principle, “Think Slow, Act Fast,” it is useful, according to the authors, to see a project as consisting of two distinct phases, namely, planning and delivery.

• Delivery refers to all project-execution tasks that follow the planning phase

The meaning of the terms “planning” and “delivery” as applied to projects may vary from one industry to another, but the underlying concept remains the same.

At the core of this principle is the fact that project failure is often due to poor or hasty planning, which in turn is due to the desire to get to the delivery phase quickly.

In this type of project, potential problems are often postponed until the delivery stage, rather than addressed at the planning stage. This raises the likelihood that problems will occur later in the project-delivery phase, often resulting in longer delays than if the parties had spent more time planning.

The authors call this model “Think Fast, Act Slow,” and they recommend its very opposite, which is aptly named “Think Slow, Act Fast.” The latter model calls for meticulous and exhaustive planning prior to project implementation. As a result, implementation can proceed promptly, thanks to efforts made beforehand to identify and manage any problems that may arise along the way.

How can this Principle Guide Us to Better M&A Practices?

M&A transactions generally take place at a rapid, even frenetic pace. Each stage is characterized by a sense of urgency and must be completed within tight deadlines.

Yet, before taking the plunge, the parties generally spend some time planning their transaction. In fact, it is common practice in mergers and acquisitions to prepare a letter of intent. This letter specifies the terms of the agreements that the parties plan to enter. It also serves as a roadmap for bringing the transaction to a successful conclusion. Viewed in this light, the letter of intent is a valuable tool for planning any M&A transaction. Indeed, the principle of “Think Slow, Act Fast” is echoed by practitioners in the field, which is a positive development.

Unfortunately, this principle is all too often neglected. At times, in the rush to complete due diligence and draft definitive agreements, key transactional components are omitted from the letter of intent. In such cases, the parties prefer to defer negotiation surrounding key matters to the final agreement stage, using wording such as “and on such other terms as may be satisfactory to the parties.”

Consequently, discussions are postponed on matters that inevitably come up in subsequent negotiations, such as limits to sellers’ compensation obligations, guarantees of payment of price adjustments or compensation or the seller’s granting of restrictive covenants.

By delaying efforts to identify issues, challenges, and differences, rather than making such efforts at the letter-of-intent stage, the parties violate the “Think Slow, Act Fast” principle. This principle holds that when planning is deficient, solving problems and challenges is often put off until later. Practitioners keen to embrace this principle should devote more time to drawing up a detailed letter of intent.

By making letters of intent as detailed as possible, the parties are compelled to discuss important aspects of the transaction earlier in the process. As a result, if irreconcilable differences arise, they can terminate negotiations earlier, at lower cost.

Of course, it is unrealistic to expect the letter of intent to cover all details, as many considerations may arise after it has been signed (for example, during due diligence).

 Also, we recognize that any M&A transaction may involve two or more parties with many opposing interests, and that strategic considerations may justify the omission of certain points or requests. Parties may also face tight deadlines, making it difficult to prepare a detailed letter of intent. Lastly, certain types of M&A transactions, such as auctions, may not easily lend themselves to such a practice.

In short, it seems that adopting the “Think Slow, Act Fast” principle would help to maximize a project’s likelihood of success. As such, a detailed letter of intent may be considered the best practice for professionals. It remains to be seen whether the market will embrace such an approach and whether it will help to reduce the time and costs associated with M&A transactions.

Our Business Law team will be glad to assist with any questions regarding the best practices in M&A.