Merger Mastery for Finance Leaders

There's always lots of discussion about M&A, but let's focus on the M - mergers.

Mergers typically involve equity splits within 40/60 or even 30/70. I've worked on mergers from both the operating and investment banking sides, across public and private companies.

In my experience, these are the key challenges:

1. Diligence

Particularly challenging as companies are often competitors. Sharing data becomes complex. One one deal between public companies, we had to coordinate opening data rooms at the exact same second because neither side trusted the other to follow through!

2. Defining ownership splits

a. Public companies face constant share price movements during negotiations and the again between signing and closing. Even with established collars (agreement that deal terms stay fixed if movement is under 10%), we often exceeded these limits before signing.

One unique advantage of public company mergers is you have analyst consensus forecasts that are unbiased, credible ways to set merger ownership ratios. Using management forecasts means each side has an incentive to show hockey stick growth.

b. Merging private companies typically results in the most recent valuations not from the same date, making using valuation a difficult metric to use. Example: "Your valuation is from the peak of 2020, it's not real, ours is from the depths of 2023."

The company with higher revenue typically wants to define ownership by revenue split (e.g., "$100M revenue versus your $80M means we should own 56% of the combined company"). If you're more profitable? That becomes your preferred metric.

3. Non-deal terms

Things like choosing the new company name, which headquarters is the new headquarters, and of course every employee role is at risk because now you have 2x of everything.

4. Board and management structure

Some mergers arise when there's a departing CEO with no clear successor, which simplifies the hardest management decision. Even with a clear CEO candidate, questions remain about Chairman, COO roles, and board composition. Folks ready to retire makes that role selection easy, I recommend round robin for the rest of the roles (Chairman from company A, CEO from company B, CTO from company A, etc.)

Despite these challenges, consider exploring mergers with competitors and partners:

1. Combine smaller competitors to create a market leader

2. Merge with your largest partner

3. Combine to achieve the scale that's required to go public

Thoughts or Questions?

Reach out to me at [email protected].