Transformational transactions should be exciting opportunities to dramatically accelerate your company’s growth, and there are all kinds of reasons why you would want to execute that kind of deal. It could be to break into a new industry, gain market share, add new capabilities to your company’s portfolio or any number of other factors that would give the subsequently-combined companies a true competitive edge.

But realizing those benefits means picking the right company to enter into a transformational transaction with. That’s something that needs to be done with great care if the newly constituted company is to be successful down the road. How then, do you sort out the good opportunities from the bad as early as possible?

That’s the question they sought to answer at the ACG National Capital February monthly meeting, where moderator Marc Marlin, a managing director at KippsDeSanto, led a panel of M&A experts with keen knowledge of the National Capital region, including:

  • Chris Donaghey, Senior Vice President for Corporate Development at SAIC
  • Sid Fuchs, President of MacAulay-Brown
  • Carey Smith, Chief Operating Officer at Parsons

During their panel discussion, these experienced corporate growth pros  laid out the questions you need to think about when you’re considering a merger or acquisition.

Does their company culture fit with ours?

As you look at a potential acquisition target, it’s important to make sure that their company would mesh well with your own company’s culture and to remember that your employees and theirs will have to work side by side if you go through with a deal. Do you see that happening? If not, that should raise a red flag, maybe even a deal-breaking one.

Chris Donaghey, Sid Fuchs and Carey Smith talk transformational transactions with Marc Marlin of KippsDeSanto.

“I’ve walked away from a deal because the chemistry didn’t work with the management team,” said Sid Fuchs, and that’s a good reason. As Chris Donaghey reminded attendees, acquisitions are often about acquiring the other company’s people and expertise. If you don’t think that their personnel and yours would be able to come together if you were to merge, then you’re not going to be able to retain them, and quite simply, Carey Smith warned, “your results won’t be there.”

Does this company have organic growth?

Not all growth is equal. “Organic growth is always valued more highly than M&A growth,” Chris Donaghey claimed, “if you’re only buying companies and not growing organically, that’s a clear warning sign,” suggesting that there may be deeper reasons why the firm can’t generate growth with the capabilities it already has in-house.

To that end, Sid Fuchs advised that prospective acquisition targets need to be able to clearly articulate the strategy behind their deals and how that aligns with their plan for future growth. If they can’t do that in a way that you understand, it’s another warning sign that a transformational transaction with them isn’t a good idea.

Is the market in a good place for this kind of deal?

Lastly, as early as when you even start thinking about pursuing any transformational transaction, you need to consider external factors in the larger M&A marketplace.  You can have the best management team and great products, but the panel agreed unanimously that “the market always wins.”

No matter how good a company looks and how great a purchase it would be, the market sets the conditions – the incentives, the interest rates – under which a potential transaction would have to take place. It’s why the M&A market is hot right now and why, for example, there is such an appetite for deals in cybersecurity. But those deals, as promising as the individual companies involved may be, just won’t happen if the market conditions aren’t favorable.

According to Sid Fuchs, executing on a transformational transaction, “is like threading a needle.” A successful one needs to be the right fit and meet a number of important criteria: the price, the timeframe, what the culture of the merged company will be. But before you get into the nuts and bolts of negotiating the deal, be sure to ask the three essential questions that the panel established.

Ask yourself those questions early in the process, so that you don’t have to ask yourself “what went wrong?” later.

For more expert advice and thought leadership from leading industry experts, register now for this year’s Mid-Atlantic Growth Conference.