Mergers and acquisitions: five questions for an expert
What are the winning conditions for a company to succeed in this process?
Companies that engage in a merger or acquisition often do it to increase their market share, diversify their offering, expand their geographic presence or future-proof their business. How do you set up winning conditions to succeed in this kind of process? Is there a perfect time to do this? Are there pitfalls to look out for? To find out, we met with Benoit Leroux, Manager, Investment — Financial Services, at the Fonds de solidarité FTQ.
Hello Mr. Leroux. You've guided many companies through a merger or acquisition. Are there challenges with this type of transaction?
B.L.: Yes, several. The first that comes to mind is culture compatibility. If your number one priority is customer service while the shareholders of the other company put return on capital at the top of the list, it won't work. Transition or integration are also key moments. You have to take the time to ensure continuity between the existing management and the new owners and also make sure that the latter take the company's values into account, as was the case in the sale of the Cartier advertising agency, where management rejected some very interesting offers in favour of a succession team more in line with its vision and values. You also have to communicate clearly with employees and customers to simplify change management and avoid eroding the value of the company. Finally, you have to set a deadline and stick to it. As I like to say, "what is left lying around gets dirty."
"In fact, the human aspect of a transaction can be the biggest obstacle to seeing it through, which is why it's important for the stakeholders to have a good relationship."
In your opinion, are there conditions conducive to the success of this type of transaction?
B.L.: Definitely! Starting with good financial health and an experienced management team, because the transaction and post-merger integration are demanding processes. We can easily talk about six to nine months of intensive work for senior management, since they're at the heart of the negotiations. Its members must therefore be used to working together and have a good dynamic. In the case of a fast-growing company, management must be able to continue to devote themselves to operations and must therefore surround themselves with the best people to keep their hands on the wheel so to speak.
And just how does one surround themselves with the best people? Who should you turn to?
B.L.: You should preferably do business with an investment partner who has in-depth knowledge of the industry targeted by the company. We're talking about an investor who knows the industry trends and challenges, who knows the market well and who can network with businesses if necessary. This is a real added value.
An experienced investor can also provide the business with the resources it lacks to cover all angles such as market, tax, legal, valuation, human resources, audit and financing experts. This multidisciplinary team brings real added value, because it allows all aspects of the transaction to be examined. This is what we did when La Capitale and SSQ Insurance combined operations, a very complex transaction. In this way, the company gets an objective and impartial due diligence review (in French) so that it can be fully confident in its decision.
Are there preferred financing models or strategies for mergers and acquisitions?
B.L.: It all depends on what you're looking for. If a client can't stomach share dilution, for example, the investor can offer them debentures and preferred shares. This is a win-win solution that allows the company to close the deal and the investor to obtain an acceptable return. Conversely, some clients who've invested their wealth in their business want to take out some of that money. In this case, the investor can inject capital into the company, a portion of which will be paid out to the owner. This allows the company to continue growing and the client to share the risk and rewards with the investment partner. Depending on the amount and the purpose of the financing, sometimes several investment partners join forces to allow the client to do the deal. That's what happened with the Dutil family's buy-out of Canam, which wanted to see the company's ownership repatriated to Québec.
In short, there are different strategies to take the client's needs and objectives into account, hence the advantage of having access to creative and flexible financing solutions that provide the necessary leeway to deal with the unexpected, because no matter how hard we try to think of everything, surprises can and do occur in business transactions. That's why it's important and reassuring to have a partner focused on the long term and who'll be there for you in good times and in bad.
Beyond industry expertise and financing, can the investor also act as an advisor to the company?
B.L.: Of course! The investor can and must guide the company, advise its management—it's part of their job. This advice may relate to strategy, valuation, the deal negotiation, and other things. But whatever its nature, the advice will be all the more relevant if the two parties have developed a relationship of mutual trust.
"A company must therefore look for a financing partner who pays attention to the human aspect of the relationship, because these exchanges, both formal and informal, often play a major role in decision-making."
One last tip?
B.L.: Each transaction is unique, and so are the people and companies that engage in the process. So, if you're considering a merger or acquisition, take the time to discuss it with a trusted financial partner, because ultimately, we all have the same goal: to make this transaction a success for everyone involved.