DAY 1

PREPAREDNESS

in M&A
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 WELCOME
M E S S A G E

Hello, and welcome to this guide!

My name is Michael, and I created
this handbook to help other
executives and employees with
mergers and acquisitions.

M&A can be intimidating. It is

sometimes a lengthy, complicated
process, and many people are
involved. However, you don't have
to solve everything alone. You can
use external experts and combine
them with your top employees. The
more complex the transaction is,
the better it is to follow the M&A
process that is outlined in this
guide.

A little bit about myself: I have been a senior executive in international

companies for over 20 years. I have a Ph.D., an MBA, MS in Accounting, and
I went to Wharton for my executive education. Based on 30+ M&A
transactions, my specialty is in all topics around mergers and acquisitions.

Enjoy the guide!

Michael Hofer

www.bymichaelhofer.com
 Congratulations!
You have already successfully gone through many important steps in the
M&A process:
You have defined that M&A is a good tool for your company to achieve
strategic growth.
You developed a target pipeline and evaluated the companies with an
M&A scorecard.
You completed the due diligence and developed a business case and an
investment thesis.
You have successfully negotiated and closed the deal.

But are you ready for the next step? Are you prepared for day 1 after
the closing?

Day 1 preparedness is one of the phrases that you often hear in M&A, and it
has a significant impact on whether your M&A deal is successful or not.
Have fun reading more about it in this guide!

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 A 5 STEP M&A
PROCESS
Understanding mergers and
acquisitions is difficult because of 1 Strategy Formulation and
its complexity. Nevertheless, you
usually follow five steps from the Pipeline Development
beginning to the end in the M&A
process.

Once you have defined that M&A is

2 Initial Discussions with
one of the strategic tools for your Target and Letter of Intent
company's long-term growth, the
development of a target pipeline is
next. After you analyze your targets
with an M&A scorecard, you start 3 Business Case and
with initial discussions, followed
by a term sheet and Letter of Intent Due Diligence
(LOI). Next comes a more detailed
data analysis in the due diligence.
You take this information and
develop a business case and value
4
Negotiation and Closing
capture approach. Afterward, you
continue with the negotiations and
close the deal if you still believe
that the transaction adds value. The
operational integration comes 5 Post-Closing
after the closing in parallel with Adjustments and Integration
any required post-closing adjust-
ments. And this is the focus of this
guide.

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 There are many things that need to happen after the closing.
Here are some of those topics:
Internal communication with employees from the acquirer
and the acquired company
External communication to financial stakeholders
Communication with clients, business partners, and
suppliers
Post-closing adjustments to the purchase price
DAY 1

Follow-up on conditions subsequent

Purchase price allocation in accounting
Operational integration, which affects all departments
Development of a new common culture
Start of performance improvement plans

This is not a comprehensive list; there are many more

depending on your specific transaction and approach to the
integration.

It is crucial to prepare those plans early in the M&A process and

not to begin after the closing. I suggest that you start with
initial plans during the first discussions about the
investment thesis/value capture creation and continue
through the due diligence and business case development.

On day 1, you need to be ready to kick off all of those

topics and manage them successfully.
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 C H O O S E A S T R O N G
PROJECT MANAGER
P R O J E C T M A N A G E R
It can get crazy during the post-closing period, and the M&A
project manager needs to organize many different teams and
topics. Also, you will learn new things after the closing.
Remember, you only have limited access to information and
people before the closing. In almost all of my transactions, new
and unexpected things came up after the closing.

It is obvious, but ensure that you choose the best person for
this position. The project manager plays an extremely important
role during this period of the M&A transactions.

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 COMBINE
I N T E R N A L A N D
E X T E R N A L E X P E R T S
I always found that combining internal teams and external experts results in
better results. I suggest that you use external experts and combine them with
your internal teams throughout the M&A process, including the post-closing
period. You don't have to solve everything by yourself.

M&A is different from regular day-to-day work, and there are some unique
topics where external experts can be very helpful for you. Examples are
valuation topics for the purchase price allocation, legal topics for the
conditions subsequent, changes for the legal entity structure, and
accounting firms for the working capital adjustments. Also, consider using
integration and restructuring consultants if you don't have the talent in-
house.

Another reason for using external experts is that the workload for people on
the post-closing team is high, and adding external resources helps you to
avoid overloading your employees.

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 PURCHASE PRICE
ADJUSTMENTS
In many M&A transactions, you agree in the purchase agreement to adjust
the purchase price after the closing to specific changes in the financial
situation. Theoretically, you can use any metric for those adjustments, and
the examples below are not comprehensive. In essence, you use those
adjustments of the purchase price for any changes that affect the value
of the target company at the closing date. Here are a few examples of
post-closing adjustments:
Working capital adjustment
Net debt adjustment
Indebtedness adjustment
Other adjustments for significant changes in revenue (e.g., ARR/annual
recurring revenue), material changes in expenses or capital expenditures,
or contingent liabilities

Use external accounting firms and lawyers to

help you with the purchase price adjustments.

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 PURCHASE
PRICE
ALLOCATION
T O D E T E R M I N E T H E
G O O D W I L L

One of the complicated financial exercises you have to do after the

closing is to determine the fair value of the assets and liabilities in the
company to calculate how much you over- or underpaid (compared to
the identifiable net assets). Overpaying means that you paid for assets that
are not included in the balance sheet and have not been identified in the
purchase price allocation, which is the goodwill. Underpaying means that
you paid less than the value of the identified net assets, which is called
"negative goodwill" or "bargain purchase." Most of the time, you create
goodwill. Here are some examples of intangible assets that you don't have on
the balance sheet but will often be used in the purchase price allocation:
Intellectual property (IP)
Brand names and customer relationships
Favorable supply agreements
Non-compete agreements

There are experts that can help you with the

purchase price allocation.
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 INVESTMENT
T H E S I S A N D V A L U E
C A P T U R E A P P R O A C H

At its core, M&A is a tool to achieve a specific company goal. You can use
it to grow faster in an existing market, expand into a new geographic area,
develop your product & service portfolio, achieve cost savings based on
synergies, or improve your competitive position (i.e., a market consolidation).
The big question is whether you add value to your company with M&A,
and here come the topics of value capture and the investment thesis in the
game.
I'm not going into the details between value creation vs. capture. A simple
explanation is that value creation is the potential gain (i.e., willingness to pay
minus cost), and value capture is the actual gain (i.e., price charged minus
cost). What is an investment thesis? An investment thesis represents a clear
and concise statement of the strategic goals and expected outcomes of a
transaction and how to get there. It is the basic idea of how you create value
with the M&A transaction. In essence, the investment thesis is the same as the
value capture because both focus on how a company actually achieves a
financial gain with an M&A transaction.

Always keep your eye on the investment thesis.

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 OPERATIONAL
I N T E G R A T I O N &
C H A N G E M A N A G E M E N T
The operational integration comprises all of your departments. Depending on
your investment thesis and integration approach, you either start integrating
them right after the closing or at a later stage. For example, I have seen
companies that want to run the acquired company separately for some time to
see how it develops. In such a case, some - or all - functions stay initially
separate. Here are some tips for a successful change management:
Make it clear why change is necessary. People want to understand why
the company wants a change.
Use different communication channels and talk with people. Some
prefer social media, some email, and others like to go to a website on
your Intranet to learn about the planned changes.
Set up regular check-in meetings with the leaders of the integration and
ensure that you exchange information about the status and issues.
Find change agents and use the concept of marginals. Change agents
play a crucial role in successful change management. Ideally, they are at
the margin of social groups, meaning they jump between social groups in
the companies.
Focus on opportunities. There are always opportunities in life, but
many tend to highlight problems and issues more. Continue highlighting
the opportunities.

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 PERFORMANCE
I M P R O V E M E N T P L A N S

There are different reasons for

M&A transactions, but often,
the acquirer believes that they
can improve the financial
results of the target company.
To achieve them, companies
develop a business case that
includes operational and
financial improvements. Those
plans can range from minor
operational modifications to
significant synergies or a
complete restructuring. Here are
some tips:
Before the closing, be careful with your business case assumptions and
discuss ideas with the target. Also, include a risk adjustment.
The change management team needs to work closely with the due
diligence and integration teams to ensure that all are on the same page.
Work with HR to identify and retain key talent. The right people in the
right role in the organization can make anything work.
Communicate actively with all stakeholders. You cannot
overcommunicate in this phase of the M&A transaction.
It's crucial to have tight control of the progress at the beginning.
Continue updating your plans. You will get more information after the
closing, and some information may change significantly.
Focus on predictive indicators and not only actual results. It
sometimes takes longer than expected to achieve the results.
Motivate people throughout the process, and celebrate milestones.
Be resourceful and flexible in your approach. There are always
different options and alternatives how to achieve the results.

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 COMMUNICATION
While financial considerations and legal aspects often dominate the
discussions around M&A deals, the significance of effective communication
cannot be underestimated. Clear, transparent, and well-executed
communication plays a vital role in facilitating successful M&A
transactions and ensuring long-term integration and growth. This is the
case for the whole M&A process and is especially important in the
integration of the company.

RELATIONSHIP
BUILDING
There is one crucial success factor in mergers and acquisitions that you
cannot find in textbooks or university courses, but it makes a big difference:
Relationship building between the acquirer and the target company.
Building a relationship between the parties makes everything easier
during the early M&A process and after the closing, especially during the
integration and performance improvement projects. Ensure that you
include communication and relationship-building actions in your M&A
plans.

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CULTURAL
INTEGRATION
Integrating different organizational cultures is often a complex and difficult
task. I have seen companies where people identify with their former parent
company even years after being acquired by another company. Understanding
what the company's culture is, acknowledging differences between the
companies, and actively working towards creating a culture with common
goals is essential.

The most successful approach is to develop a new

common culture instead of "rolling out" one
company culture to the other company.

Organize workshops together, foster collaboration between companies, and

create teams from different functions to bridge cultural gaps and build a
successful new working environment.
 STAY FLEXIBLE
T H E R E A R E A L W A Y S
S U R P R I S E S I N M & A
Be ready for surprises and stay
flexible in your approach. You will
have more data after the closing,
and you can talk with everyone
from the acquired company. It is
almost unavoidable that you will
discover new things that you
didn't find before in the due
diligence. Remember, you only
have limited access before the
closing.

Don't panic when some things go

wrong, and stay focused on
solutions, alternative approaches,
and different options on how to
achieve your plans.

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