(Charlotte, NC – September 26, 2017)
Building Incentives for the Long-Term –
This month we continue our series on six principles for successful acquisitions. Below, we elaborate on the fourth principle: “aligning incentives.”
Get Creative. Conventional M&A approaches may not be adequate to create meaningful opportunities and competitive advantage. Michael Volpi, former Chief Strategy Officer at Cisco Systems, remarked that he is “constantly amazed how often companies structure deals without considering the key concept of aligned incentives.”1 Companies should view the combined entity as a dynamic platform of valuable assets, all of which can be beneficial to each other. An example of this approach is Scotts Miracle-Gro’s 2016 investment in Bonnie Plants. A convertible minority investment was paired with marketing and R&D agreements, creating a mutually beneficial structure for all parties.2
Keep What You Pay For. Successful acquirers routinely manage their human capital with the same rigor and discipline with which they manage balance sheet risk. Key practices to preserve people value throughout an M&A transaction include: engaging the workforce, retaining top talent, and aligning rewards with desired behaviors. Notably, recent trends show frequent use of a “bottom-up” approach to retention programs, focusing on talent first and making sure retention is designed with the end goal in mind. Buyers have become more nuanced about to whom they offer retention, often expanding beyond the C-suite.3 Consider the importance of integration champions, operational management, and a pipeline of developing leaders when designing an incentive strategy.
Incentives are More Than Just Cash. Although incentives frequently include financial rewards such as cash bonuses and stock options, the list of ways to motivate employees is far longer and more diverse. Consider a recent example in the acquisition of the Constantia Flexibles Labels Division by Multi-Color Corporation in July 2017. Former Constantia business unit president, Mike Henry, was tapped as CEO-elect when Multi-Color’s current CEO retires next year. Additionally, two Constantia representatives were appointed to Multi-Color’s Board.4 These tactics served to generate broad-based buy-in regarding the importance of future success of the combined company. The importance of operational leadership in transaction success should not be overlooked.
Earn-Outs: Helpful or Harmful? One of the most common stumbling blocks in deal structuring is earn-outs. Typically structured with a set of metrics that create a sliding scale for the price paid for the acquired company, earn-outs have one key weakness: no post-sale metrics will be an objective value metric in the same way as stock price. Indicators such as revenue, earnings, or market share can all be gamed by both the acquirer and the seller, creating misaligned incentives in the long term. The result is a schism right at the starting point of the two companies’ relationship. Whenever possible, a better solution is a stock acquisition or more creative deal structure that aligns the incentives of both parties to growth the business, thereby increasing the acquirer’s stock price.1