Improve M&A success rates by testing for system reliability

Coming out of recessions, merger and acquisition volume typically picks up as lower interest rates drop the cost of capital and Corporate Development teams begin executing on the strategies they’ve developed during the holding periods. This year has been no exception, with $350 billion spent on tech acquisitions to date. This period is a boon for entrepreneurs seeking exits and for companies trying to expand their businesses into new markets or increase market share.

When over 60% of acquisitions destroy shareholder value, you need to stack the odds in your favor. Post-acquisition, the spotlight is on the merged company, and any downtime tarnishes the brand and hurts the chances of achieving a successful acquisition. The cost of an outage always hurts revenue and the bottom line, but it is especially impactful on the parent company’s reputation and stock price with an acquisition. Reliability has a clear value for a business, which is why it’s important for acquisition targets to build reliable systems, and for acquirers to include reliability as a focus during due diligence and integration work. This ensures a smooth path forward towards realizing the full potential synergies of the deal.

You wouldn’t buy a home without checking the soundness of the foundation. You shouldn’t buy a company without checking the soundness of its reliability practices.

We’ll walk through a deal process from scouting to close to integration and point out important ways to incorporate resiliency testing and improvements.

Prospect scouting

In the initial phase of a deal, company scouts are meeting with many companies on a near daily basis. At this point, private documents are not available, but conversations and web research surface reliability practices. When speaking with the company or scanning their website, ask these questions.

• Does the company have public status pages?
• Does the company perform retrospectives and blameless post-mortems? Do they publish post-mortems to their website or status page?
• Does the company have redundant data centers or regions?
• What is the historical availability of their various offerings?

It’s not important to get into every detail, but if reliability is important, the answer to these questions will be top of mind for executives. How well executives answer these questions should factor in decision making for moving forward with a deal. Don’t look for perfect availability and overspending on redundancy, but confirm that these practices are in place and that the company is making improvements every day.

Due Diligence

When the acquirer has downselected to a single target and the acquisition strategy rationale has been agreed upon, the deal progresses to due diligence. Corporate Development works with the business unit and Finance to come up with a list of questions and document requests prior to performing the financial analysis and drafting the term sheet. This is an opportunity to dig deeper into the reliability practices at the target company.

The potential target will have a deal room with private documents to share with the acquirer all under a signed NDA. Few employees from both sides are involved, so not all information will be available. At this stage, the acquiring party should include documentation for reliability practices.

• What SLOs, monitoring, and alerting do they have in place?
• What SLAs do they have in place? How often have they been violated?
• What tools, such as multi-region redundancy, load balancing, orchestration, autoscaling, etc., do they leverage?
• What are their disaster recovery processes? Are their runbooks up to date and have they been used?
• Do they have a high severity incident management program?

Compare these to industry best practices to see if they meet those standards. If not, you’ll need to build in extra capital expenditures and operating expenses as integration costs for your discounted cash flows to account for the upgrades you plan to make.

Once the deal progresses to a term sheet, further due diligence begins and more teams get roped into the process. Many acquiring companies will use code scanning to check for licensing issues. This is also a chance to dig deeper into the practices of the Ops and SRE teams, and add in an expert from those teams under the NDA umbrella. Ask for ticketing logs for key metrics like mean time to resolution (MTTR) and mean time between failure (MTBF). This will ensure that any risks to the acquisition’s success are fully understood prior to close.

Integration process and synergy realization

After term sheets are signed and legal checks off, the deal closes and wires go out, the acquisition integration efforts begin. One of the ways to accelerate collaboration is to run a joint GameDay between the acquirer and acquired companies. GameDays are when you perform Chaos Engineering, or the methodical practice of injecting failure into systems to learn how systems and teams respond, as a team. This exercise should answer many of the following questions.

• Are their resiliency mechanisms up to your expectations?
• Does their team have the muscle memory to respond under pressure?
• Can you share some learnings you have that could help them?
• If something goes wrong, are they able to triage, fix it, and learn from it?
• Is there tribal knowledge necessary to fix things that don’t show up in the runbooks?

If we have to look at our very senior member or someone who is the architect of the piece to answer a number of questions about the system, that tells me that we have a lot of tribal knowledge.

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Take the learnings from this exercise to file tickets and update documentation. Find the issues as early as possible to fix them prior to becoming a customer impacting issue.

From here, systems integration work is performed or applications are completely rewritten. This is a key time where the new company has a moment to establish itself as a new, high-quality brand to attract and retain its customer base. Teams need to audit their practices and perform chaos experiments regularly to ensure the reliability of the combined or new applications to increase the odds of a smooth launch that garners customer interest.

Once systems are fully integrated, redundant systems are shut down. There’s a period where you are running redundant systems, but only one is receiving a majority of the traffic. This is an expensive way of operating, and it results from the fear of turning off the old system, only to find you still need it.

The faster you can get to this stage of the integration and out of it, the more money you save and the higher chance of success for the acquisition. Using Chaos Engineering to know your systems’ critical path is key to ensuring that unknown dependencies don’t catch you off guard and to speeding up this process. Before shutting down the new system, drop traffic to that system, and make sure all previously dependent systems operate as expected before turning off the lights on the legacy system for good.

We learned a lot [during our first GameDay], and what started out as a scary, timid, anxious exercise—it actually ended with excitement. We did a GameDay every single sprint...and we had an amazing launch. We 50x-ed our traffic in two weeks, and we had zero issues.

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Ensuring merger success

As deal volume continues to heat up, acquisition success hinges on a smooth transition to a merged company with a brand that customers trust. M&A brings the spotlight onto a company, which is a very inopportune time for an outage. Both sides of the deal prevent customer churn and realize synergies at a higher rate during and after the transition if teams are focused on bringing the two companies together, and not on putting out preventable fires.

Being aware of the reliability gaps prior to an acquisition helps mitigate the risk and provides time to plan for and make the changes to bring systems up to par. During the integration, joint team exercises ensure a smooth transition to combining operations and systems and saving money.

Chaos Engineering is a discipline that speeds the process along and maximizes the return on investment (ROI). Using GameDays to bring operations teams together and providing an opportunity to learn about new systems. Following these steps will help increase the odds of merger success and pave the way for more, exciting deal making.