Member Article

Making an acquisition work

The key to success in today’s global marketplace appears to be a race to add capabilities or access new markets faster than your competitors. Of course, this can be achieved organically, but it takes a long time and you risk falling behind. Acquisitions are seen as a fast track route to growth, but there are risks involved and it is important to get things right.

It is generally agreed that around 75% of acquisitions don’t deliver on expectations. Unsuccessful acquisitions tend to exhibit the following mistakes:

Overestimation of the perceived synergies. Paying too much for the acquisition. Inadequate integration planning.

Making plans

The message is clear. You need to do a serious amount of planning before you make that acquisition, so what sort of questions do you need to ask yourself…

Firstly, consider your vision. What is the vision for the enlarged enterprise? How will value be created for your customers? How will you achieve your objectives? What new capabilities, products, markets or other value offering can be provided? Why are you doing this? Having a clear plan will ensure you don’t just react in an opportunistic manner and stumble into an acquisition as if by accident.

Secondly, what will need changing? What parts of the business should be integrated? How quickly should this be done? What capabilities can be shared, migrated and improved? What are the operational and overhead savings? Begin planning early, work with urgency and deal with the lowest risk and highest return opportunities first.

Lastly, consider leadership. Who are the key executives and what are their roles? What level of resource should be devoted to the integration? What are the cultural differences and how should these be addressed? Plans cannot be delivered nor change achieved without the right people.

Consider the price

If you pay too much you will most likely end up being financially stretched and it could be ages before you see any return on your substantial investment. The key to paying the right amount for the business is to turn valuation into a two stage process.

Firstly, value the target business realistically on stand-alone basis. This will guide you in setting your best value price, i.e. the lowest amount you could get away with paying.

Next, assess target’s strategic value to you. How much additional value can be created from combining your business with the target:

Are you taking out a major competitor which will enable you to increase the market price of your products? Will you be able to enter new markets where you can sell existing products to a new set of customers? Will you gain access to favourable purchasing agreements leading to increased gross margin? Are there significant cost savings to be made?

There could be many good reasons for making the acquisition, but you must be realistic about the gains to be made. Most buyers over-estimate the future benefits and end up paying too much.

Having decided on the enhanced strategic value, you now have a negotiating range. The closer you have to go to your upper limit, the less beneficial the acquisition will be. Consider the funding

Many buyers like to think that they can fund an acquisition wholly on debt. If your balance sheet is not highly geared, then this may be a viable option. However, if you already carry a high proportion of debt, then taking on additional debt will increase financial risk significantly. In the current environment, debt providers are very cautious about this. Don’t be afraid of considering additional equity investment. Avoid putting extra pressure on cash flow.

Critical success factors

Choose quality advisers with whom you can work. A good adviser will not be afraid to challenge your thinking as well as guide you through the planning, valuation and funding processes en route to a successful completion. Be realistic about the benefits to be gained from the acquisition and don’t be tempted to overpay. Have a clear vision and plan for what you are going to do with your new acquisition. Change what must be changed and integrate quickly.

To sum up, the key to making an acquisition work is to take your time, look at every factor, get advice from experts and be realistic. Without doing the basics and investing in proper due diligence, a deal could well turn into a financial and commercial nightmare.

Jim Akrill is corporate finance partner at PM+M

www.pmm.co.uk

This was posted in Bdaily's Members' News section by Jim Akrill .