If you are considering acquiring a business you should refrain from making the decision based on price alone warns Paul Tuite, Transaction Services Partner, PricewaterhouseCoopers.
There are three key questions that should be asked by any company considering a business acquisition in order to improve the odds of a successful transaction:
-How does it fit with your strategy?
-How do you ensure it adds value?
-How do you manage the post-deal integration process successfully?
Let’s explore each in turn.
STRATEGIC FIT?
If the acquisition is not in line with your business strategy, no matter how good a deal it might seem at face value, there is a lower chance that it will realise long-term value for your business.
To determine whether an acquisition prospect is a good strategic fit you should consider what the target company's core competencies are, the competitive advantages the acquisition delivers to the combined, or post-deal business, and the gaps the acquisition will address in your current product range, technology, skills or services.
ADDS VALUE?
Secondly in order to ensure that the transaction adds shareholder value, a strong, management discipline in the acquisition process is essential to achieve success.
Often the pressures of achieving growth targets can lead companies to overpay for acquisitions and under-deliver from the integration of the acquisition.
A company's Board of Directors can manage this risk by prescribing ‘checks and balances’ which will see progress reported regularly to the Board throughout the acquisition process. Possible control checks include:
-Setting acquisition criteria (so the rules are not "made up" as the transaction proceeds);
-The acquisition project manager being appointed managing director of the target company in the post deal period (ensuring those who commit the company to the transaction are responsible for achieving the expected benefits);
-The acquisition project manager being required to sign-off on the post merger integration plan which details the resources, outcomes and key milestones which he or she is expected to deliver;
-Linkage of executive remuneration and rewards to post deal outcomes;
-An independent post deal review to assess what improvement can be brought into future deals; and
-Timelines in the post merger integration plan to allow the Board to objectively monitor post deal performance and initiate corrective action.
Such checks and balances make the project team more accountable and reduce the chances of them making inappropriate decisions during the acquisition process.
This in turn gives the Board more confidence in the process, and means it is more likely to be supportive of the acquisition.
In research, successful dealmakers consistently articulate clear, strategic reasons for undertaking a transaction. They also follow a disciplined process that measures value and aims to identify both how best to realise it and minimise risk post completion. Supporting these two overarching principles of successful deals, other attributes noted include committed people, comprehensive planning and a compelling pace.
Maintaining the pace of a deal reduces the chance of costs growing out of control and either side losing focus.
Figure 1 depicts how these components work together to make for a disciplined acquisition process.
MANAGING THE INTEGRATION PROCESS
The hard work is not all over once the acquisition has been completed, as it is vital to ensure the integration process runs smoothly. Research suggests that while growth objectives (of revenue, market share, etc) are achieved some two-thirds of the time, reductions in operating expenses or more efficient business processes are much harder to capture with only one in three deals delivering success in this area.
In the period immediately after a merger or acquisition, it is imperative that management is able to rapidly and effectively implement its business strategy.
At this time there are many projects to execute, resources to co-ordinate, business models to implement and structures to establish.
For example, any new tax initiative must be focused and scarce resources applied carefully.
Failure to align tax strategy with business strategy and a lack of clear decision making on tax issues will delay successful integration and will mean missed opportunities for optimising the group tax position.
Employees are one of the key assets of a business, albeit that they are never highlighted on any balance sheet.
The workforce represents a significant element of any goodwill premium reflected in the acquisition price. It is therefore vital that this key asset is protected and maintained in the early stages of the integration.
To help ensure success in post deal integration, you and your project team need to be focused on identifying and achieving core actions that have the highest chance of success and will deliver the
most value.
If you are not sufficiently focused, there will be a risk of under delivery. Capturing the value of an acquisition is a lot more complex than simply getting a good deal on the purchase price.
The acquisition target needs to promise the delivery of a good strategic fit and the bid process needs to be carefully managed to ensure it stays on track. There should be sufficient checks and balances to ensure the acquisition only proceeds on terms that are likely to add significant value for the acquirer and the integration process needs to be swift and highly focused to capture the additional value before it ‘evaporates’.
Tables have been omitted from the online version of this article.
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