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Commercial Angles' Newsletter - December 2001

Acquisitions & Mergers

It is commonly accepted that two-thirds of mergers and acquisitions fail to achieve their desired objectives. Some commentators go further and say that a good proportion of acquisitions actually destroy shareholder value. Why is that? And what can be done to improve the chances of a successful acquisition?

The process of acquisition normally consists of the following:

Identify possible acquisition targets.
Obtain as much information as possible about the targets, their markets, their products, their strengths and weaknesses.
Analyse the possible benefits to be obtained by combining the two organisations together, whether this be economies of scale, mutually beneficial cross-selling of product ranges, acquisition of key technologies or customers, enhanced market presence or other benefits.
Approach the targets and explore the possibilities of working together.
Draw up a heads of agreement and confidentiality agreement.
Perform financial, legal, intellectual property and other due diligence work.
Re-examine the benefits expected in the light of the due diligence experiences and revise the acquisition strategy.
Revise the offer and negotiate the warranties and indemnities required from the selling party.
Sign the agreement and pay the consideration for the acquisition to the previous owners.

And that, to be fair, is often all that can be done, or all that is necessary, or all that time allows to be done. If the acquired business is not as good as was expected, e.g. more bad debts or obsolete stock than was declared in the due diligence process, it is usually possible to extract a reduction in the consideration payable by exercising the warranties and indemnities in the sale and purchase agreement.

Because acquisitions are frequently done in conditions of secrecy and because of the huge volumes of data collected in the due diligence process, the people involved in the acquisition are frequently not the people directly involved in making the acquisition work after the event. On the seller's side, the people involved are frequently from a parent company which is selling a subsidiary. After the sale goes through, their work is done and they go back to their own company. On the purchaser's side, the people involved are usually accountants and lawyers, often not employed by the purchaser and who know little of the industry, the businesses or the cultures in the organisations and who usually go back to their normal jobs after the acquisition is completed. The acquired company is then handed over to some unfortunate manager who is required to make the acquisition work.

What is missing is the people aspect. And it is the people who deliver the benefits. If there is a clash of cultures between the acquiring and the acquired businesses, the benefits will be difficult or impossible to achieve. The personnel in the acquired company may be resentful and not work together as a team with the personnel of the acquiring company. The atmosphere may be such that key people in the acquired company leave to work in better conditions, taking with them the expertise that was part of the reason for the acquisition. Once problems arise in one area of the business they tend to permeate the whole organisation and productivity, motivation and benefits decline. In serious cases, and there are almost weekly examples reported in newspapers, the problems can bring down the whole merged organisation.

In an ideal world an acquisition team would be created from people within both the acquiring and the acquired companies. They would look for potential problems such as culture and personality clashes and look for solutions before the acquisition is completed. Creating such a team is possible in private company takeovers where secrecy is not a major factor. It may not be possible in hostile takeovers or where secrecy is important and this increases the risk factors in such cases. The risk increase should theoretically be reflected in a lower acquisition price but usually the reverse is true. In a hostile takeover the acquisition price is frequently over-pitched to sway over hesitant shareholders. Not only is the chance of a successful post-acquisition business reduced because of the hostility but the base price on which ROI objectives are based is uneconomically high. Such acquisitions are doubly risky and must have compelling arguments in their favour if they are to succeed.

Articles from previous newsletters