For a small or medium sized business, the acquisition of another company is not an everyday occurrence. It’s a highly disruptive activity, which can upset the operations of both the acquired and acquiring businesses.
In this series of articles, we’ll explore Mergers & Acquisitions from the perspective of the smaller business. We’ll look at the end-to-end process, from deal strategy through to making sure you get the planned benefits acquisition.
This first article is going to focus on the basics. Why are you acquiring another business and what do you need to do to make it successful?
We won’t be using the term Merger here, as in the majority of cases, it’s a false concept. In almost every deal, even ones where a new company is formed from two others, one party will take a majority ownership. This is an acquisition as the power lies more with one of the parties.
Make no mistake - if you are approached about a merger - in reality, you are going to be acquired.
Let’s start with that first question - why do you want to acquire another business? This is the Strategic Rationale for the deal, and having a clear understanding of this is critical for the acquisition to be a success.
That strategic decision to acquire is the result of a formal or informal process to review the ability of the company to react to external pressures. These may include new competitors, technological change, industry change and many other sources of pressure.
By understanding the comparative strengths of your business, you can reasonably decide whether to organically grow your business through internal development, or grow inorganically by acquisition:
Having made the decision to grow by acquisition, the Strategic Rationale describes the reasoning behind the deal, for example:
- Geographic market penetration
- Distribution channel extension
- Product extension
As specific targets are identified, it more specifically describes the benefits that are sought from the deal, for example:
- Cross selling opportunities
- Skills transfer and acquisition
- Cost reduction
- Access to new markets / distribution chains
- Economies of scale and scope
These combine to set the overall objectives for the acquisition.
Always remember - the decision to undertake an acquisition is a choice that this is the best way to achieve the objectives of the business. Doing deals is not a strategy in itself.
Let’s consider the phasing and main activities in the acquisition process. We can show you this in two ways. There are the main milestones which mark an acquisition:
These key deal milestones are:
- Deal Approval
- Initial Target Engagement
- Letter of Intent
- Binding Offer
- Deal Signing
- Deal Closing (Day 1)
- Day 100
- Integration Completed
However, to simplify this, we’re going to split things up into two main chunks - Do the Right Deal and Do the Deal Right.
Do the Right Deal
Doing the right deal is all about making sure you are acquiring the right company, at the right price. The right company is one which meets the criteria set out in your strategic rationale, both financial and operational. You may need to evaluate many companies before you find the one that is right for you, funnelling these down to a small number of final prospects. Each company should be evaluated against a number of criteria, such as:
- Financial match
- Cultural match
- Industry metrics
- Perceived risk, e.g. due to reputation, outstanding legal proceedings, etc.
- Likelihood to sell
At this stage only a high level assessment can be performed, though this may be easier with the support of advisors who may have access to additional industry or financial information. Some information is available with minimal effort, such as the basic information on shareholders and financial details at Companies House, trade associations, company websites and of course via Google!
Once the pool of potential targets has been narrowed down to a smaller number, these can be approached to determine their appetite for a deal. These initial discussions, if fruitful, may lead to more detailed Due Diligence and the creation of an acquisition business case including:
- Business Valuation
- Synergy Opportunities - Growth and Cost Savings
- Integration Cost
If the business case stacks up, negotiations can start the with target and a deal may be agreed.
By now you might be starting to think about the amount of time and effort that may be involved in the acquisition process, and you would be right to be worried. This is not something which should be undertaken lightly and without a good plan in place.
However, this phase is arguably the easy bit! The greater challenge comes once you have agreed the acquisition and need to integrate the two businesses.
Do the Deal Right
Doing the deal right starts long before you have any agreement in place. The objective for this phase is to establish a strong integration plan, which sets out all of the activity you will undertake to merge the two businesses.
You can start to develop this plan at a very early stage of the deal. As with everything else, this comes back to the Strategic Rationale for the deal - this sets the overall direction. The deal value drivers which we’ll discuss below will shape the projects and initiatives needed to achieve the benefits.
The information gathered during the Due Diligence phase gives you further information to build your plan. You will have a better understanding of the structure of the acquired business.
From this, you can start to plan the changes which will be needed to your business structure. This will include the organisation and people, locations, IT, suppliers, and many other areas. This is your Target Operating Model, and the changes required will form another major part of your Integration plan.
As well as these integration activities, you will need to start thinking about the governance model for your deal. Key questions which will need to be resolved will include:
- Who will be in charge?
- How will you manage it?
- Who will be responsible for achieving the synergies?
- How will you measure, track and report the benefits?
Why Bother With All this Planning?
Acquisitions are perhaps the most disruptive thing you can do to your business. As such, good planning is critical to maximise the benefits, achieve them quickly, and minimise the risks.
Studies have estimated that between 70% to 90% of acquisitions fail to achieve their goals. Many reasons are suggested - usually in line with the interests of whoever is leading the study!
By taking a structured approach to your acquisition, you have a greater chance of beating the odds and successfully achieving your objectives. One thing is for sure - if you do not know what you are trying to achieve, there’s no way you can succeed.
The Strategic Rationale for the deal sets out your top level objectives. Leading on from this come the Value Drivers for the deal. Value Drivers are the means by which the objectives will be achieved, for example specific Cost Synergies, Growth Synergies, Increased Cash Flow, Product Acquisition, Customer Acquisition, etc.
A good way to think about this is using a Deal-on-a-Page. The deal-on-a-page maps the benefits you are hoping to achieve through from the Strategic Rationale, to Value Drivers, and ultimately to the individual projects and initiatives which will be used to deliver these.
By having this information available, you will be in a better position to make good decisions about the deal, such as addressing the most pressing problems which might derail your benefit plans.
This information is also valuable at the start of the acquisition process. By having a clear view of the value drivers for the deal, you will be better able to establish if the deal is worth doing. For example, if the value drivers will not deliver enough benefit, you may either pay too much for the business, or achieve a lower return than other strategic investment options.
Again, having a clear understanding of what you are trying to achieve is key to delivering the benefits faster.
Each value driver must have a clear business case showing the benefits, costs and resources required, and the risks faced. This information allows prioritisation of the integration activity against the criteria you set.
For example, you may have some quick wins that can be achieved with minimal effort and risk. Other benefits may require significant operating model change such as technology investments or staff recruitment. Prioritisation of these projects will give you the best 'bang for your buck', and the fastest return on your investment.
Perhaps the most significant benefit of good planning is reducing the risks of the acquisition. The high failure rates of a typical acquisition are mentioned above - but what does this mean?
At a simple level, failure may mean not achieving the objectives of the deal. We can think of a successful acquisition as one where 1+1=3, i.e. that the sum of the new business is greater than its parts. A deal where 1+1=2 is not a disaster - just a bad investment. However, a failed deal where 1+1 is less than 2 may cause you major problems.
Good planning of a deal will allow you to avoid some risks, and address others as they arise. Some of the risks you may face are:
- Overestimating the Benefits - It can be easier to make assumptions of benefits which will be achieved by the acquisition. A strong project business case will help define the exact benefits to be attained, and outline the plan for realising them.
- Underestimating the Costs - Synergy projects will have integration costs to achieve the benefits, for example redundancies, IT investments or equipment decommissioning. It is important to clearly establish the costs for all of the integration projects up-front. This integration budget will form a key element of your overall deal business case.
- Impacting the Existing Businesses - Acquisitions can be extremely distracting to the wider business. By ensuring there is a well managed integration programme, there can be clear expectations and communication to the wider business about what is happening, and who is doing what.
In the next article in this series, we’ll dig more deeply into the ‘Do the Right Deal’ phase of the acquisition. We’ll look in more detail about finding and choosing acquisitions targets, as well as working out the value of the deal, and doing the deal itself.