Mergers and Acquisitions can be an expensive business. The opportunity to scale-up quickly brings with it a large up-front cost, which may equal or exceed the cost of growing organically. However, by planning properly, it is possible to minimise the Total Deal Cost and maximise your return on investment.
Your Total Deal Cost takes account of all the negatives which must be overcome before you can make a positive return on investment, such as:
- Acquisition base value
- Price premium over base value, i.e. goodwill
- Cost to achieve, e.g. pre-deal processes and integration costs
- Financing costs
- Unplanned costs - Risks and Issues
They key to minimising your Total Deal Cost is to ensure a structured end-to-end approach to your acquisitions, and making sure you do only the right deals, delivered the right way.
Not all elements of the Total Deal Cost are under your absolute control. For example, a competitive acquisition may mean that you pay a higher premium than in an uncontested deal. However, structured planning can help you minimise other deal costs, even those dependent on other parties.
1) Lowering cost of external financing with clear Value Drivers
It’s likely that your deal will be partially financed externally. You may be able to bear some of the cost through cash flow, but the remainder of the financing will come through external sources. These may include:
- Banks or other lenders
- External investors, i.e. equity partners
- Seller financing, i.e. deferred payments and earn-out agreements
In each of these cases, it’s feasible to reduce the cost of capital by being explicit about the Value Drivers for the deal.
What are Value Drivers? These are the sources of value for your deal - the opportunities which will result in an organisational value greater than the sum of its parts. They will drive accelerated growth or cost savings (synergies) in comparison to the existing plans of the acquired business.
Each Value Driver should have a clear business case and plan stating the costs to achieve, benefits, timescales, dependencies and risks. This detail feeds into the pricing case for the deal, determining what you will be willing to pay for the acquisition, and establishing your expected ROI and payback period.
External financiers will consider two factors when deciding whether to fund your deal - risk and returns. Your Value Driver business cases will allow you to negotiate from a stronger position with your sources of external financing. In each case:
- Bank or other lenders will be willing to fund at a lower rate due to lower perceived risk. The covenants required may be less restrictive due to clearly demonstrated control.
- External investors may be willing to accept a lower preferred or variable return prior to the return of their capital, and a lower level of carry thereafter.
- Sellers who agree to partial financing the deal may agree to a lower rate of return against deferred payments if they can be shown a faster exit than expected.
Ultimately, you should never go into a deal without clearly understanding the sources of value. These lower costs of financing should be an additional benefit, over and above your planned return.
2) Doing the right deal at the right price
The early phases of the M&A process involve sourcing and assessing acquisition opportunities. When acquisitions are undertaken opportunistically, a large part of this process may be missed out, but this can result in cost impact later in the deal.
It can be tempting to progress opportunistic deals quickly. However, it is still critical to ensure that you are doing the right deal for the right reasons, and that you understand all the implications of doing that deal.
Whether you are considering one deal or one-hundred, each should be screened and assessed against your strategic criteria. These criteria may include considerations such as affordability, cultural match, willingness to sell and the opportunity for value creation.
Having a robust screening and assessment process allows you to filter out inappropriate deals quickly, before too much time, effort and cost has been incurred. The incremental cost per deal will be small, but a few day’s effort up-front will avoid months of pain and significant cost later if these deals are progressed. It’s better to do no deal at all than the wrong deal.
For those deals which pass the screening and assessment phases, robust Due Diligence should be carried out. This will identify opportunities for Value Drivers as described above, as well as risks and issues which may derail the deal or cause problems during integration.
Establishing these Pre-deal processes as part of your strategic business development will result in an ongoing cost to the business. However, this ongoing cost will be minimal in comparison to the potentially catastrophic consequences of doing the wrong deal at the wrong price.
3) Reducing impact and probability of risks
Selecting the right deal and identifying Value Drivers mean nothing if the value cannot be delivered. This is the focus of the Integration phase of the deal.
Like any project delivering business change, managing the portfolio of risks is key to the success of the deal. As such, to minimise the Total Deal Cost, it is critical that these risks are known and mitigated. Structured programme management of your Integration will ensure that you minimise the impact of risks and issues.
It is particularly critical to ensure that those risks identified in Due Diligence are passed through into integration. All too often, these risks are not transitioned between phases, and the opportunity to mitigate those costs and impacts is lost.
By using an integrated system to manage the deal process, the probability of these risks occuring and their financial impact can be tracked and actively minimised throughout the deal.
Of course, the biggest cost in any deal is the acquisition itself. However, the Total Deal Cost is proportional to the the deal value - the larger your deal, the greater the ancillary factors which make this up.
Taking a structured planning approach to your deals allows you to actively minimise your Total Deal Cost. By minimising this cost, it is much more likely that you can deliver a positive return on investment for your acquisitions.