Making An Acquisition Work

Making An Acquisition Work

July 30th, 2018 // 2:36 pm @

I have discussed in a previous post the need for a strong commercial logic behind any acquisition, but even those with strong logic often fail due to poor implementation. I have undertaken many acquisitions and sales across Europe and North America, and in my experience people underestimate the sheer workload involved in a successful acquisition, but there are some key things to get right.

Firstly to plan the amount of managerial time an acquisition and assimilation will take, this is not something one can do in ones spare time. It needs a dedicated team with the right skill mix and the time to do it right, it is often sensible to bring in outside help in the form of interim managers with experience in such deals. It will soak up more managerial time and bandwidth than you expect.

Once you have your acquisition target, and your team in place you need to do detailed financials based on the strategic logic of your acquisition. Generalities are not sufficient; one needs specific actions you plan to take and the financial benefits you can budget. It is only when this is done can one realistically move forward.

How you price an acquisition and how you pay for it is obviously critical. The price you are prepared to pay needs to come from three directions. The first is what bankers call comparables, essentially what have similar companies sold for; this can be a multiple of profit, or revenue or another matrix. Secondly you should know from your calculation of synergies how much you can afford to pay, and lastly but often overlooked is how motivated is the seller. I have bought companies where the owner was desperate to retire; equally I have pulled out of deals where the owner had ridiculous views on his company’s valuation. From all this you can set your opening bid, and most importantly, the maximum you can pay, your “Walk away price”. Every acquisition however strategically appealing has a price at which it no longer makes sense.

Beyond the right price is how you pay for the acquisition; there are a number of options beyond the obvious cash. I ran an aggressive pan European expansion plan, significantly driven by acquisitions. We had for market reasons very over valued stock, so I was able to use stock to do almost all the acquisition in the knowledge that I was using stock that was over priced.

The other commonly employed technique is to pay based on future sales or profit. Simply put, one encourages your acquisition target to present optimistic revenue and profit growth, not normally hard to make them do, and then offer to pay over the coming years based on these targets being hit. If you price it right, one can still get a good deal, and the reality is such ambitious targets are rarely hit, in which case you get the company cheap. I have never heard of an acquisition using this strategy that has paid out the full amount on targets that were set.

Once a price is agreed you get into implementation, and you need a strict timeline for decisions and actions, it is so easy to allow the process to slip, pushing the synergies further away or even loosing them.

It is impossible to overstate the importance of company culture, every company has one, and some major acquisitions have failed purely on culture. The reality is mergers do not exist only acquisitions, and only one culture can survive, and it is important to decide which one will be dominant early.

From that needs to come as soon as possible the new managerial structure, and from that who will have what responsibilities. It is inevitable some will gain and some will loose, and probably some will leave. If these decisions can be made and communicated early, it allows those with responsibility to start work in their new roles, and avoids confusion and overlap.

Acquisition are unsettling times for all staff, and the more time spent explaining what is happening the better, and the earlier it is done the more effective it will be. One naturally needs to keep some information confidential for at least some time. However to many acquisitions are attempted in secret, assuming the staff will not find out. They will find out and without proactive communication rumours will abound.

Managerial Ego is the cause of many acquisition failures. Firstly some CEO’s like the adoration and attention that acquisitions bring, and secondly they can be drawn into paying too much as walking away when the price is too high is seen as a failure, not a sensible fiscal decision. One rarely hears a CEO announce an acquisition was not going to happen, as they believe the price is too high.

Lastly one must review the process both as you go through it to ensure you are sticking to your plan of actions and financial benefits, and secondly a year latter to see was the acquisition successful in achieving the planned goals and what can be learned from the process.

A sale or acquisition is a time consuming and risky undertaking, and should only be undertaken when the commercial logic is strong.


Category : Blog &Business Strategy

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"I had the honor of working with Mark for 3 years during my tenure at Hcareers. Mark is a truly dedicated and sophisticated executive, bringing the company from an early stage start-up to a leader in the industry in a short period of time, resulting in a very lucrative acquisition. Mark leads by example and his strength, knowledge, and dedication lead his team to growth and incredible success. I would not hesitate to join a company under Mark’s leadership, and would be grateful to have the opportunity to work with him again. September 15, 2009."

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