Acquisitions – When to spend?
Marcus Mackay – Strategic Planning Director

When it comes to buying a company, when is it best to spend your money to ensure success; before, during or after the deal?

The answer can be found by considering the 3 key reasons why acquisitions fail;

1. Overpayment
2. Weak Strategic Fit
3. Poor Integration Planning and Execution

Looking at the first risk, protecting yourself from Overpayment is rarely missed.  This is why so much money is spent on expert accountants and lawyers to undertake rigorous due diligence, something which is often exhausting for all involved.  We’re all conditioned to expect to spend a lot of money “during the deal”. In fact, such is the enthusiasm for the highly measurable activity of due-diligence, that often long term relationships that will be vital for ongoing success are severely tested, if not damaged during the process.  In some ways this can be viewed as spending a lot of money to very precisely calculate the right cost price for a business, as opposed to looking more widely at the long-term value of the business and the critical actions that will be required to ensure that value is realised.  Ultimately if the vendor feels like they were overly squeezed during the sale then the goodwill, critical to long term success, can be lost.  Here it is worth remembering that the best deals really do have to feel win-win.

The second risk, Weak Strategic Fit, is even more interesting to examine.  It is useful to consider strategic fit from a quantitative and qualitative perspective.

Examining the quantitative aspects of strategic fit can be relatively straight forward, essentially this is providing further clarity as to what is being bought, this may include assessing attributes such as:

• Capabilities – Operational, production and specialist skills. What additional value will these bring? To what extent can synergies be realised?
• Reach – Access to new markets, strategic relationships, general economies of scale.
• IP – Complementary products that may complete or strengthen a group offer, along with value adding intellectual property that may differentiate propositions and extend competitive advantage.

Such analysis can provide much in the way of sound evidence in support an acquisition business case.  Let’s face it, such good news makes for great reading; lots of the reassuring, quantifiable, tangible measures and underpinned forecasts boards like to see.

Now it gets more difficult. Boards tend not to like what they can’t see or measure, yet the “soft”, qualitative attributes of a business are often the critical part of a company’s formula for success.  Factors such as the company’s brand, its reputation, the energy of key individuals and most importantly of all company culture come into play.  When it comes to strategic fit, a company’s culture, in effect how it operates and succeeds can be central to whether acquisitions will succeed or fail.

So how do you address the cultural challenge?  Firstly, by recognising that it exists and accepting it really matters.  It is important to examine the cultural fit of both organisations.  If there are fundamental cultural or ideological mismatches, the companies will most likely fail to co-operate, never mind collaborate, in such situations any acquisition is destined to fail. In such situations it is better to face up to this as part of due-diligence and walk away.

Assuming that the answer to the first cultural “go / no go” question is “yes” the cultures are broadly compatible, then the next stage is to work out how cultural issues can be best managed.  This is where due-diligence overlaps with integration planning. In fact, due diligence is only complete when it includes a credible, costed and worked-through integration plan.

The good news is that cultural considerations can be planned for in a systematic way.  Critically, potential risks and issues can be identified and mitigation measures put in place.  A good cultural integration plan will be sensitive to the fact that different functions may have their own sub-cultures, for example sale teams may be dynamic and open to change, whereas design and production teams may be more considered by nature and may require a correspondingly more considered integration plan.  Not only will a good integration plan be phased over time, it may operate at different speeds to recognise the cultural differences and acceptable speed of change within different teams.

There are many reasons why weak strategic fit occurs, but protecting yourself from this risk is all about doing your homework and in effect spending money up front to truly understand all aspects of the acquisition target company and, simultaneously, put in place the foundations for the integration plan.

Ultimately, the biggest acquisition risk by far is poor integration planning and execution.  Regardless of whether the sale price was good, without a focussed long term push to make the deal work, value won’t be realised. As we have already covered, successful integration planning is best undertaken during due diligence, managed correctly, it will set the stage for successful working relationships later on. This is why spending time and money planning for success and making sure resources are available to execute the integration plan is most important of all, in effect, spending money after the deal.

Integration planning is a specialist, far-reaching and long term exercise. The list of what can go wrong is almost infinite, there are very many case studies that reveal the tales of woe arising from acquisitions that go off the rails.  So let’s look at getting integration planning to get it right.

At Mercury Stone we have developed an approach, borne from business planning that helps develop effective integration plans, to ensure that strategic objectives of major joint ventures and acquisitions are realised.  This systematic approach to ensure acquisitions deliver value creates integration plans that are centred on three key areas:

 

1. Vision – What is the vision for the integrated business?

• How will the new enterprise create value for its customers?
• What incremental market presence can be created?
• How will the new enterprise achieve its objectives? What new capabilities, products, markets or other value-added offerings can be provided?

 

2. The Architecture – How will the organisation work?

• What parts of the business should be integrated (if at all) ?
• What aspects to the target’s operating model should be applied to the parent?
• At what level of the business should change occur?
• At what pace should the integration proceed?
• What capabilities should be migrated, shared, and built upon?
• What operational and overhead savings can be made?

 

3. The Leadership – Who will make the new business work?

• Who leads the acquisition / alliance integration process (overall and day to day)?
• How is change created and managed?
• What are the roles of CEO and key executives?
• What is the non-executive structure / wider governance?
• How is participation between companies balanced?
• What level of resources should be dedicated overall to the process?
• What are the cultural differences and how should they be managed?

Understanding what the acquired business is for and how it fits within the wider organisation are critical.  This approach provides the clarity of vision, architecture and leadership all of which are central to an effective integration programme and getting everyone on board.

With complex companies and lots of people, difficult issues are inevitable, but the application of a structured, fair and rigorous approach to integration will ensure that problems are identified early and are properly worked through.  Naturally the vision, architecture and leadership questions will lead to the development of many detailed plans, from what will happen on day one, to the realisation of one hundred day targets and two year objectives.  Critically, effective integration plans will recognise and address cultural issues in a systematic and appropriate way.

Finally, spending money “after the deal” is not just about spending money on the acquisition itself, but also internally within the parent organisation making sure the resources are in place to ensure the acquisition can be integrated effectively without neglecting the core business and the bottom line.

Finishing on a dark note, it is worth taking a reality check and considering why acquisitions need to be taken so seriously.  While companies spend circa $2 trillion a year on acquisitions, a Harvard study of failure rates indicated that they may be greater than 70%.  Here it is worth noting that companies undertaking acquisitions can be split broadly into two groups; those who undertake acquisitions as a one off, sometimes opportunistically, and those who use acquisitions as a strategic tool to accelerate their growth.  The former group tend to have the worse outcomes when it comes to acquisitions as they lack the honed systems and experienced team of the “expert buyer” companies that undertake regular acquisitions successfully as part of their day to day operations.

 

Marcus Mackay

Strategic Planning Director
Mercury Stone Ltd