What can be done to improve your chances of acquisition success?
Top tips for company acquisition success including 10 key points for consideration.
Search the internet for “acquisitions” and you will find a wealth of information on the subject. It is a hot topic with advice from all of the investment banks, strategy houses, consultants and the like. You will find the reasons they are undertaken and the reasons they fail. You will find it is generally accepted that there is a high chance of failure. Why then do companies enter into this world where in all probability the end results will not be as envisaged at the outset and what can be done to maximise your chances of success?
I have been working within the IT SME market for the last 25 years and have been actively involved in 6 acquisitions both from a purchaser’s and seller’s perspective. My experience suggests that this market is poorly advised and prepared in how to undertake an acquisition and what is involved. All too often SMEs will not have a corporate finance department who have done multiple transactions before. The task will be left to one or two of the key Executives who may not have undertaken this type of project before and therefore are inadequately prepared for what is likely to be a significant investment for the business. The following is a personal view on some of the tips to consider so that you are not part of the failure statistic.
Acquisitions are undertaken for any number of reasons but generally to:
- Increase capabilities, whether people, resources, geography, products etc
- Build or maintaining competitor advantage whether this is defensive or offensive to protect a market position
- Diversify from existing market to allow a broader set of products/resources to sell to clients
- Replace or strengthen the leadership team which might come about through smaller tactical acquisitions or more strategic as key personnel look at succession planning
- Cut costs through looking at synergies between companies and how to reduce overlaps and leverage overheads
- Survive just to keep the company alive acquisition is potentially a solution
Assuming you have identified a strategic need for a transaction and a suitable target the steps you take next are critical in ensuring that you have the best possible chance of making the acquisition a success.
My experience suggests that getting a complete understanding of the data at the outset is critical. Think of an iceberg most of it is hidden so too with the key data you need to get you hands on. Whether this is the corporate, statutory, financial, market, product, customer, supply chain, HR, IT, etc it is key that you are able to obtain relevant reliable information and then analyse it. The due diligence process will help you to assimilate the raw information but do you have it all and have you analysed it appropriately? Do you understand how it impacts your current corporate environment as well as the target’s? In effect are you making key decisions based on insight from well grounded factual information? Never has “Caveat Emptor” been more important than before the acquisition.
However, this is just the beginning, as most acquisitions fail after the deal is completed and attention to post acquisition data is critical. How do you get it, analyse it and then act on it? Are things on plan? What adjustments should be made? Who is going to do them?
Whilst most of what I cover seems obvious and just common sense it is important to ensure you consider each part carefully so you don’t end up making a expensive or potentially catastrophic mistake.
Aspects to consider in detail are:
- Assembling a Team – Make sure you pull together the right mix of skills and people with the relevant time, tools and talent to undertake and drive through the project. This team is often called the Implementation Management Office or IMO and as a minimum will need to have financial and legal involvement but what about marketing, sales, operations, IT, HR etc. All will need to be involved in some capacity and it is important the Project Leader communicates regularly with all of the interested parties. Remember the deal team is just part of what needs to be considered. More importantly the implementation team will be the ones that either make a success of the transaction or consign it to being a failure statistic.
- Planning – Make sure you not only have a robust plan but one that you are not afraid to go back to and change as circumstances alter. Remember that having a plan means that you have thought about the various activities required. It gives you a head start for when things do not go as expected and it is absolutely certain you will not plan for everything. The more time you spend on thinking through the activities the less likely you are to be surprised. One way of stimulating your thoughts here is to brain storm everything that you think could go wrong and then plan around it. Most acquisitions fail during the implementation phase so give real thought to the 100 day plan and manage a detailed Risk Register. Consider what Key Performance Indicators (KPIs) you are going to report on? How and from where are you going to get the data to analyse them? Plan these in advance and set them as objectives. Reinforce and report on them regularly. Let people know how you are performing.
- Undertaking Due Diligence – Checking what you are buying is critical and is often outsourced to accountants and lawyers to undertake. However, understanding the numbers, contracts and documented processes is only part of what needs to be done. Equally if not more importantly is getting to grips with the market, clients, suppliers, staff, management, premises, facilities and infrastructure. Make sure you really understand how the business operates ie what makes it tick behind the numbers and legals. Analyse the data and ask questions where there appear to be anomalies. And don’t forget the culture of the business. What really makes the business work? Do you know who the key staff are and how they operate? Where is the real power in the company? What behaviours are acceptable/unacceptable? Understand the unwritten rules. How do they match those of your own business? What are the staff benefits/remuneration policies? Are you going to align these to your own business? Remember that the seller is likely to be dressing up the business in the most favourable light – make sure you dig below this and understand the truth. Once you have signed on the dotted line it will be your problem not theirs!
- Do not overpay – This can be easier said than done as the advisers may well be on contingent fees where there is a significant incentive for higher prices. Also be careful about overcomplicating the payment mechanisms – deferred payments etc. may well seem sensible to protect the acquirer but they are likely to have unintended consequences that could be significantly more expensive to unravel.
- Organizational Design –Organisational design is not just an org chart. It is much much more. Who does what, what are their roles, who is accountable for what, what skills and competencies do they have? In other words you need to complete a baseline audit of the business so you know. One means of doing this is to complete an Individual Activity Analysis (IAA) to understand exactly what people do and how they spend their time. This will help identify overlaps, synergies and opportunities for you to drive enhanced value. Looking forward what is the right size for the new integrated business and make sure you spend time on this during planning.
- Do not make change for changes sake – Remember you are buying a business for a reason. It has something that you want – make sure you don’t destroy that very thing by making unnecessary changes. It can be something as simple as the expenses policy that tips the balance and changes the profile of what you have acquired.
- Question everything tirelessly – At every stage ask questions. Do we need to integrate the businesses/finance/HR systems? They have probably been working fine in the past so why change them now? Perhaps this can be done at a later stage. Do we need to have a joined up finance/HR team? Should the businesses continue to operate independently?
- Focus on the top line – Look at growing the revenues of the combined entities. Focus on your target clients and keep them informed after all they are the ones buying the products or services and you want this to continue. A 1% increase in turnover can be significantly more valuable than a 10% cut in costs for example. If you are looking to cut costs are you sure they are the right ones or have you killed the golden goose? Perhaps look to put in some of benefits tracking process so you understand the progress you are making and whether you have achieved what you set out to achieve.
- Communication – Communication within the IMO and with all parties involved is critical. It needs to be clear, succinct, regular and well managed. Action plans must be recorded, assigned, communicated effectively and managed. It is essential, therefore, to have good communicators who consistently and regularly talk to all staff about what is going on even if there is little to say. Stopping the rumour mill before it begins is much easier than changing its course or stopping it once it has started. I encourage you to read “Employee Communication during an Organisation Design Process” which gives some interesting perspectives.
- Remember the Core business – Above all remember that your Core business must continue to function and deliver. Do not neglect it. Communicate to this business as much as you communicate to the target business.
Orgvue has a unique combination of skills and technology that can help you succeed. The Business Intelligence teams have in depth experience in data analytics, whilst our consultants have worked extensively on post merger integrations and how you can drive value from these activities. Our amazing product, Orgvue, will help you to understand the people dimension so we can support you along every step of the way.
In summary there are many good reasons to undertake acquisitions but they can be undone by inadequate planning and by focusing on the wrong issues. Don’t’ be caught up in the excitement of the deal and live to regret your decision. Be sure that you don’t become one of the statistics and prepare well and be prepared to say no, even at the last stage, if it does not feel right.