Mergers & Acquisitions – Some Tips for Success

Mergers and acquisitions are as well known for destroying value as creating it – you only have to think back to the AOL and Time Warner merger, for an extreme example.

This is also backed up by a number of different studies, which indicate that more than half of all mergers and acquisitions fail to meet the objectives they were originally designed to achieve.

Rather than attributing such failure to weakness in the business case for merger, these studies indicate that the most common source of failure can be traced to poorly planned and executed integrations of the transaction itself.

It follows that buyers who invest sufficient time and effort in planning and executing their acquisition strategies are much more likely to buy well and to increase the value of what they have bought. You only have to look at some of the spectacular investment returns that have made by Britain's private equity community in recent months, to see what can be achieved.

The following are some practical points to bear in mind, to help improve your chances of doing the best deal:

Strategy

Know what you want to buy and what you are going to do with it once you have bought it. Remember that strategy should drive the acquisition process, and not the other way around. That means making sure that you have a concrete business case for making the investment and are not doing it just for the sake of scale. Be very clear why the acquisition fits. Does it provide cost synergies or is it access to new products or markets? Why would you be the best owner?

Synergies

Don't overplay cost synergies. It is very tempting to convince yourself that the acquisition is going to result in all sorts of cost savings, particularly if you are looking for reasons to justify paying a higher price. Rarely do all those anticipated cost savings get realised and, in any event, why give away all of those potential savings up front?

Structure

Consider legal structuring issues early on. Generally there are two methods of acquiring a business. One is to buy shares of the company that owns the business and the other is to buy the assets that make up that business. The two are quite different and there may be considerable tax savings and/or opportunities for limiting liability, by choosing the right one.

Also, be prepared to be creative in how the transaction is structured. Some sellers actually don't want to exit completely and some buyers don't want to take the risk of buying 100% outright. In those circumstances, think about an option arrangement. Alternatively, perhaps the parties both have business interests which could be pooled? If so, a joint venture might be a better method for unlocking value, than an outright sale.

Price

Don't over-pay! Never enter into negotiations without knowing your walk away price. Remember that acquisitions are expensive, but ones that fail are more so.

Earn-Outs

Take care when using "earn outs" to fund the acquisition. An earn out is basically an arrangement where at least part of the purchase price is calculated by reference to the future performance of the business being sold. Commonly they are used as an incentive where owner-managed businesses are sold and the managers are to continue to work in the business following the sale, but that doesn't have to be the case.

For a buyer, an earn-out can be an effective means of being able to pay a higher price, without having to raise it all up front, knowing that the increase will not actually be paid unless its earned and will effectively be funded out of the business after sale. For the seller, an earn-out usually provides an opportunity to receive more money than would otherwise be on offer for a fixed price deal.

The difficulty with earn-outs is that they are often a source of potential conflict. The seller will usually be advised to retain some sort of legal right of control or veto over the way the target is run after the sale, so as to protect its ability to make the earn-out succeed. It may also ask for security from the buyer to protect its contingent right to payment, perhaps through a payment into an escrow account or by taking a charge over the buyer's assets. The difficulty with this for the buyer, is that these restrictions can make longer term business integration and planning more difficult. This is particularly likely to be the case if the earn-out is devised in such a way that there is an incentive on the seller to implement measures which maximise short term profit. More often than not, this will conflict with the buyer's longer term interests.

So, be wary of earn outs. They can be a great idea in principle for the buyer and seller, but the devil is in the detail. Make sure you devise an arrangement that is workable, having regard to both sides' interests going forward.

Due Diligence

Carry out a proper due diligence exercise. If you do not ask, you will not find out. Do not just expect to be told about anything that is wrong with the target. Also, be prepared to act if you do not like what you find out and do not hesitate to pull out of a transaction if you are not satisfied. When the pressure is on to conclude a transaction, deciding to withdraw because of something discovered from your due diligence investigation can sometimes be a difficult call. Do not be scared to make it, if the evidence indicates that you should.

Teamwork

Pick the right team from within and outside your organisation to make the acquisition decision, execute the transaction and manage it afterwards. Do not underestimate the amount of time and effort that will be involved. An acquisition can be very demanding on the time of management and other people in your organisation. Make allowance for this. Also, choose your professional advisers wisely and make efficient use of their services. As the oil fire-fighter, Red Adaire, once said, "if you think it's expensive hiring a professional to do the job, wait until you hire an amateur!".

Timetable

Draw up a realistic timetable and try and stick to it. Don't let the deal process drift, and make sure you also have a timetable for implementing post-deal integration issues. Your time-table should make allowance for the obtaining of any necessary regulatory clearances and third party consents.