How many acquisitions can you think of where both parties, let alone the marketplace, are still saying a year after the event: “It was a great deal and we have no regrets”?
A lot has been written about what constitutes a “good price” in relation to acquisitions. Much less has been said about what drives individuals and companies to buy intermediaries, why firms choose to sell and how much real thought and planning goes into the process – in particular, the consequences and possible alternative outcomes.
The obvious answer is money. Acquirers, in particular consolidators, believe they can enhance the value of a firm if they can alter its propositions and processes having acquired additional clients.
Sellers want to realise the value of their work in building their businesses over a number of years. Some will continue to work in the business post acquisition; others will retire to enjoy the proceeds.
Taking acquirers first, have they drafted acquisition criteria and prepared financial models? If so, are they strictly applied, with due diligence informing the final decision to acquire? Having bought a firm, have they the resources to integrate the business effectively?
While acquisitions often start with good intentions, the wish to do a deal for a variety of reasons – perhaps the need to show the market that they can – sometimes leads to a ‘bending’ of the acquisition criteria, whether financial or otherwise.
Another scenario is that having completed the due diligence, the chemistry between the companies is so strong that the acquirer will turn a blind eye to some of the results and complete the sale based on watered-down criteria – and without having adjusted the price paid.
Sellers are on some occasions little different. Having taken the decision to sell, they will, when a viable purchaser has come along, stick with it – hoping for the best outcome even when the initial price is adjusted. Sometimes this is because there is financial imperative to sell, perhaps a divorce that needs to be financed, but on other occasions it is because of a lack of proper preparation or research.
So, what should each party do to improve the chances of a successful outcome? In two words: prepare and resource.
The acquirer is more likely to succeed if it has prepared a firm set of acquisition criteria. Just because there is an opportunity to buy another firm, perhaps because the respective shareholders know each other, doesn’t make it a good deal. Having access to people who can help them make an objective decision is vital – and in particular, who command the respect to be able to advise when the time has come to say no, even after money has been spent on due diligence.
It is important to have the resources in place not only to complete a deal but also to integrate the acquired business. The money spent will be potentially wasted if the deal, once made, cannot be executed in terms of quickly realising efficiencies and synergies.
For their part, firms contemplating a sale need to draw up a set of criteria it must meet (not just financially, but also in terms of the acquirer); ensure they have prepared a comprehensive ‘bible’ of due diligence documentation; and hire an adviser/advisory firm to provide a source of reference. The adviser may also be used to negotiate.
Roderic Rennison is director of The Ideas Lab