Strategy: Why Does The Deal Make Sense?

Strategy is the basis for any acquisition or sale. If you can't explain in one sentence to a layperson why you are doing the deal, then it shouldn't be done. There are many strategic reasons to buy or sell a company, but the best ones are:

• Complementary product lines
• Innovative technical skills
• New markets and customers
• Leveraging existing infrastructure or vertical integration

Just because the company is for sale and you can afford it are not good enough reasons to do a deal.

Reasons to consider a sale include:

• Looking to exit the industry (possibly from retirement or similar)
• Strategic Sale to introduce capital into your business funding expansion
• To fund rapid growth establishing a dominant position in your sector
• To capitalise on your business value whilst market conditions are favourable
• Forced Sale (for various reasons)
• Merger with a complementary business reducing overheads and increasing profit

 

Motives: Understanding The Party On The Other Side Of The Table

As a buyer, never assume you know the reason a company is being sold. As a seller never assume you know why the purchaser is looking to buy. The key here is for both parties to ask difficult questions, for example, ask why the company is being sold and be sceptical looking for fundamental facts to back qualify this. If there is so much opportunity, why are they buying you or why are they selling? What do they know about the business that they are not telling potential buyers, what do they think your proposition offers that others do not? A buyer can work with a lot of motives for selling, as can a seller, but understanding these reasons upfront will help you structure the right deal for all Parties.

The buyer should also examine its own motives for wanting to acquire the company. Is this a good asset for the company (i.e. known brand name, leading edge product, strong customer base) that would give the buyer a faster time-to-market than building the business internally? Or is this just about getting bigger?

The seller should also identify it s own motives for selling and ensure that as much as possible these key differentiators are met before any deal is finalised.

Price: 1. How To Minimize Buyer's Remorse

A low price does not always equate to a good deal, but the higher the price, the less cushion for unexpected problems. Buyers are often forced to pay more than they would like in a competitive, strategic deal. In a competitive situation the buyer needs to decide how much it is willing to pay and not exceed that level, even if it means losing the company. Every CEO will tell you that some of his best deals are the ones he never did; meaning an experienced CEO will walk away before being extremely uncomfortable with the price. Does this mean every buyer gets the price it would like to pay? No. However, in any acquisition there is a pricing range, based on different assumptions of the future performance of the acquisition. The buyer has to decide what price to offer in that range, or how risk will be divided between the buyer's and seller's shareholders.
Another important decision is the transaction currency. Unless its stock is severely undervalued, a buyer should prefer a stock transaction. This method will ensure the management teams and employees of both the buyer and seller will share the same motivation: to increase the stock price of the combined entity.

Price: 1. How To Maximise Your Value

TBA

Will The Companies "Fit" Together?

Fit is an intangible, but critical, factor in the success of an acquisition. Fit is another way of saying "people issues", but it will translate into financial performance (or underperformance), so the buyer needs to consider the issue carefully. For example:

• Can the new executive team speak with one voice?
• Will employees of either the buyer or the seller bad-mouth the deal?
• Will the reputation of either company alienate customers?

No fit is perfect, but the buyer needs to assess these cultural issues in advance, identify the worst-case scenario and double it. The buyer needs to ask if it can live with losing some good people and potentially some customers. If the buyer can't live with the worst-case scenario, it should reconsider the transaction.

Integration Will Make Or Break The Deal

Successful integration of the two companies will have an enormous impact on the success of the combined company. Planning for integration should start as soon as an acquisition is being considered since integration costs will impact the buyer's price negotiations. Tension is created by the unknown, so announce the integration plan as soon as possible once the deal is public. Any management team that has done a deal agrees that when changes need to be made, the key is to cut fast, cut deep and do it all at once. Going back for a second or third round of layoffs is devastating on morale.

Someone Needs To Own The Business

After the deal is completed, a senior manager who has advised the deal team during negotiations needs to "own" the new entity. This manager needs to be a highly respected individual who will champion the new entity and not simply view the unit as another project to be delegated. The best way to ensure a motivated individual is to tie his compensation to specific goals for the new business. Even if the acquired management team is staying, the buyer cannot assume the new business will be easily melded into a larger organization. The best people in the company, including the CEO, need to focus on the issues, and one person needs to be held specifically accountable.

In The End, Is It Worth The Effort?

Whether an acquisition is worth the effort depends entirely on what is being bought. There are unique acquisition opportunities that can dramatically increase a buyer's position in its market. With careful planning, analysis, and hard work by the senior management team, acquisitions can be an excellent way to achieve a company's strategic goals.