WHAT TO ASK BEFORE BEGINNING THE ACQUISITION PROCESS
Mergers and acquisitions, when well planned and executed, can provide companies with substantial growth opportunities. But they also carry significant risk including a high failure rate due to sudden shifts in the business environment, unrealized synergies and corporate culture clashes. (For example, one insider described the 1995 merger between pharmaceutical giants Upjohn and Pharmacia as two different species meeting each other.)
How then can your company avoid making mistakes that will lead to post-transaction strife and doom your deal to failure? You can head off many mistakes early in the process by ensuring youre making an acquisition for the right reasons and walking into the deal with your eyes wide open.
Questions to ask
Quantitative analysis of your potential target during the due diligence stage is a crucial component of the acquisition process. But you also need to examine qualitative factors including corporate culture, human resources policies, manufacturing processes and sales, and marketing practices. Vigorously questioning your own motives and objectives for making the acquisition will help you better identify risks and determine the ultimate outcome of the deal.
Before you make an acquisition, ask the following questions:
What does our company hope to achieve through the acquisition? Acquisition failure rates are high, so you need to be careful to avoid the empire building syndrome or the belief that bigger is always better. In fact, merged businesses can be more difficult to manage and make profitable.
Ultimately you should be able to clearly articulate the anticipated benefits of the deal. For example, will it:
- Expand your markets,
- Add to your product line or customer base,
- Reduce expenses through economies of scale, or
- Eliminate competition?
Once youve pinpointed the anticipated advantages, make sure you can measure their revenue- enhancing or expense-cutting effects.
Is now the right time to make an acquisition? Acquisitions can be extremely time-consuming for senior management. So the amount of time and energy key executives have to spend on the deal given other company initiatives should be considered.
Other timing issues to think about include pending deregulation and technological changes that may affect the target companys operations. Rising interest rates, which increase the cost of financing your deal through debt, might also give you pause before proceeding.
Are there alternatives to making an acquisition that will provide us with similar benefits? If you havent already, compare the costs including debt, equity dilution and employee time and the benefits of an acquisition with the costs and benefits of internal growth initiatives. These might include more aggressive marketing campaigns or the introduction of new products.
Do we have an acquisition plan? What is it? An acquisition involves many steps from conception to completion. Targets must be identified, due diligence performed, financing found and stakeholders communicated with all within a limited time frame.
Make sure your company is anticipating every step of the process by meeting with advisors. They can help you formalize a calendar of strategic events and delegate individual responsibility for the completion of each task on the list.
What do we want to pay? You should be aware of a target companys fair market value as well as its synergistic value which can include economies of scale or the benefits associated with eliminating major competition.
Keep in mind, the greater the amount you pay over the fair market value, the greater your acquisition risk. As many exorbitantly priced and ultimately unsuccessful deals for telecommunications and dot-com companies in the late 1990s show, its important not to overestimate synergistic benefits.
How will the deal be financed and structured? Its never too early to start thinking about how you might finance your deal. Debt financing, for example, might affect your capital structure and leave you with too little future borrowing capacity. Or should you pay using cash, stock or a mix of both?
Examining your companys balance sheet and amount of collateral can help you determine the best financing and deal structure. If your company is mature, with low growth rates and stable earnings, debt may be the preferred method. A young, fast-growing business, on the other hand, may require an equity investment.
Are we prepared to effectively implement the deal? The acquisition transaction is only the beginning. In fact, acquisitions usually fail at the implementation stage, which is why you need to draw up a formal integration plan that is as detailed as your acquisition plan.
Also consider other scenarios that might affect the deal. For example, what would happen if sales or operating margins unexpectedly decreased by 5%? What if receivables remittances slowed down? While its impossible to anticipate every negative development, you should maintain sufficient operating and financial flexibility to withstand bumps in the road.
What is our acquisition strategy? The acquisition strategy should define, or be consistent with, your long-term plans and objectives and your organizations culture. You need to be able to communicate your vision and rationale for the deal broadly and succinctly to everyone from members of the due diligence team to employees of the target company. This will help ensure they will work to make the acquisition succeed.
An acquisition can be a turbocharged method of increasing your companys size and profitability. Like a chemical accelerant, however, an acquisition must be handled with care. Without planning and foresight which includes asking the right questions early in the process your acquisition plan can easily go up in smoke.