Over the last several years, acquisition activity has been strong among corporate buyers. Many companies are looking to grow beyond their traditional organic growth rates and are turning to acquisitions to meet these goals. Synergies can be the competitive advantage for a “strategic” buyer and the story that is used to explain the strategic objectives of the transaction to the board, shareholders or market. Since synergies can come in many different forms, it is important to understand what exactly constitutes synergies. Synergies are defined as the present value of the net, additional cash flow that is generated by the combination of two companies that could not have been generated by either company on its own. The term “net” is important because companies need to factor in the incremental costs associated with achieving their identified synergies.
Strategic buyers should have a plan for identifying and capturing synergies prior to negotiating with the sellers. It is very common for strategic buyers to identify revenue and cost synergies and incorporate them into their valuations; however, capturing and implementing the synergies can provide a new list of challenges. Acquirers need to understand the potential magnitude and timing of the synergies, and their impact on cash flow, in order to understand the value that the company represents to them. More often, the biggest contributor to an unsuccessful acquisition is the acquirer overlooking the implementation side of a transaction and failure to capture the synergies they originally identified.
One of the decisions that an acquisitive company needs to make is choosing the size of the internal M&A team. Many companies opt for the larger teams who can fulfill all the possible requirements of deal planning, execution and integration. However, we have found that opting for a smaller, experienced team that pulls in resources on a project basis can be more advantageous. These teams take a project-driven approach and consist of a handful of core team members. In many cases, these smaller teams are better than the larger teams insofar as their project approach is better suited for inconsistent or unpredictable deal flow. However, the companies that use these smaller M&A teams need to have a good M&A playbook in place for transaction review, analysis, valuation, due-diligence and integration. Along with these requirements, there are particular challenges that arise in several essential areas.
Like any other business process, acquisitions do not have a set blueprint that outlines how the acquisition will be successful. Each deal is unique and because of this, the acquirers with the most successful deals tend to have the most specific and clear strategies. Not surprisingly, acquirers who use vague strategic rationales tend to have less success.
While M&A activity continues to expand in the current environment, we find that many companies are becoming increasingly frustrated in their inability to close strategic acquisitions. The reasons for this are varied, but a common theme is the continuing excess of buyers versus sellers and capital versus available transactions. Most of the companies that are actively “for sale”, are typically represented by an investment banker who is motivated and incented to deliver the highest price for their selling client. While many companies can justify a higher price with the synergies that may accrue to the buyer in a strategic acquisition, the time pressure and limited interaction with management that are typical in a competitive sale process, often sour corporate buyers from actively participating in these types of auctions.
There are a myriad articles out there about choosing a sell-side M&A attorney, but very few that address the other side of the deal. Our middle-market acquisition clients and prospective clients run the gamut when it comes to M&A experience. For those that may be newer to M&A, I propose 5 tips to help you choose M&A counsel and ramp your acquisition program.
If you were to ask a corporate executive, “did your recent acquisition create or destroy shareholder value,” you may be surprised at their response. Recently, KPMG commissioned a global study which indicated that 69% of surveyed corporate buyers did not enhance shareholder value from acquisitions made over a 2 ½ year period. My experiences over the years representing both buyers and sellers give me considerable insight into why some acquirers are able to enhance shareholder value, while others fail. In this article, I will focus on some of the key factors that may hurt the outcome of your transactions; however, the good news is that all of these factors can be overcome with proper planning and organization. Continue reading
If you’re relatively new to acquisitions, you either have yet to discover the challenges you will face while managing your integration, or you’ve already discovered that integration can be downright difficult.
When preparing for an integration, one of the first questions you may ask yourself is, “who”?
- Who inside your company has plenty of downtime in their current role, or can take a hiatus from their job for 2 to 4 months or perhaps even longer to manage your integration project?
- Who do you trust to integrate the current acquisition, and to establish your integration playbook for the future, assuming you don’t want to reinvent the wheel every time you acquire and integrate a company?
- Who has managed complex projects, and is familiar with project management best practices?
- Who is senior enough to require performance of the integration team, while maintaining frequent and fluid communication with upper management?
- Who can manage the project objectively, without focusing too much on their own functional background?
Until recently, I viewed outsourced financial due diligence as a commodity type of service. In my prior role as a Corporate Development Director, budget was probably my biggest concern when it came to hiring an accounting firm to perform financial diligence. Firm reputation and experience are table steaks. And there’s so much inter-firm movement out there that you can find great resources with big 4 experience, but billed at smaller firm rates.
Then I was talking with a long-time acquaintance, Chris Dalton of BKD (formerly of Ernst & Young, and Grant Thornton), and he mentioned a relatively new development, something he calls, “diligence through data analytics.”
If you are anything like most of my buy-side clients, you typically handle IP diligence internally. This is partially because the middle market companies I work with often acquire businesses with minimal patented IP (though there are always other types of IP in a deal), but it is also due to the potentially high cost of outsourced legal diligence.
As buy-side advisors we often help navigate our corporate clients through the due diligence process. This process typically uncovers issues that may impact the offer that our client had originally proposed in their letter of intent. Rarely have I experienced an issue that would be considered a “deal killer”, however, most material issues will require some delicate negotiations as they will impact the seller in a negative way. If you have a motivated buyer and seller, these issues are commonly addressed through a change in the price or terms of the acquisition or managed legally through the purchase agreement. Two of the most common issues that arise from due diligence include quality of earnings and environmental liabilities.