A good question, as history has shown acquisitions can be hard to get right. I was at a seminar in 2007 which focused on the success rates of corporate acquisitions during the 2000’s. This was pre Lehman, in a period of rising prices and time looked back on by many as the good times. It would be natural to expect that in a rising market acquisitions would have been a success, but rather surprisingly, the presenter estimated that approximately 8 out of 10 acquisitions had either created no shareholder value, or worse, and more often than not, destroyed it!
Why? During this period, the economic backdrop was benign and there was a wide availability of cheap debt, surely this should have enabled companies to buy well. What went wrong? Simply put, there were two main reasons why the acquisitions didn’t work; either: 1) The acquirer did not manage to realise the synergies they had priced into their valuation; or 2) They did not integrate the business properly.
I think that this does highlight some simple rules which could apply when considering making an acquisition:
1) Know your target and precisely which bits are of value to you (its people at all levels, products, customers, IP, assets, markets etc);
2) Know how the target will fit with your business (including culturally), have a plan to integrate it and someone responsible for driving integration. Acquisitions are exciting and people want to be involved; but, a busy senior team are often not best placed to push through a post deal integration plan, so work out who should do this, and ensure that they have appropriate cover for their day job;
3) Know your price, how you have reached it; and have a clear view of the level of synergies (if any) that are included in your valuation;
4) Scope your due diligence properly e.g. look to test the critical success factors which will make the acquisition a success or not and challenge key areas of judgement;
5) Know your limits and don’t be afraid to walk away. It will always be better not to make an acquisition than to make a bad one; and
6) Have the finance available to take advantage of opportunities as they arise and to be seen as a deliverable buyer.
If, as suggested, 8 out of 10 acquisitions may fail, should shareholders and management teams bother to take the risk? In my mind…Yes! The reason most acquisitions fail is because basic rules aren’t followed e.g. the business didn’t really know what it was buying. When a business does get it right and successfully executes a clear, well thought through M&A strategy the results can be inspiring!
Acquisitions can not only be a very effective way to grow, but, acquisitions have the potential to be transformational, changing the balance of a market, or a business in its entirety. It is feasible for the right acquisition to enable a business to become more than the sum of its parts; for instance, I’ve worked with businesses which have used acquisition to vertically integrate not just for margin gains but to dominate a position within the supply chain, or used acquisition to become the single dominant player within a market, or, to reposition a business with a disruptive business model into a new and more fruitful market.
We see acquisitions as a potential key route of growth for the businesses that we invest in, and our portfolio both past and present includes some great examples of growing businesses using acquisition to successfully diversify product lines or to add critical mass to a specific area of the business, such as Nexus Vehicle Management or Enotria; or, to strategically move the business in new directions such as SLR Consulting which used a Canadian acquisition as both a cornerstone to enter the North American market and to add further upstream oil and gas expertise.
There are risks in business and acquisitions are no different. Execution is key but the right acquisition should always be a consideration for any growing company and having the finance available to move quickly can play a crucial difference when the opportunity arises. Have you completed an acquisition? Have I missed any key areas that you would recommend other businesses consider?
Contact: Steve Cordiner, ISIS / February 2013
The ideas and opinions contained in this column are the author’s own and do not necessarily reflect the views of ISIS Equity Partners. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any investment.