Target practice maximising the value of an acquisition

With merger and acquisition activity at near-decade low levels, there is an opportunity for businesses to buck the trend by adopting an acquisitive growth strategy.

Businesses willing to change their mindset from rationalisation to acquisition could, in the current market, gain a competitive edge by taking advantage of low market prices and a lack of competitors in the buyer’s market.

Few businesses succeed, however, when pursuing growth for growth’s sake. An effective acquisition should be tied to the business’ strategic objectives.

When assessing an acquisition target, it should increase the value of the business whether directly in the case of increased earnings or indirectly in the case of achieving economies of scale.

Some of the more common characteristics sought when selecting a potential acquisition target are discussed below.

 

Financial performance Targets may be profitable or unprofitable but in each case the acquirer must be confident that the acquisition will add value post-completion.
Some acquirers may purposefully seek targets which are in financial distress in order to obtain a bargain with the belief that they have the ability to turn the target’s performance around.

It is essential, however, to gain an understanding of the underlying reasons which have contributed to the poor performance and the subsequent implications. These factors must then be carefully assessed to ensure that they do not permanently prohibit the target’s ability to generate profits and growth in the future.

 Target size Determining the size of the acquisition target will depend largely on the experience and resources of the acquiring entity.  Generally speaking, where experience and resources are limited, smaller targets should be pursued. The attractiveness of an acquisition should not solely depend on the size of the potential target. Ensuring that the target reflects the objectives of the acquisition strategy will be of greater importance, and subsequently, factors such as market share or synergies may be more significant than size.
Management and key staff When reviewing a potential acquisition target, it is important to assess the capabilities of management and key staff and look at ways in which their skills can be used to fill gaps in the current business’ capabilities.

It is vital that the management and key staff required to ensure the future success of the business are willing to remain with the company subsequent to the acquisition. Conversely, it is important to look at functions or job roles which may overlap post-acquisition and have a redundancy strategy in place if required.

Cultural compatibilities Differences in corporate culture is one of the major factors contributing to the failure of mergers and acquisitions. As such, cultural issues should be carefully considered prior to entering into any transaction.

Depending on the level of integration proposed, cultural compatibility may or may not be essential to the success of the transaction.

Where there is a low level of integration required, the transaction is unlikely to cause any significant culture shock to employees and synergistic cultures may not be essential to the success of the transaction.

Where there is a high level of integration, culture shock can be a big problem which may eventually lead to key employees feeling unsatisfied and leaving the organisation.

Achievability of forecasts Careful consideration must be paid to any forecasts (financial or otherwise) which may be relied upon in making decisions regarding the transaction, particularly where they are prepared by the target or on behalf of the target.

Financial forecasts may often be unrealistic and can fail to take into account delays as a result of the transaction going ahead.

Intellectual property Mergers and acquisitions can be useful strategies for obtaining intellectual property, such as trade secrets and patents, complementary to existing assets.

It is important that sufficient due diligence is carried out to ensure that intellectual property is protected, that the target holds full title to these assets and that they are not subject to any restrictions which may inhibit the intended benefits of the transaction.

Price and terms Where the acquisition target is highly attractive it can be easy for the acquirer to get carried away in the negotiation process. A transaction should not be carried out at any cost to the acquirer. It is important to maintain an objective perspective and ensure that a fair price and suitable terms can be agreed with the potential target’s owners.

 

Each acquirer will have its own individual characteristics and requirements.  When selecting a potential acquisition target it is essential to refer back to the unique objectives sought in the acquisition strategy and pay close attention to the acquisition profile established.

If you are considering pursuing an acquisition strategy or are interested in any of the issues raised in this article please contact your local William Buck office.