Companies spend more than $2 trillion on acquisitions every year, according to an article in Harvard Business Review. Yet studies frequently cite failure rates of mergers and acquisitions (M&A) between 70 and 90 percent.
David E. Shaffer, a director in the Audit & Accounting practice at Kreischer Miller, says problems are often the result of poor planning. Companies are enticed by the opportunity to create synergies or boost performance and fail to consider all ramifications of an acquisition.
Smart Business spoke with Shaffer about ways to mitigate the risk and ensure a successful transaction.
Why is the M&A failure rate so high?
Many companies don’t establish a clear business strategy for mergers and acquisitions. Some questions that need to be answered include:
- What are the goals of the merger or acquisition?
- Do you want to leverage existing resources or create a new business unit?
- What is the maximum price you are willing to pay?
- Must the seller agree to some holdback of the price?
- What happens to administrative functions and management of the target company?
- Must key employees sign agreements to stay?
- Will you negotiate between an asset purchase and a stock purchase?
- Is culture important?
You should be proactive in identifying candidates for acquisition. Companies that have done many acquisitions tend to ignore requests for proposals because the sellers in such situations usually go with the highest price. They reason that the law of averages is against them and at least one competitor will overpay.
Instead, companies involved in many acquisitions prefer to target entities and establish a relationship before that stage in order to avoid a bidding war.
How should the due diligence process be conducted?
It’s important that you don’t take shortcuts in your due diligence. Hire professionals who are knowledgeable about the industry; they can negotiate better deals for you because they are not emotionally attached and can push harder for seller concessions.
Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability — employees, processes, patents, etc.
The more risk present, the more you should ask for holdback in the selling price. For instance, if much of the profit is derived from a few contracts, require that the contracts be renewed under similar terms if the seller is to receive the full purchase price.
M&A failures often result because buyers concentrate too much on cost synergies and lose focus on retaining and/or creating revenue. Client retention at service organizations is at significant risk following a merger or acquisition, according to a 2008 article from McKinsey & Company. Clients will receive misinformation, so it’s important that the acquiring firm step in quickly to assure clients that service levels will equal or exceed what they have been accustomed to expect.
What needs to be done post-acquisition?
It’s important to have a clear post-acquisition plan, including financial goals, with as much detail as possible. The quicker value is created by the acquisition, the better the result for the buyer.
Key post-acquisition steps to ensure a successful integration include:
- Developing the organizational structure.
- Developing sales expectations.
- Identifying what processes and systems will change, and when.
- Developing performance measures.
Finally, you also need to hold key management responsible for producing results.
David E. Shaffer is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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Deal activity among both strategic and financial buyers dropped off significantly in February. This slowdown in deal volume was due in large part to the rush to get deals done by the end of 2010, which was driven by the fear of tax changes that never occurred.
Strategic buyers led the way in the second month of 2011 by focusing on smaller deals. The Euclid Chemical Co. bought LaFayette, Ga.-based PSI Packaging Inc., which has annual sales of approximately $6 million. Euclid Chemical is a Cleveland producer of micro and macro fibers for the ready-mixed and precast concrete market and subsidiary of RPM International Inc. The move is expected to add a complementary product line and boost manufacturing capacity and expertise for Euclid Chemical.
Cleveland-area Hartland Payments Systems Inc., the fifth-largest payment processor in the country, sold a small portfolio of merchant customers to Sage Payment Solutions, which furthers Sage’s strategic growth goals. I.D. Images LLC, the Brunswick-based and industry-leading producer of variable information printed labels, closed its third strategic acquisition in the last 18 months and expanded its presence in the Southeast with its purchase of Heather Label Inc. of North Carolina.
In a move to continue its transformation and portfolio repositioning, Cleveland-area PolyOne Corp., a premier provider of specialized polymer materials, services and solutions, sold its stake in Sunbelt Chlor Alkali Partnership to Olin Corp. for $175 million. In addition, Smart Business Network Inc. acquired Cleveland-area Wise Group to further expand its Smart Business Content Marketing Division.
As the inventory of quality targets increase later in the year, look for more strategic buyers to come off the sidelines, rested and ready to make quality acquisitions.
Private equity firms were also active in February, although not nearly at the same level as they were in the fourth quarter of last year. Chicago-based private equity firm Pfingsten Partners, LLC acquired Independence-based TPC Wire & Cable Corp., a leading distributor of industrial wire and cable, from private equity firm Premier Farnell plc for approximately $43 million. Pfingsten Partners investment in TPC is aimed at capitalizing on TPC’s market opportunities and growth potential.
James M. Hill is a director on the ACG Cleveland board. He is also executive chairman, a partner and the chairman of the private equity practice of the law firm of Benesch, Friedlander, Coplan & Aronoff. For more information about the Association for Corporate Growth, visit http://chapters.acg.org/cleveland.
Deal of the Month
February’s deal of the month is Mayfield Heights-based Linsalata Capital Partners Inc.’s purchase of NeuroTherm Inc., a leading manufacturer of interventional pain management products. In addition to marking Linsalata’s fifth platform company acquisition in the last 13 months, the purchase of NeuroTherm is Linsalata’s first platform investment in the health care field. Congratulations to the Linsalata team on embarking into the health care sector.