Have a Post-Acquisition Plan

As the year progresses, we are starting to hear about major acquisitions that have been made, and about several that are rumoured, as well as the corresponding value of the deals and the key advisers behind the top transactions. For those of us in the industry, this list usually is interesting reading material.

What I would like to see, however, is a list of which mergers and acquisitions (M&A) deals made three years ago worked and which ones failed. Statistics indicate that a vast majority of acquisitions do not end up as planned.

I attribute most of the failures to a handful of reasons. Most textbooks tell us that M&A deals are made to gain one or more of the following five key benefits:

1. Acquiring market share
2. Diversifying product and service offerings
3. Increasing plant capacity or distribution channels
4. Acquiring specific strategic expertise, R&D, and assets
5. Reducing financial risk

The attractiveness of acquisitions typically stems from the speed of growth that can occur by gaining new assets and resources overnight. You make a one-time investment that hits your balance sheet just once.

The other option is growing organically. Regular organic growth takes time to achieve, while choosing the acquisition route yields much quicker growth.

Basically, all these reasons and benefits are technically correct, but I define the main reason for acquisitions is acquiring a larger market share, which leads to improved control over pricing, which results in improved profitability. This may be an oversimplification, but that’s the bottom line for most M&As.

Plan of Attack

All major consulting and accounting firms stand ready to help you identify targeted companies; assist you with putting together a plan of attack; help you evaluate, negotiate, and finance the deal; obtain government approval; do the legal paperwork; and address fiscal strategy.

All this is true, but once the acquisition is consummated and the advisers collect their fees, the army of accountants, lawyers, experts, and advisers leave. You are usually left alone to sort out the new customers acquired, the new employees who are now members of your family, the new assets that were purchased, and, most importantly, the new culture that you have just inherited.

This is when you need help most, and what if nobody is around to help you put together these two organizations?

Lack of post-acquisition planning and execution is the main reason that acquisitions fail.

For an acquisition to succeed, a well-researched, comprehensive plan must be in place that has been put together by the new team, not by some consultants and advisers. Many acquisitions have earn-out clauses, meaning that a portion of the agreed-upon price of the deal is paid upfront and a second part is earned and paid as the benefits of the M&A are realized/harvested.

So why not pay M&A consultants in the same manner?

A second big reason that M&As fail is that the acquisition price is usually inflated. In the interest of sealing the deal, the acquiring company ends up paying too much. And why is that, you ask? For the simple reason that the valuation was made by a non-independent interested party.

Remember that the value of advice is directly related to the expertise. If your expert adviser fees are directly tied to the value of the deal, then the adviser will benefit from a higher price and not a lower one.

Meaningful advice must come from an expert that is independent.