Golden rules of acquisition
Article Date: Jul 10 2006
By Anthony Vickery, Partner, Ernst & Young
Many acquisitions fail to deliver their anticipated benefits owing to poor post-deal implementation, lack of planning or shoddy due diligence. Follow the golden rules and your chances of a positive outcome should be greatly increased.
Don’t just accept what’s on the market
Most acquisitions are undertaken to achieve growth more rapidly than would be possible organically. Be clear about what you are looking for: a direct competitor, or a complementary business? Don’t just choose from businesses that already have a ‘for sale’ sign up. It is better to conduct a proper search to identify a shortlist of targets that best fit your needs. Go knocking on doors, or get an acquisition search firm to do it for you.
Gain as much confidential information as possible
You have approached a promising company that is willing to talk to you. At this point you need to gain as much confidential information as you can about the business. It is on this information that you will base your offer and agree heads of terms, so the more you know now, the better. Don’t assume that everything in the garden is rosy.
Don’t skimp on the due diligence
Vital. Make sure you use a good commercial law firm to assess the legal matters and a quality firm of accountants for the financial side. You also need to complete environmental and property due diligence. Make sure you have investigated any sources of hidden liabilities. Companies may have underestimated their pensions liabilities. Similarly, one acquirer discovered it had a huge hidden liability for asbestosis, which pushed the combined business into insolvency. Don’t forget commercial due diligence, even if you do it yourself. Check how the business is regarded in the marketplace, that its products work, and that the assumptions about the products in the pipeline are realistic.
Be canny about funding and don’t overpay
Because debt is cheap and equity expensive, the tendency is to borrow as much as possible. But avoid over committing the business. Don’t use short-term funding to finance long-term assets. Make sure the funding structure accurately reflects the cash flow of the combined business. Get advice on how to create a capital structure that matches future revenues with debt repayments. Try to build in some headroom, such as negotiating a capital repayment holiday in the first year. In this way, if something goes wrong (and something probably will), the business won’t be plunged into an immediate financial crisis.
Follow through on your 100-days plan
A couple of weeks before completion draw up your 100-days plan. This must be a comprehensive plan of how you will achieve the benefits anticipated from the acquisition. It should cover communications with employees, customers and suppliers and the merging of operations, production issues and the supply chain. Any area where you have identified potential benefits and synergies must be included. Something as small as an accounting system can be destructive if it isn’t addressed.
Don’t forget the people issues
Acquisitions usually throw-up a range of political issues, so the people in the combined businesses need to start working together quickly. You have to decide how to do this, whether mixing up personnel from the two companies in the existing sites, or bringing everyone together in a single location. If you are going to close one headquarters, do it quickly. If you are going to close any operations, you will need to give key personnel an incentive to stay long enough to see the task through. This could involve offering a bonus for a successful outcome. Without such incentives the best people will quickly find new opportunities elsewhere.
Don’t forget your day job
You have to keep running your own company well. Businesses can find their own sales slipping in the post-acquisition period because key people were distracted. Lower than expected sales put pressure on cash flow at the time when borrowing is highest. Set up an internal team to handle the acquisition, as well as external advisers.
Anthony Vickery is partner at Ernst and Young. Contact Anthony on 020 7951 8273 or avickery@uk.ey.com.
