So, what is the reality?
The fact is that many local companies are currently trying to increase profitability for their shareholders through a merger or an acquisition. The logic is simple enough. The combined business will not need two offices, two insurance premiums, even two accountants, and can therefore realise economies of scale through this process. However, there are many pitfalls along the way. Indeed, the vast majority of negotiations during the courting process end in stalemate, whilst having spent a great deal of time, energy and resources in the meantime.
The two main reasons for this are fairly simple. Firstly, timing on both sides is everything and whilst one party may be very interested, the other may be just ‘testing the water’, or not in a place to responsibly enter into serious negotiations. This stage is often very cagey, and in the absence of a direct approach, will simply eat up time.
Secondly, and more importantly, many people value what they have significantly more than those looking in from the outside; so it’s hard to arrive at a price that both parties can agree. All this changes, of course, if one of the parties is virtually forced to sell (or buy) for a particular reason, which is usually financial. As I highlighted above, the ‘we won’t need two of everything’ is a strong financial argument and when you factor in the high cost of staff locally - and the potentially significant reduction in administrative and direct staff costs, the potential savings are even more attractive. When these efficiencies are achieved, it can be possible to recover the investment made relatively quickly.
So how do you do this?
There are generally three stages to getting a deal done:
Courting: Fact finding and agreeing the deal in principle - making sure the deal stacks up financially and getting the price down (or up!) Corroboration: Formal due diligence of the numbers and reviewing agreements to check what the other side has said is true and that risks inherent in the deal are sensibly reduced where possible.
Completion: Getting everything signed off, all the administration sorted and dealing with the first few days after the deal. Making sure too that you do realise the benefits.
For now let us assume that you have successfully courted, corroborated and completed and are looking to realise the benefits. Easy, right? No.
‘Big four’ accountancy firm, KPMG has produced a study identifying that 78% of all acquisitions do not realise the anticipated benefits. And why do the vast majority of all these intelligent people doing deals fail to realise these benefits?
KPMG found that the reasons were:
Working with many small and medium-size enterprises, I know that the owners at the top often have similar, outgoing personalities, coupled with the drive and passion to propel their business and make it succeed. However, they may well have very different approaches to handling customers and staff - and often these approaches clash when businesses come together. Perhaps at least as important as the price of an acquisition is an investigation into whether or not the teams are likely to work together effectively once the ink on the contract is dry.
There is little excuse for a poorly planned integration. If you do not believe you have the skills sets or experience to do-it-yourself, there are professionals on hand who can help with significant experience and skills. There is a cost to professional input but if you are spending more than, say £200,000 on the target, it must make sense to maximise the huge opportunity to leverage the knowledge and experience available from the target team in order to drive more value out of the transaction.
It is a real challenge to avoid neglecting the existing business whilst a transaction is taking place. Apart from the exhilaration of a potential deal, the extra work involved for the management in undertaking the necessary due diligence and assessing the resultant risks will make it more likely that they take their eye off the ball to some degree, at least. For me, this really forms a major part of poorly planned integration, since it should be identified early and extra resource, or hours, put into the existing business to make sure things do not slip. Don’t get greedy and under-invest in the future benefits you’re about to realise.
I feel the risk of key staff leaving can be significantly reduced by establishing early on who they are and then taking extra steps to keep them aware of what is happening. It’s also important to help them visualise the importance of their future role within the newly created bigger business.
Well, I hope I haven’t put you off doing that deal!! Just don’t forget the five ‘ps’: proper planning prevents poor performance!