Acquisition rewards are achieved through momentum
It is after the deal is done that the real work of acquisition begins. Basically, anyone can negotiate a deal but very few can extract a high return on the investment after the event. There are simply hundreds of things that can go wrong, and often do go wrong, once the dust settles. The smart acquirers start mitigating the risks well before the agreement is signed.
The due diligence undertaken by the buyer should not be limited to inherent risks in the selling business. While it is critical to ensure that there are no skeletons in the closet, it is just as important to examine what will happen to the business once ownership passes and the buyer needs to achieve whatever acquisition objectives they justified the deal on.
Plan post-acquisition changes from the outset
The classic due diligence; that is, the one we all imagine will happen to us when we sell a business, concentrates on the risks, costs and delays the buyer will incur to bring the business up to an efficient and effective level. It is also designed to uncover weaknesses and problems in legal structure, outstanding real and contingent liabilities and obligations, missing information and errors of misstatement and representation. Such a review will also examine historical and forecast levels of revenue and expenses to uncover business performance, resilience and anticipated profitability. Unexpected problems or considerable risks uncovered at this point might result in a renegotiation of the price or a termination of the acquisition activity.
What is often neglected in this examination process are those aspects of the acquisition which occur after the ink is dry. A change of ownership often involves many activities on the part of the buying and acquired firms. Some level of intervention in the affairs of the selling firm are inevitable. At the same time, some level of integration might occur between parts of the seller and buyer organizations. These changes are often time consuming, disruptive and problematic. Differing cultures hamper progress and result in the loss of good employees. An essential part of pre-acquisition due diligence on the part of the buyer is to construct a detailed plan of ownership change which minimizes disruption and staff loss.
What will it take to realize the acquisition objectives?
Lastly, due diligence needs to consider how the investment objectives are to be achieved once ownership has changed. Basically, how is the growth and profit potential in the acquisition to be realized? Too often acquisitions are made without detailed consideration of how the opportunity is to be exploited and by whom. This may mean additional funding, new structures, changed responsibilities, recruiting new managers and so on. Anticipated delays, problems and costs of achieving investment objectives need to be considered well before the deal is completed. If you can’t see your way through to a healthy positive return on the investment, perhaps this is the wrong deal or the wrong time to do it.
From a wealth of research we know that 70% of acquisitions fail to achieve a positive shareholder return. Since many acquisitions fail to undertake a thorough due diligence across these three stages of investment realization, it is easy to see how such an outcome occurs.
