Why is it some acquisitions work while others fail to deliver? It comes down to planning and people, according to experts John Pirrie and Murray Strachan.
Both entrepreneurs have been involved in acquisitions, some of which worked successfully and others less so.
At a recent focus dinner, chaired by Alan Bonner of Pinnacle Telecom, Exchange members and speakers discussed the pros and cons of acquisition, and highlighted the strict attention to detail needed in the process to execute successfully.
But firstly, why would you acquire another business? Maybe for access to new customers or markets (commercial or geographical) or access to new products, technologies or services to sell into existing and new customers. Perhaps for brand enhancement – tapping into the profile and goodwill associated with the brand of the target – or to acquire high quality management and employees.
There could be synergistic savings or additional turnover and profit in the chosen markets or simply to avoid being acquired by the competition yourself – defensive acquisition.
Regardless of the reason for the acquisition, the process is crucially identical.
Murray (Strachan and Partners)
has worked in the oil and gas sector for 27 years, lived, worked, bought and sold companies in more than 30 countries plus set up/closed down Joint Ventures and large projects. He spent five years working with execs and shareholders in various companies, investing, rightsizing, adding value and fundraising and is now back in a corporate strategic development role.
His extensive experience means he’s able to identify what causes more than 50% of acquisitions to fail;
The biggest reasons are poor implementation, poor communication and HR issues.
“Acquiring a business is highly time consuming, costly and distracting from running your business, and
opportunistic acquisitions have a poor history of delivering value to corporate purchasers,” says Murray.
“You should ask yourself ‘will this transaction increase the long term value of the business?’”
The other alternative is organic growth and/or acquiring (recruiting) some of the key management or players of the target instead.
Either way, you need to focus on fit issues and process issues:
• Fit issues – including size, strategic fit, diversification, previous acquisition experience of the acquirer, organisational fit (culture and personnel/administration practices), and the acquisition timing relative to market conditions/cycle
• Process Issues – including negotiation failures/mistakes, inadequate research and diligence, inadequate pre-planning, poor integration plan execution, price paid and form of consideration, poor communications and negative reaction by acquirer’s management and/or employees
“This can be overcome through thorough planning, effective communication, professional and diligent integration and sufficient monitoring within the critical first 100 days,” says Murray.
For Murray, the key acquisition phases are;
• Establishing the strategy and objectives
• Market research – identification, screening, and short listing potential targets
• “The approach”
• Information gathering – initial research and light diligence
• Structuring an offer – acquisition plan, valuation, funding, financial and non financial issues
• Concluding the transaction – full diligence, negotiation, then close the deal including Completion
• Transition of ownership & Integration – transition plan execution and review
• Stabilisation and performing
• Review – objectives, resultant outcomes and lessons learned
His final words of advice? Make sure you “over” communicate and don’t be scared to walk away.
John Pirrie has been in business for 34 years, setting up LCH Generators with his brother James in 1980. He build the fleet to 2500 generators by 2006, becoming the largest fleet in the U.K, serviced from five locations, with the company employing 200.
In part, that growth came from acquisitions; he made his first acquisition in 1995. It was, as he explains, a “very light legal agreement”.
In 2006 John set up Nevis Capital, a private equity firm with a track record of successfully growing businesses that need capital and management support. They invest across the industrial services sector with a specific focus on power.
Since then the company has done hundreds of deals, but the biggest issue throughout has been lack of management.
Says John: “It’s about communication at all levels about your plans and implementation of them.
”Remember, it is your deal. They are your documents – even with the best accountants and lawyers, it is only a job for them – so you need to focus on management, management, management.”
That is why big company deals like Hewlett Packard go wrong, explains John. And he cited the example of Caterpillar, a Chinese company worth $653 and written down by $580 because nobody counted the machines to check they were all present and accounted for.
“My key tips from the evening – ‘It’s your deal’ – keep on top of every legal document – don’t trust the lawyers to do it right, it’s just their day job. Also, maybe ‘buy’ the people away from a target rather than buy the company. Employees in acquisition targets expect ‘a team parachuted in’, they expect to see some action going on, lack of it is disconcerting. Make sure there is a strategic fit.”
“Extensive due diligence is absolutely critical and don’t forget the HR issues.”
“Create a template for acquisitions and stick to it.”
“Key tip – It’s all about people.”
“Some good detail on the nitty gritty of acquisitions – what to insist on, valuations, people issues, non-compete. I will have more confidence in approaching acquisitions now.”