Ask first, shoot later
Improve your M&A marksmanship with these 12 acquisition must-dos
So, you’ve decided to pursue an acquisition. You’re poised to strike a deal. Market volatility, Brexit, economic uncertainly, and fluctuating currencies are no deterrent – you see the opportunity while others sit on the sidelines. You have one or more targets in your sights, and your finger is on the trigger. Are you ready?
Seizing the right opportunity is hard work. A successful M&A deal depends on many critical factors. Are you confident you have: Identified the right target that fits within your M&A strategy? Secured the appropriate resources and expertise to execute the deal, including the right funding package? Devised a sure-fire plan to seamlessly integrate the target? Easier said than done? Maybe. Here’s how to do it…
- Tone from the top - A clear M&A strategy will articulate your growth priorities and how you will succeed within your competitive landscape while still staying true to your overall corporate strategy. Your M&A strategy will drive your investment approach and filter throughout your M&A lifecycle from target screening through to due diligence and integration.
- There are plenty of targets in the gallery - While it may be tempting to hold out until conditions seem to guarantee you’ll hit the bulls-eye, good deals are hard to find. A structured approach will make sure you stick to your strategy, define your acquisition criteria, and find the right fit. Patience is a virtue, but so is decisiveness.
- Approach with caution - Slow down, check your blind spots and start gathering the right information. Get to know the company, the upsides and the downsides and start to assess the indicative value as a baseline for negotiations. However, a lot of targets move – so don’t wait too long before you pull the trigger…
- Zero in on the right price - You’ve done your initial homework and now you need to make some important decisions. What is this business worth? How will you fund the deal? Understand the seller’s preferences and expectations. You may need to be creative to bridge value gaps through vendor notes or earn outs, which can also be used to mitigate risk. And you might need to consider raising funds with a bank, alternative lender or private equity firm in order to facilitate the transaction, which will have timing implications and need to be carefully thought through.
- Time may not be on your side – Your letter of intent is signed but now the clock starts ticking and there’s much work to be done before your exclusivity expires. This will likely include integration planning, which shouldn’t be left until it’s time to actually integrate. Due diligence, meanwhile, needs to be swift, but you only have one shot at getting it right.
- Scrub thoroughly – The target’s numbers may look clean at first glance but they need a proper scrub before you let them hang to dry in your model. The quality of the company’s earnings needs to be carefully scrutinized. Assessing normalised earnings and the true quality of historical and forecast profitability should be one of the key outputs of due diligence.
- Watch out for headwinds – Unexpected changes in the macro environment like commodity price declines, foreign exchange fluctuations, disruptive technologies, competitive pressures, and changing demand patterns can wreak havoc. External headwinds can be a deal-breaker. Commercial and customer due diligence is crucial to understanding and quantifying the impact of market factors and customer spending decisions on the target’s financial performance.
- Don’t forget about the tax structure – There is often a natural push and pull between buyer and seller on the optimum tax structure – you want this to be tax-efficient and to protect against exposures, while the vendor wants to avoid adverse tax impacts and minimise transaction tax costs.
- Making the hard call – Retention of key management and employees is paramount. As the buyer, do you have the resources you need to manage this new business? Does the target? What about when you put the two teams together? Should organisational restructuring be on the table? How will you ensure alignment of goals with top talent?
- Get your stakeholders on board - You must ensure the majority of your stakeholders – family members, management teams, other shareholders, key customers, etc. – are out of the line of fire and supportive of any deal you’re considering. This alignment is crucial. Dissenting views and dysfunctional groups should be managed in advance. Avoid any eleventh-hour surprises that may put the deal in jeopardy.
- The last line of defence – All of your due diligence findings should be captured in the negotiation of the purchase agreement. Purchase price adjustment mechanisms, indemnities, representations, and warranties can all act as safeguards against potential exposures. Traditional completion accounts will have adjustment mechanisms for net working capital and net debt. You need to invest the time to properly assess historical trends, set definitions, and negotiate a working capital target to ensure you are properly compensated for any working capital shortfalls or avoid overpaying in the event of higher than normal levels at close.
- Bringing it all together – The final stage in a transaction is the most imperative. A poorly planned and managed integration is the most common reason for deal failure. The complexity of Day One and end-state integration will vary depending on the target and whether the acquisition is a tuck-in or transformational. Synergies and any step-up costs also need to be carefully considered to assess how they might impact your strategy.
Now you’re getting closer to preparing for a successful close. When you’re finally ready to shoot, you want to be confident you’re going to hit exactly where you’re aiming.
After all, even ‘friendly fire’ has potentially dire consequences. So, take a little care and pay attention to the details. When you do, your aim is more likely to be true.