There are many reasons why a growing business might consider an acquisition strategy; challenges to organic growth, tough competition, high costs, low valuations and so on. Whatever the reason, there are three main keys to success; fit, price paid vs value acquired and integration. If you are considering selling your business, you might feel like these issues are, quite frankly, not your problem, but you’d be wrong. Here’s why.
Unless you’re in such a rush that you’re dropping the price to the floor, you won’t get all your money out on deal day. Your chances of trousering the balance are therefore inextricably linked to the future success of the purchaser. There are a number of variables at play in any organisation but in terms of your transaction, the purchaser’s vision of success pre-transaction, will include a range of assumptions that can only be realised post-transaction; rationalisation of propositions, alignment of teams, harmonisation of systems and processes, reduction of suppliers and all the resulting productivity enhancements and costs savings that should accrue. In many cases, your deferred consideration will depend on these factors.
The risk of failure is high. Study after study puts the failure rate for acquisitions at 70% to 90% and my own experience working on north of 200 deals, suggests that the reality for transactions involving privately owned firms is towards the top of that range. So why is it so hard for organisations to integrate acquired firms?
Incentives are a big factor. Deals are balance sheet projects, whereas integrations live in the profit and loss. The deal is often paid for using a mixture of cash (retained profit or debt) and equity (leveraging the anticipated future value of the organisation) and these tools rarely impact the management teams own compensation (think basic, benefits, incentive reward and profit share). Integrations have a nasty habit of breaking the budget, which clearly impacts the profitability and with it the management teams compensation. If some of their reward was linked to the amount of deferred consideration the vendor receives in the years post-transaction, things might be different.
Another major factor relates to the change of personnel pre and post-transaction. Creating deal structures, negotiating, project managing vendors, lawyers, accountants, corporate finance guys and ultimately getting a deal over the line requires a very specific skill set. Understanding culture and how to blend it, project managing the integration of propositions, teams, operations and finances and playing hearts and minds along the way requires a different approach. Chicken and egg comes into play here; if you don’t have a completed deal, you don’t need an integration team and many organisations focus on building a team that can do deals, leaving integration teams for later. There is also a popular miss-conception that every acquired business will have an operations maestro who can swing into action and sort all the nitty gritty stuff out. This is rare.
Lastly, it’s just plain messy work. Facing up to people, explaining what integration will actually mean (ie significant change you hadn’t banked on) that commitments made pre-completion won’t be forthcoming, rationalising teams (ie firing people, moving offices and so on), terminating supplier relationships and generally buggering about with just about every aspect of your business that ‘worked just fine before’ does not make one popular. Many executives like acquired businesses to enjoy a period of calm immediately after completion (bed them in), however this sows the seeds of post-merger drift, a nasty condition that we’ll save for another blog another time.
Avoiding post-transaction integration is a little like taking one’s health for granted. You function ‘normally’ right up until the heart attack. A smart vendor (who intends to actually bank 100% of the consideration over time) should be questioning the purchasing organisations track record on integration, the integration strategy and the capability and experience of those charged with the messy stuff. If the keys to a successful acquisition are fit, price paid vs value acquired and integration, the only way to succeed on the first two is to execute on the last one.