Tips to Ensure Acquisitions add Shareholder Value
Filed under:
The majority of acquisitions – over 60% – destroy shareholder value. Here are some tips to ensure your deal is one of the 40%…
Do you remember Mike Coupe, the CEO of Sainsbury’s singing “We’re in the money” in April 2018?
He and his top team were about to be “in the money” but were Sainsbury’s shareholders?
Acquisitions can be a waste of money and a huge distraction. Corporate managers are accused of carrying them out in order to inflate their salaries and massage their egos.
A Harvard Business Review (HBR) article from May 2016 analysed 2,500 business acquisitions and found that in more than 60% of deals, shareholder value was destroyed.
Some big corporate failures were cited: eBay buying Skype, AOL buying Time Warner and HP buying Compaq.
My ex employer, Procter & Gamble, was cited in the article as a successful acquirer.
I have experience of acquisitions since 1988, covering small, medium and large companies.
As a consultant since 2009, I have helped my clients make six successful acquisitions, each of which added to shareholder value.
If you get it right acquisitions can create significant shareholder value.
Higher profits can be achieved if the synergies can be delivered and business losses are minimised.
A larger more diversified company will attract larger EBITDA multiples.
There are four essential steps that will ensure you do not waste your money AND your time when you make acquisitions.
1 – Have a clear “Basis for Interest” – including a financial outline to justify studying a target.
The buyer needs to be very clear as to “why” they even want to study the “target”.
Right from the start, increasing shareholder wealth must be on the agenda.
There should be a high-level business case, some call it a “basis for interest”, that sets out how the target’s assets can be leveraged (worked harder) or how the target will help work your own assets harder.
Initial list of synergies should be developed to be investigated.
2 – Methodically build the business plan in order to line up backing from the management team, the shareholders and if necessary banks or other sources of funding (Angels, Private Equity; Venture Capital; etc..)
Involve the top team so that quality information is gathered and also to engage the top team and get their buy in to the plan. If an acquisition is “imposed” on a management that is already overworked there will be an increased risk of failure.
Ensuring there is capacity to deliver the integration is vital. Bonuses and incentives should be included in the plan so that key players are fully on board with the plan.
3 – Carry out essential due diligence – commercial; financial and legal.
This is to give confidence that the key assets that underpin the target business are in good condition. This work also clarifies the key things you must maintain and secure on completion.
4 – Create a 100 day plan that focuses on the main assets of the target.
The plan needs qualified resources in place to complete specific action steps to secure the critical assets and deliver the synergies and savings fast. The 100 day plan can be included in the business plan.
I believe you must go through these steps even if the acquisition is small.
Please see testimonials from Mike Bacon and James Capel on the LinkedIn profile of David Cardno. These are two MDs that David helped make successful acquisitions.