The long expected surge of M&A activity as companies with strong balance sheets picked rivals up on the ‘cheap’ hasn’t come to pass. Good companies have held their value and management teams understandably want to know exactly what they’re buying before putting their reputations on the line by giving the green light to a transaction.
Basic emotions are at play – no one wants to risk overpaying or regret selling too cheaply. Likewise, embarking on a strategic acquisition is tough when markets remain unpredictable and a five-year plan seems too much like a leap of faith.
Christopher Clark, a Partner at BDO Corporate Finance, says: “Lots of companies are looking to do deals but having that sentiment and the confidence to actually execute is the difference at the moment. With the current uncertainty, people are more cautious and are maybe not willing to pay the price in case of obstacles that might come their way.”
As always, the figures have to add up for a deal but the smartest management teams will now place as much importance on the cultural as the financial due diligence. Nigel Guy, Chairman of recruitment group The Cornhill Partnership, says: “Businesses need to look at acquisition targets from two perspectives: how does this change my competitive position… and what does it do for value? Does it make the business more attractive to be acquired down the track and is it going to get the right level of return?”
There has to be a solid case put forward that makes it clear to stakeholders and members of the board how a target complements the business. Jim Wilkinson, Chief Financial Officer at online gambling company Sportingbet, says: “Non-executive directors play an important role in approving a transaction pre-deal... There should also be a strategic overview of why the deal is important and what the acquiring company expects to get out of the transaction – then a consideration of whether this makes sense and its likelihood of realisation.”
Chris Stooke, Chairman of insurance broker Miles Smith, says: “A lot of the success depends on the cultural fit – unfortunately, not enough planning tends to be done around the post-deal implementation period. There can be a lot of focus on completing the transaction but not enough on the first 100 days and the first year is where the acquisition is integrated into the business – people focus on their day jobs but the trouble is that a transaction requires a lot of focus away from the day job to make it work.”
The rule of the thumb is to put together a team that drives the post-deal transition so that systems are integrated (such as finance departments) and culture clashes are spotted early. Sarah Murphy, Group HR Director at engineering concern Ricardo, says: “People expect you to make changes in the first 100 days. So if you lose that opportunity then you are far less likely to make the acquisition and integration a success.”
Bernie Waldron, a Criticaleye Associate and Non-executive Director at IT company IPPLUS, says: “Think about the integration plan like any other major set of change projects. Decide how important they are relative to other changes going on and whether they need dedicated resource to drive them. In any case, the resource and cost needed for integration should be planned and factored into the business case.”
Sanity checks
Still, the question remains that, aside from distressed M&A, deals are thin on the ground and a lot of the prices for the best companies – certainly in the mid-market – may be seen as at the top end of the scale, especially where private equity firms are competing in fierce bidding wars. For Tony Cowling, a Criticaleye Associate and former CEO, Chairman and now Life President of the market research multinational Taylor Nelson Sofres, argues that an opportunity is definitely being missed.
He says: “The best time to acquire should be at the bottom of the business cycle as there are lower prices, a less arrogant workforce and longer growth prospects. Although the economy is unpredictable at the moment, in my experience it is generally better to buy good companies when they are down than to buy poor companies when they are up – remember a rising tide lifts all ships.”
Sam Ferguson, the CEO of information management company EDM Group, who has led two acquisitions during the past six months, takes a slightly different view: “I don't think there’s ever a good or bad time. In 2008 and 2009 people thought lots of bargains were going to come on the market, but in the years leading up to 2008 people were paying silly multiples for not great business and they’re the ones that have got problems today. But if you bought the right business for the right multiple back in 2007, it would still be a good buy today. It's possible I would have bought these two companies at any time, but if we'd have had to pay any more I wouldn’t have bought them.”
In other words, it’s a case of not succumbing to deal fever. “Often companies make acquisitions simply thinking bigger is better,” says Tony. “Acquisitions should always be strategic. If the target does not fit into your strategy then it – and the new employees – do not have a clear role and purpose in the new organisation.”
Identifying the right acquisition target is the easy part; finding the formula to make the new business integrate with the existing one is where many executive and non-executive teams fail to make the grade. According to Sam, it has to come from the top: “The CEO is going to be held accountable so they need to be involved in the buying and the integration. Whether it's hands-on or via your chosen people – you'll be held accountable over its success or failure. I can’t see any reason why a CEO would buy a business that's material in size and not be heavily involved in making it work.”
Maybe that direct accountability is another reason why deal volumes are on the low side at present.
Please get in touch if you have any comments about the issues raised here.
I hope to see you soon.
Matthew
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