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Mergers and acquisitions: a value enhancer or destroyer?

26 May 2011

This article first appeared in Western Daily Press on 26 May 2011.

With a revival in corporate activity on the horizon, the sound advice of one of my former clients comes to mind.

He once said that a successful acquisition focuses on ‘winning the peace following the transaction’ rather than ‘winning the war during the transaction’. I’m sure this sentiment rings true for all those who have ever been involved in an acquisition.

I read recently that between 70% and 90% of all mergers and acquisitions are doomed to failure.

With this in mind, what can be done to minimise the risk of failure and improve the chances of making your next acquisition a success?

The first and most important step is to analyse and understand the reasoning behind your next acquisition. What is the motivation for the deal? Is the business looking to acquire additional ‘resources’ or is it looking for a different ‘business model’?

Once you have the answered these questions – which are deceptively simple and yet worth the effort – you can assess potential targets and develop a plan for executing the deal. Due diligence will of course feature as part of this plan, but aside from the usual legal, financial and tax aspects, a few other matters are worth considering. If you have a “one-stop shop” rationale and the motivation for the deal is to expand your product range, ask yourself whether new customers will need or want to buy these products at the same time and in the same place.

Do your sales staff have the necessary skills to sell the acquired company’s products and, of course, vice versa. Finally, be honest about who has the stronger personal skill sets. Within people businesses, such as professional practices, inmy experience an attitude of ‘acquirer’ and ‘acquiree’ rarely adds value.

The two main deal drivers are the pursuit of additional resources or a new business model.

Targeting resources propels most M&A activity by professional practices. A current example of where the motivation for M&A is driven by the desire for a different business model is Microsoft’s acquisition of Skype.

Resources and business models are very different and will require a fundamentally different approach post-acquisition. I would recommend the following integration strategies post-deal. If your objective is to acquire resources, integrate them quickly into your existing business and then let the former business ‘die’.

Alternatively, if your plan is to acquire a new business model, try not to interfere too much, although make sure to add your own resources and expertise to learn and exploit the advances it brings.

When acquiring resources, suchas professional practices, you run the risk that very little time and effort is actually spent on executing an integration plan. People will always need to understand the rationale behind the deal and feel part of it – quickly. A mobile resource can just as easily walk away.

‘The two main deal drivers are the pursuit of additional resources or a new business model’

In the case of a new business model, a significant amount of time and effort should be spent on dissecting the product as well as processes and systems. Look at what can be learnt and applied to your existing model as well as the problems that they have encountered and overcome. Real value can be unlocked by this careful investigation. Where such acquisitions can go wrong is the temptation to assume that the acquirer’s processes are the best.

As a leading national audit, tax and business advisory firm, Crowe Clark Whitehill has the industry experience and technical knowledge, combined with good local business connections and strong international capabilities, that can help you assess the true value of a proposed acquisition. We are prepared to challenge your thinking and can also help with that difficult post-acquisition phase, working with you and your team to grow and groom the enlarged group.With the right perspective and help, one plus one can often make three.

For more guidance on mergers and acquisitions, contact: David Anderson, Partner, Crowe Clark Whitehill LLP on 01242 234421 or email David.Anderson@crowecw.co.uk

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