Depending on the context, acquiring another company is a good growth strategy, yet most acquisitions fail to meet their desired strategic and financial objectives. Here are five mistakes that contribute to this lack of success:
1. Lack of a Disciplined and Rigorous Culture & People Impact Assessment
During due diligence, companies often fail to fully recognize and plan for the challenges and change that come with integrating an acquired company and its culture. Sixty to eighty percent of your acquired costs and 100% of your success is driven by people. Not enough assessment is done to understand whether the culture, its values and the talent levels are compatible and what should be the required integration plan to make it work. Transitions are disruptive to the company, the target and all employees. When companies fail to assess and plan along this dimension, the following financial impacts are more likely to occur:
a) Higher employee turnover and related costs especially amongst key high performers
b) Higher severance costs resulting from the acquisition of talent that does not “fit”, performs below expectations or becomes disengaged
c) Under-estimating the cost of integrating pay scales and employee benefit programs
d) Under-estimating the cost of internal change management or communication plan
2. Due Diligence Process Disproportionally Focussed on Data Gathering and Validation
Many companies spend a disproportionate amount of time during the due diligence process gathering what they need to know about their acquisition target to validate their business case. In many cases, not enough of the due diligence phase is used to build a detailed post-acquisition plan, especially in key areas of success. When companies fail to build a detailed post-acquisition plan the following are more likely to occur:
a) Higher than anticipated costs for integrating IT systems, processes and data
b) Failure to achieve the desired level of cost synergies especially as it relates to people, structure and technology
c) Failure to hit cross-sell targets for products or distribution capability acquired
Once the deal closes, you will want to move quickly and capture the benefits. Have your complete post-acquisition plan done and ready to implement on day one.
3.Deal Fever or Chasing the Deal
Companies get excited by the “deal” or “hunt”. Sometimes the best deals are the one’s you don’t make or waste time on. There are “red lines” beyond which you must be prepared to “walk away”. The time, energy and labour put into an acquisition can often be at the expense of success for the existing core business. Decision-makers need to be diligent and disciplined in target selection aligned with the desired requirements and strategic outcome.
Many acquisition targets will want “the sun, the moon and the stars” included in the deal. Just like people over-valuing their homes, the same is often true with business owners. Trust your acquisition financial model. If what it takes to do the acquisition does not provide for an appropriate level of risk adjusted return, then “walk”.
4.Where is the Risk Management?
Many companies fail to adequately assess the risks associated with their acquisition. Blinded by excitement and enthusiasm for the returns, they fail to assess the impact and/or likelihood of potential negative scenarios and what they could do as part of their post-acquisition plan to mitigate or respond. Companies should:
a) Have a strategic and operational risk assessment and mitigation plan as part of their due diligence process. Potential negative scenarios exceeding an entities risk appetite should be mitigated to the extent possible or reasonable
b) Use an acquisition financial model to test the outcomes of potential negative scenarios and the enterprise’s tolerance for risk
5.Lack of Creativity in Bridging the Valuation Gap
It is often that the seller and buyer have a valuation gap when it comes to the purchase price. The parties go their separate ways despite the potential strategic and financial value that could result from an acquisition. Too often, negotiators look past the use of creative future contingent payment schedules as a lever to bridge the gap. Contingent payments based on appropriate business value drivers (e.g. future revenues or sales) can help bridge the gap and create the winning conditions for both the buyer and seller.
If you would like to find out more about making successful strategic acquisitions, reducing business risk, reducing costs and strengthening your organization, please contact us at 613-727-1230 ext. 211 or firstname.lastname@example.org
Adam Cantor, CPA, CMA, MBA is an Associate Consultant with OTUS Group, a team of advisors to business, government and not-for-profit organizations.