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INSIGHTS.

BUSINESS INTEGRATION

28/9/2020

 
BUSINESS INTEGRATION POST-ACQUISITION
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After you have completed the deal and you are now acquiring/merging with the new/additional entity, the process of integrating both companies into a single entity starts.
The post-merger integration phase is one of the most difficult phases of the merger and acquisition process because there will be differences in the companies involved — differences in strategies, differences in culture, differences in information systems, and so on. So, this phase requires extensive planning and design throughout the entire organisation.

The integration process can take place at three levels:
  • Full integration: All functional areas will be merged into one company, and the new company will retain the “best practices” between the two companies.
  • Moderate integration: Certain key functions or processes (such as production) will be merged together, and strategic decisions will be centralised within one company. However, the day-to-day operating decisions will remain autonomous.
  • Minimal integration: Only selected personnel will be merged together in order to reduce redundancies, but both strategic decisions and operating decisions will remain decentralised an autonomous.

Five Strategic Reasons Why Mergers FAIL:

The sad reality about mergers and acquisitions is that the expected synergy values may not be realised, in which case the merger is considered a failure.

The following are some of the reasons why mergers fail:
  • Cultural and social differences: Most problems with mergers can be traced to “people problems.” If the merged companies have wide differences in culture and values that are not well handled, then synergy values will not be realised.
  • Poor strategic fit: The two companies involved may have strategies and objectives that are too different and are in conflict with one another.
  • Poorly managed integration: The integration process requires a very high level of quality management. If the integration is poorly managed with little planning and design, chances are high that the merger will fail.
  • Huge cost of acquisition: The acquiring company, in anticipation of a high synergy value, may pay a premium for the target company. However, if the expected synergy value is not realised, then the premium paid to acquire the target is never recouped, which means the goal of the merger has been defeated.
  • Over-optimism: The acquiring company may be too optimistic in its projections about the target company, leading to bad decisions in the merger and acquisition process. An overly optimistic forecast or projection can lead to a failed merger.

While there are many more problems—including organisational resistance and loss of key personnel—that can lead to failed mergers, a solid due diligence procedure will help to avoid most, if not all, of these pitfalls.

100 DAY PLAN

14/9/2020

 
WHAT ARE YOU GOING TO DO POST-ACQUISITION?
When the hard work begins
Planning for the management and development of the business post-completion. After the MBO it is essential to hit the ground running. There is usually considerable goodwill from staff, suppliers and customers immediately after the deal is announced and it is important to leverage this.
  • The deal must be “sold” to important customers and suppliers – it is not difficult to deliver a very positive message about such deals.
  • Staff must also be informed in a thoughtful and positive manner; the introduction of incentive schemes for key staff can help here.
After the MBO it is essential to hit the ground running.
The MBO team may also wish to consider the appointment of one or two experienced non executive directors to the board to help monitor and develop the business.
Planning to drive growth
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The plan’s purpose is twofold: To give direction to the implementation team, and to build consistency and stability between the acquirer and the existing management.
Achievement of both objectives is critical to the success of achieving both the short- and the long-term goals of the company. The overall goal is to drive growth.
The process of designing a plan should help the acquiring company's management and new company owners agree on areas where they can improve and specific ways they can do so. Ultimately, the key to success when implementing the 100-day plan is staying on track. Having the right people in the right places is crucial; holding them accountable is even more important. People sometimes underestimate this because they assume if a person is competent, he or she can deliver on a task. That’s a bad assumption. People need to be in the right roles to succeed.
Implementing the plan
Implementation of the 100-day plan does not always go exactly according to plan. In fact, it rarely does. Acquisition team and company management need to be deft in reacting appropriately when necessary to keep the company from falling off the tracks. Undoubtedly, the acquirer's are sometimes called upon to make hard decisions.
There is a need to be careful when reviewing and implementing new processes and systems “People tend to push back when they are required to do things differently or learn new skills against their will. Management teams are no exception.
The key is to remember throughout implementation that even when things aren’t going exactly as planned, IT’S IMPORTANT TO CONTINUE TO PUSH FORWARD.
Incentives
To keep management on track, it’s not unusual to offer financial incentives. In companies where they’re in place, if members of the management team achieve 100-day plan goals, most frequent rewards are a one-time bonus. It’s important to note that often, but not always, incentives are tied to the successful execution of the 100-day plan.
Creating value
Having different ways of creating value at the acquisition, sometimes implementing an outsourcing strategy is part of the 100-day plan. Services such as IT management and support, freight management, compliance, production and accounts receivable are functions that firms explore in terms of outsourcing. It really depends on the company. In some cases, outsourcing makes sense, and for others it does not, but either way, it’s important for firms to look at their options and then make a decision. In fact, it makes sense to look at what aspects of a company can be outsourced if it helps the company focus on the core business, for example, a service such as freight management can be outsourced because it is often not the core competency of the company.
A deep dive into the financial reporting systems can help drive improvements. Daily, weekly and monthly operating metrics, as well as month-end closing timelines and forecasting capabilities, are crucial, and they need to be set up during the 100-day plan. Without accurate financials and metrics for forecasting, it’s almost impossible for a company to put a plan in place and execute successfully. So the month-to-month accuracy of financial reports is particularly important.
The last piece of the equation in creating value is the depth and strength of the management team. You cannot underestimate this factor. In most acquisitions, the firm puts together a 100-day plan of what the firm is going to do. Every line item has an individual’s name next to it. Every week the acquirer should check in to see how people are progressing and hold each one accountable for his or her end of the bargain. The acquirer is responsible for driving returns, and those with the most checks and balances in place will find the job easier and requiring less negotiation.

After the first 100 days, next steps vary by company. But for all companies, it’s important to keep the focus on growth and moving the business forward. It’s equally important to stay on the same page with management as new plans are laid out.

GROWTH THROUGH MERGERS & ACQUISITIONS

31/8/2020

 
SETTING YOUR M&A STRATEGY TO DELIVER REAL VALUE TO YOUR SHAREHOLDERS.
Deals present unparalleled opportunities for faster growth, stronger capabilities, and dramatic transformation for companies that engage in M&A activity, but the strategy has to be the right one for the right reasons and will be specific for each and every company.
With the belief that two companies together are more valuable than when existing separately, individual companies often consolidate with a target of achieving greater efficiency and market share through merger and acquisition deals (M&A). ​
What is the most appropriate merger/acquisition strategy for your business?
  • Horizontal mergers: These are mergers between two (or more) firms that offer similar products or services. Horizontal mergers are often driven by the need for a company to increase its market share by merging with a competitor. For example, the merger between Exxon and Mobil (to become Exxon-Mobil) was to allow both companies to have a larger share of the oil and gas market.
  • Vertical mergers: These are mergers between two (or more) firms along the value-chain, such as a manufacturer merging with a supplier or distributor. Companies go into vertical mergers when they want to gain competitive advantage within the market and increase the reach of their offers. For example, Merck, a large manufacturer of pharmaceuticals, merged with Medco, a large distributor of the same products, in order to gain advantage in distributing its products.

To create successful transactions, today’s deal environment demands new levels of creativity and forward thinking from corporate development professionals. Whether the question is where to find targets, how to structure terms, or when and what to communicate with shareholders about a transaction, one sure answer is that what worked yesterday may need to evolve and adapt to an increasingly fast-paced and ever-evolving environment to succeed tomorrow.
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When M&A Works as a Growth Strategy Mergers and acquisitions make perfect sense in a variety of situations. For example, maybe an opportunity presents itself that requires fast, decisive action. Or maybe a competitive threat compels a defensive move to get bigger, faster.
  • Fills critical gaps in service offerings or client lists
  • Efficient way to acquire talent and intellectual property
  • Opportunity to leverage synergies
  • Add a new business model
  • Save time and long learning curves

DUE DILIGENCE

17/8/2020

 
WHAT IS DUE DILIGENCE?
Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all facts, financial information, and to verify anything else that was brought up during an M&A deal or investment process.  Due diligence is completed before a deal closes to provide the buyer with an assurance of what they’re getting.
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Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision makers.

From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that his or her expectations regarding the transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence substantially increases the risk to the purchaser.
 
From a seller’s perspective
Due diligence is conducted to provide the purchaser with trust. However, due diligence may also benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the fair market value of the seller is more than what was initially thought to be the case. Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to potential transactions.

Reasons For Due Diligence
There are several reasons why due diligence is conducted:
  • To confirm and verify information that was brought up during the deal or investment process
  • To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction
  • To obtain information that would be useful in valuing the deal
  • To make sure that the deal or investment opportunity complies with the investment or deal criteria

Costs of Due Diligence
The costs of undergoing a due diligence process depend on the scope and duration of the effort, which depends heavily on the complexity of the target company. Costs associated with due diligence are an easily justifiable expense compared to the risks associated with failing to conduct due diligence. Parties involved in the deal determine who bears the expense of due diligence. Both buyer and seller typically pay for their own team of investment bankers, accountants, attorneys, and other consulting personnel.
Why Due Diligence Matters
"Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions"
Due Diligence Activities in an M&A Transaction
There is an exhaustive list of possible due diligence questions to be addressed. Additional questions may be required for industry-specific M&A deals while fewer questions may be required for smaller transactions. Below are typical due diligence questions addressed in an M&A transaction:
1. Target Company Overview
Understanding why the owners of the company are selling the business –
  • Why is the owner selling the company?
  • Have there been efforts to sell the company before?
  • What is the business plan and long-term strategic goals of the company?
  • How complex is the company (in terms of products, services, subsidiaries)?
  • Has the company recently acquired or merged with other companies?
  • What is the geographical structure of the company?
 
2. Financials
Examining historical financial statements and related financial metrics, with future projections
  • Are the financial statements audited?
  • What do the financial statements imply about the financial performance and condition of the company?
  • Are margins for the company increasing or decreasing?
  • Are future projections reasonable and believable?
  • What amount of working capital is required to run the company?
  • What are the current capital expenditures and investments?
  • What amount of debt is outstanding and what are its terms?
  • Is there any unusual revenue recognition?
  • Does the company have enough financial resources to cover the cost of transaction expenses for the deal?
 
3. Technology/Patents
The quality of the company’s technology and intellectual property
  • What patents does the company have?
  • What trademarks does the company have?
  • What copyrighted products and materials does the company use or own?
  • How are trade secrets preserved?
 
4. Strategic Fit
How the company will fit into the buyer’s organisation
  • What synergies will be obtained?
  • What products or services will be provided that the buyer does not already have?
  • Will there be a strategic fit?
 
5. Target Base
The company’s target consumer base and the sales pipeline
  • Who are the company’s top customers?
  • What consumer risks are apparent for the company?
  • Are there warranty issues, and what is the customer backlog?
 
6. Management/Workforce
The company’s management, employee base, and corporate structure
  • What is the current compensation structure for officers, directors, and employees?
  • What are the current employee benefits?
  • What are the management incentives or bonuses?
  • What are the policies and employee manuals?
  • Detailed background on the company’s CEO and CFO

​7. Legal Issues
Pending, threatened, or settled litigation
  • What is the nature of any pending or threatened litigation?
  • What claims, if any, are there against the company?
  • Settled litigations and the terms of settlements
  • Are there any governmental proceedings against the company?
 
8. Information Technology
Capacity, systems in place, outsourcing agreements, and recovery plan of company’s IT
  • What software packages are being used by the company?
  • What are the annual IT maintenance costs?
  • What is the capacity of the usage level of existing systems?
  • Is there a disaster recovery plan in place?
 
9. Corporate Matters
Review of organisational documents and corporate records
  • Charter documents of the company
  • Who are the current officers and directors?
  • Who are the security holders (holders of options, preferred stocks, warrants) of the company?
  • Are there subsidiaries of the company?
  • Current stockholders and voting agreements
  • Are securities properly issued and in compliance with applicable laws?
  • Are there any recapitalisation or restructuring documents?
 
10. Environmental Issues
Environmental issues that the company faces and how it may affect the company
  • Are there hazardous substances/materials used in the company’s operations?
  • Does the company have environmental permits?
  • Are there any environmental claims or investigations related to the company?
  • Are there contractual obligations relating to environmental issues?
 
11. Production Capabilities
Review of the company’s production-related matters
  • Who are the company’s most significant subcontractors?
  • Who are the company’s largest suppliers?
  • What is the monthly manufacturing yield?
  • What materials are used in the production process?
  • Are there agreements or arrangements related to testing of company products?
 
12. Marketing Strategies
Understanding the company’s marketing strategies and arrangements
  • Are there any franchise agreements?
  • What are the current marketing strategies in place?
  • Sales representative, distributor, and agency agreements?

DEALS THAT PROVIDE THE BEST RESULTS

3/8/2020

 
PART 1: ​SMALLER M&A deals work out better over time.
The common myth that 3/4 of all mergers fail has long been dispelled. M&A does boost companies’ growth and value, in saying that, infrequent large deals do tend to hurt value creation. Instead, it is a steady stream of smaller transactions — known as programmatic M&A — that delivers the real wins. But these transactions need to reach particular thresholds of frequency and cumulative value to make a real impact.
​Companies that execute programmatic M&A over years, often decades, become true masters of the art of identifying, negotiating, and integrating acquisitions.
Companies that do many small deals can outperform their peers—if they have the right skills. But they need more than skill to succeed in large deals.
Research  shows that across most industries, companies with the right capabilities can succeed with a pattern of smaller deals, but in large deals the  industry structure plays as much of a role in success as the capabilities of a company and its leadership. As companies get bigger, the ones that get the best returns are those that continue their growth through a strategy of smaller deals, as the big deals can be a bit of hit or miss.

Large Deals: Are more suited to slower growing mature industries as there is great value in reducing excess industry capacity and improving performance, and a lengthy integration effort is less disruptive. Conversely large deals in fast moving and rapidly growing sectors have been less successful, because of the time it takes to integrate the acquisition and companies focus inwardly taking their eye off the ball to some extent on what's happening in the marketplace, maybe missing a new product or upgrade cycle.

​Pragmatic Deals: Companies across a variety of industries do well using the programmatic approach. Companies using this strategy completed many acquisitions that together represented a material level of investment. Furthermore the volume effect — the more deals a company did, the higher the probability it would earn excess returns.
PART 2: A strategy that uses CAPABILITIES as the basis for inorganic growth.
Successful acquirers make M&A deals that either enhance their distinctive capabilities systems or leverage those capabilities systems, or do both. These companies have been rewarded with deals for which the compound annual growth rate (CAGR) averages 12 percentage points more in shareholder return than M&A deals by other buyers in the same industry and location. Even during the difficult years since the 2008 economic crisis, deals linked to a capabilities-driven strategy have tended to increase shareholder value for the acquirer
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— while most other inorganic growth moves have led to a loss of value.
Deals do better when the incoming company matches the acquiring company’s capabilities system. Some industries, such as information technology and retail, show a larger effect; all industries, however, show a consistent, observable capabilities premium in M&A. Deals made with a capabilities perspective are far more likely to generate value over time.
A capabilities system, is something specific: three to six mutually reinforcing, distinctive capabilities that are organised to support and drive the company’s strategy, integrating people, processes, and technologies to produce something of value for customers. they are differentiated and complementary, working together to reliably and consistently deliver a specified outcome, in support of a company’s long-term strategy and market position. These capabilities systems are typically complex and multi functional, and tied closely to the company’s identity; they take a lot of attention and investment to build and maintain. But once in place, they guide a company’s way of creating value in the market and provide distinction and prowess to its products and services.

    Author

    Partner at Black Hat Capital.

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