|
 |
 |
 |
 |
STRATEGY OF BUSINESS ACQUISITIONS, DISPOSALS, MANAGEMENT BUY-OUTS INDEX
O’GRADYS
• Most acquisitions underperform; Research shows that over 50% of all acquisitions underperform in comparison with the pre-deal expectations. The clear evidence is that the market leader is likely to be the most profitable in the sector so acquisitions which enable a company to achieve market leadership in an existing segment should be regarded as a safer option provided there are no Competition issues with the Regulatory Authority. This avoids the pursuit of diminishing returns. Increased market share is a valid goal, particularly for a Company to become one of the three largest players in any sector. This means that prospective customers are likely to be motivated to find out what you have to offer because of your visibility in the sector. The coming together of No. 2 & No. 3 in any market creates more serious competition. Niche businesses which are relevant to strategy and are market leaders in their segments often prove to be robust acquisitions. The smallness of a niche market means the other Companies in the market are unlikely to enter the segment. The acquisition of a Niche area allows for a one stop offering to customers and clients and benefits from cross selling opportunities or to obtain or secure a key supplier or to continue a source of supply. Some acquisitions are contemplated on the basis that a successful delivery of post acquisition synergy. This should be avoided at all costs as they should be identified pre the deal. 2. Commercial Due Diligence and its Importance The single most frequent cause of underperforming Acquisitions is the Acquirer took the commercial well being of the Target Company on trust. Private equity houses are committed to commercial due diligence as a matter of routine and it should always a matter of immense importance to the Acquirer. The Commercial due diligence process should include investigation of:- • Customer satisfaction, compared against Competitors; 3. What Buyer should seek and avoid • Managing continuity is a key issue Managing continuity is a key issue. The most critical period for a newly acquired business is the first few weeks and months. Even mildly dissatisfied customers may decide to have a second supplier or to invite other suppliers to pitch for the business. Staff are likely to be nervous and suspicious assuming wrongly that there is a risk of redundancy. Consistent sales and profit growth history are a valid comfort and the three previous years performance of a Target Company must be understood and analysed. An essential step for any acquirer is to produce a separate adjusted sales and profit history which reflects any extra costs which would have been incurred as a group subsidiary. The adjusted sales and profit figures establish the level of sustainable profit which is a platform for future projections. Vendors are prone to make ambitious forecasts for the current year and the next two years to maximise valuation. Always ask the Vendors to explain the basis of any forecasts and the underlying reasons. If the forecasts are over optimistic say so and explain why that view is taken, politely! The acquirer should compile his own forecasts and base the valuation on such forecast taking into account any additional costs. On the tax and VAT front it is important that the vendors should have ensured that the up to date tax and VAT returns have been submitted and agreed. Any Revenue audit outstanding should be a cause for concern. It may be some time to reach a final agreement with the authorities and there should be maintenance of an escrow account or some withholding to cover this situation or a Director’s indemnity. Undue customer or supplier dependence is a potential risk. It is common place in service companies that the five largest clients will account for 80% of total sales. If any of these clients are lost this could create a serious loss. It is important therefore to ensure that any agreements with clients should be in writing. Major customer contracts due for renewal should be a cause for concern. 4. Developing the Acquisition Profile • Strategy needs focus; The writing of an Acquisition Profile to focus the acquisition search minimises abortive effort and accelerates an Acquisition programme. The acquisition profile should not exceed two pages and it should address:- • Market segments and product services; Clarity is the key in ascertaining the strategy and the commercial rationale should be clear. The amount of management time to negotiate an acquisition and integrate it differs very little with regard to the size of the business acquired, therefore it is more positive to acquire one sizeable acquisition rather then a handful of smaller deals. Turnover and gross profit can be used as an indication of size as an alternative to profit before tax. The vital ingredients for a successful acquisition programme are not the identification of targets but the ability to woo the vendors. The most successful acquisitions are those where the company was not for sale until a persuasive approach was made. It should never be forgotten that when a company is being marketed the reasons for sale outlined by the vendors may be plausible but are often not the key reasons and are merely a smokescreen. If using external advisors, at any initial meeting the external advisor should:- • Demonstrate the sector experience; The key requirement for success in any acquisition is the ability to change and develop the company post acquisition into a successful business. It is important to focus therefore on the benchmarks to measure acquisition success and financial terms for the first two or three years post acquisition in the terms of:- • Sales; 6. Finding the Relevant Targets and wooing the Vendor The initial meeting with the vendor is important and in advance any acquirer should offer a Confidentiality Agreement to protect the Vendor and be prepared to sign one provided by any vendor. Many multi-national operations insist their legal department approves and negotiates or insists on required changes. This is potentially a huge turn off to a prospective Vendor and must not be allowed to happen. The Confidentiality Agreement should be designed to be a comfort factor for the Vendor and a more suitable and wider ranging Confidentiality Agreement can be signed if the deal progresses. Any meetings with the Vendor should be at neutral venues and any number attending should be small to underline confidentiality, preferably with a key decision maker on the Vendor side. A written agenda can sometimes be unacceptable to a Vendor so therefore the process should touch on the following matters:- • Understand the Vendor’s personal aspirations, time scale for leaving the business and particular concerns about selling; The decision maker of the Acquirer should have an informal meeting with the Vendor first to outline the information which will be required to be collated. This should give the Vendor time to prepare and if necessary cajole and negotiate to obtain sufficient information to form an adequate basis for valuation. The essence of a successful initial investigation of an acquisition target is to identify the vital factors for success of the business concerned and to examine these in some depth. Assessment should be made also of any vulnerable features of the business and whether or not performance has reached a plateau or is about to decline. With that comes the ability to identify latent opportunities for profitable development or any undervalued assets. 7. Using Commercial Common Sense to Value Business and Make an Offer • Adjusted profit history and forecasts are vital; The financial analysis techniques relevant for valuing a business are the same for buyers and sellers. Buyers and seller should have different valuations because of the assumptions that they make. In formulating a valuation into an offer the acquirer must take into account:- • How long have the vendors been trying to sell the business; A streetwise approach to valuation is the best method. Most offers, particularly in the private equity sector, usually make an offer based on a debt free cash free basis at completion which simplifies the valuation process. The valuation is normally based on EBITDA:- • Earnings i.e. profit; The assumption is that EBITDA is a sufficiently close approximation to net cash flow generated. Private equity houses seek a pre-tax internal rate of return of 30%-35% compound per annum taking into account any dividend payments as well as sale process. The alternative method of valuation is the Price Earnings (“PE”) approach i.e.:- • Using the adjusted pre-tax profits of the Vendor for the previous financial year; When the acquirer has arrived at a maximum deal value based on the above assessments the deal structure and the opening offer should be considered. The vulnerabilities of the business should be accessed. In these circumstances the initial offer payable at legal completion should fairly reflect, but not over generously, the current value of the business. Any earn out should be no more then two financial years. 8. Negotiate the Deal and Sign a Heads of Agreement • Negotiate the Heads of Agreement; The importance of the Heads of Agreement is that it disciplines the parties and gives a more detailed description of the deal in commercial language. It is not an obligation on either side to legally complete the deal and normally is subject to due diligence. Very few clauses should be binding other than:- • Announcements; In negotiating the Heads of Agreement it is preferable that this is negotiated face to face with the presentation of a draft agenda with the mutual expectation that the Heads of Agreement would be signed within two working days of such a meeting and that exclusivity would be granted. In confirming the agenda the following should be addressed:- • Earn out arrangements; The preferable timetable is as follows:-
The number of weeks required will vary according to the size and complexity of any deal.
9. Steering the Deal to Legal Completion • Effective commercial due diligence is vital; 10. Post Acquisition Management • Make an initial impact; 11. Streetwise Tactics to Legally Complete an Acquisition • Discuss the structure in a formal confirmation before making the written offer; The tactics adopted and your personal conduct will determine whether or not you will be able to successfully legally complete an acquisition. To acquire a target company you have to sell:- • Yourself as a trustworthy, reliable and friendly person to do business with; 12. Choose and Appoint Advisors with Care • Identify the help and advice you need and want;
|
|||||
|
||||||
|
print this page
email this page| Powered by WANDSOFTTM |