We explored the landscape of the Merger & Acquisition (M & A) ecosystem and how M&A activity is generally driven by strategic objectives that must form a match between both parties – the buyer and the seller. As discussed, mergers & acquisitions, in some cases, may be required by one or both organizations in order to survive. In other cases, the M&A move be seen as a strategic action that will lead to a leaner, more profitable company once the transaction is completed – one that is better positioned for growth. We will delve, further into the points of commonality between mergers and acquisitions and looked at the buy and sell-side perspectives of each in more detail.
In this third installment, we will examine domestic versus international M&A transactions, then explore the analysis behind selecting another company worth merging or acquiring and discuss how due diligence should actually be performed.
Other M&A Factors to Consider :
Is the M&A transaction Domestic or International ?
Obviously, the complexities of mergers and acquisitions across national borders are far more so than M&A transactions with a domestic company – so the data collection, due diligence process and closing process will take more time, effort and money to complete.
The level of challenge is generally dependent on the acquirer’s experience and presence in the country where an acquisition is being made.
Acquiring across national borders requires the buying firm to understand differences to account for in areas such as:
- Economic / Financial
Different functions of the target company pose unique challenges, such as in Accounting and Finance. Standards and best practices differ across countries and the impacts of those differences cannot be overlooked. For a purchaser with multi-national acquisition experience, this may be less of a factor than for a first-time buyer. Regardless, it adds to the time and effort required for due diligence.
The human resource function is another area that in cross border M&As requires an in depth understanding of potential risk factors like :
- Labor laws
- Health benefit programs
- Vacation policies
- Pension plans
- National regulations
- Unions and workers councils
- Work conditions
- Local employment restrictions
- Employment security laws
- National and organizational cultures and customs
Being there helps. Organizations that are already operating globally and have a division or subsidiary in a particular country will have an advantage during due diligence and the negotiations of an M&A transaction over one entering into a country where there is no local knowledge and no established contacts to leverage. However, the role of the subsidiary must be clearly defined in the M&A process and just as much planning and coordination is required. In cases where a firm is undertaking an acquisition in one or more countries where it has no presence, seeking a local intermediary to assist in the process can help avert many issues that might snag the process later on after much time, money and effort have been spent. Such M&A transactions in certain countries can be even more difficult to complete when the local and federal governments play stronger roles in business affairs of companies, involving themselves in labor decisions, market entry and foreign company access to their supply networks.
How Do You Target and Select Another Company When Acquiring or Merging ?
Assessing “fit” with another company can be where executives face the greatest difficulty in the M&A process. It is easy to overestimate the synergies that might result from an M&A transaction and to underestimate the difficulty of assimilating the purchased company into the organization and harvesting the benefits of those synergies. Excitement about a pending deal can cause executives to see the M&A deal through “rose colored glasses” and fall victim to a “wishful” strategy and not a realistic one.
Knowing what you are looking for and how you want to use it are essential knowledge elements in targeting companies in M&A strategy. With a merger, the acquired company will be absorbed into the buying company. With an acquisition, it must be decided on whether the purchased company be integrated (and to what extent) or left alone. If integration is the intent, it poses another challenge that is easier said than done. Assuming the potential target to be a perfect fit for deriving synergistic benefits, integration of strategy depends on the vision and the mission of the two organizations. The strategy pertaining to target markets, human resources, information technology platforms, financial systems, accounting practices and many other ecosystem factors must be in sync for having a successful M&A deal close.
While there is something to be said for consolidation and the initial cost savings that can be achieved, integration should never be evaluated on cost savings alone. If the collective output of the integrated firm does not exceed the individual outputs of each entity (prior to the integration) than it should not be attempted other than in the case of horizontal integration for the purpose of eliminating a competitor. This basic metric for evaluating the benefits could be applied to manufacturing capacities, sales increases, engineering, economies of scale in purchasing and marketing, etc. Individually each of these areas may be a reason to consider acquisition and integration, though it is best to do so when looking at the collective picture so as to avoid placing too much emphasis on the benefits achieved in any one area that might represent the smallest cost implications (which leads to underestimation of difficulty).
The result of overestimation of the M&A benefits and underestimation of the M&A costs is, of course, another statistic in the failure count of such transactions. With more careful valuation and due diligence (and less wishful thinking) it can sometimes become apparent to the buying company’s executives that the company being acquired presents a long shot (perhaps even more so than the “more risky” strategy of internally developing the capabilities of the acquisition target) and the purchase price is far too high and likely returns on capital for the acquisition are far too low given the associated risks.
Performing Due Diligence :
After targets have been selected and initial high-level analysis has narrowed the field of candidate companies, due diligence begins. Due diligence is where much of the information gathering takes place to confirm the “fit” for the target company in the buying organization’s strategy. The process also typically involves valuation and early-stage negotiations to determine if the two companies are in the same “ball park” on valuation. It is during this period that the executives, senior managers and their staffs attempt to learn all they can about a target company (or division) so as to better understand the organization’s value, how it operated and performed in the past, how it is likely to operate and perform in the future, and how it will likely fit with the buying firm (determining the synergies).
In a perfect world, the acquiring company would have access to and know everything there is to know about a target firm prior to the M&A transaction closing. In reality, attaining that level of visibility into the target company rarely, if ever, happens. Instead, M&A deals usually get constructed with a much murkier view into the target.
So why do deals proceed without a fully completed due diligence process? Sometimes it can be because the process to get the target company’s information is not well planned and the target company is often not organized and prepared enough to gather all of the requested information. Add to that the pressures from executives in the buyer company to quickly complete a deal, and soon short-cuts are taken and “hopeful” strategy wins out over comprehensive analysis. Why would the buying company’s executives want to rush the process? Perhaps to avoid further distractions to the core business because the process has gone on too long. In some cases the rush to close is to avoid competitive bidding from other suitors.
Unfortunately, during due diligence, the executives of the acquiring firm typically develop only a partial understanding of a target firm. This partial understanding is often accomplished by piecing together information obtained from internal company documents, interviews with key managers, interviews with a sampling of employees, on-site inspection and surveys and/or interviews with key customers. During due diligence, using external data can help add back some of the missing pieces to the information puzzle.
Gathering external data might include :
- Talking to ex-employees
- Surveying or interviewing current and past customers
- Reviewing SEC and other published data
- Interviewing former consultants
- Researching past press releases or articles written about the target firm
- Conducting a 5-Forces analysis
Often, however, obtaining such information requires considerable effort and adds time to already aggressive schedules. For example, rarely is there as much external data available in acquisitions of small privately held firms. Moreover, many owners of small businesses either do not have much of the information requested or can be guarded about revealing it. This is especially true if the buying firm is a larger competitor.
In such cases, the negotiation process will have to progress to more advanced levels of commitment (e.g., letter of intent, preliminary agreement, non-disclosure agreements) before access to information is provided. Even when historical data is reasonable to obtain and is acquired during due diligence, it is still impossible to know what the future holds.