A Balanced Approach to Acquisitions
Because of the vendor warranties and indemnities contained in the “Sale and Purchase Agreement” and subsequent “Disclosure Letter”, some buyers and their advisers are overly reliant on them as a replacement for a thorough consideration of the merits of a deal.
A commonly held belief is that the buyer holds “all the cards” when undertaking an acquisition. However, statistics reveal that the buyer often ends up with significantly less, in terms of post-deal benefits, than they ‘hoped’ for. Research by Société Générale (SG) (Source:Moneyweek) somewhat depressingly reveals that just 30% of acquisitions can be considered a success, while a staggering 70% fail to deliver some or all of the expected benefits – in the worst case scenario, the ‘wrong’ acquisition can destroy value entirely. I’m sure the Lloyds Banking Group board is ruing the day it allowed itself to be encouraged to acquire HBoS, as the result of this acquisition was a massive destruction of value in what was a relatively healthy Lloyds TSB. Needless to say, the RBS acquisition of ABN Amro is also a high profile example of such value-destroying deals.
What can we conclude from the SG findings? Although interpretation of statistics is a contentious issue, you could reasonably assume that many buyers overpay for target companies. You could viably assert that vendor management teams fail to disclose or understand material facts about their business which, when discovered post-deal, have a catastrophic effect on the combined business. This is almost certainly true of the HBoS deal – it would appear that disclosure of the extent of the toxic debt was poor, or at least poorly understood. If press reports are to be believed, Lloyds TSB also went ahead with the acquisition, allegedly encouraged by Prime Minister Gordon Brown, while relying on a significantly truncated due diligence process. This raises another point which may be deduced from the statistics; that acquiring management teams often fail to take the steps to fully understand the business they are buying and give insufficient thought to how the two companies might be integrated post-deal to produce the intended benefits. The issues of risk, price and value couldn’t possibly be accurately assessed with such an approach.
Interestingly, there is another piece of research that bears a striking correlation to the SG findings mentioned above. KPMG (Source:Moneyweek) undertook research entirely independent of that conducted by SG, and produced a very revealing statistic – just 30% of buyers were found to undertake any detailed assessment of tangible synergies with the target company. These might include cross-sell opportunities, cost savings, or properly considered forecasts for revenue and profit growth. While speculative, it likely won’t have escaped your attention that this finding, 30% of buyers who undertake detailed pre-deal assessment, exactly matches the 30% of acquisitions which actually succeed.
A BALANCED APPROACH
The BCMS Corporate approach to selling businesses has remained unchanged and unique since the Company’s inception in 1987; a founding principle is that the vendor must be transparent and has as much to gain from helping the buyer understand their business, its future potential and the post-deal benefits, as the buyer does. Our belief is that what is good for the vendor is ultimately also good for the buyer; they have many shared objectives which traditional selling methods can overlook. “Deal-making” all too often becomes an adversarial process, often due to poor communication and a mismatch of expectations. Yet we know from more than twenty years of experience, it is far more likely to succeed through a cooperative and open approach.
Acquiring management teams that remain detached from the process and drive their deals almost exclusively through advisers are exposed to greater risk. Here at BCMS Corporate, we seek to maximize the price for the vendor, which should not be confused with selling at a price which means the buyer overpays or is disadvantaged. What we strive for and what we achieve is a fair price for our clients and for the buyer. This can only occur if we not only thoroughly understand our clients and their businesses but also recognize the buyers’ needs. We understand and appreciate their need for clarity about what it is they are buying and its potential, so we set out a “conservative” post-deal synergy plan, agreed on by both parties and modified to each buyer, including a financial illustration of the cross-sell opportunities, the growth prospects, cost savings and any other such tangible gains. The buyer can then, with much greater certainty, remove some of the risk element from their price offer for our vendor clients company. We do this for all shortlisted buyers to be able to identify the best match-up, ultimately choosing an buyer where the gains are most significant.
PRICE AND UNKNOWNS
This approach often generates a dramatic uplift between first and second offers from each buyer, the first offer heavily weighed down by the unknowns and the second revised upwards, driven by the clear business case we provide. Perhaps the most dramatic example of this is where the bid spread was a remarkable $30.3 million. The same buyer submitted a first offer of $4.6 million for a company they eventually paid $34.9 million for. Skeptics among you will no doubt conclude that this might fall into the HBoS category of deals. In fact, our clients agreed to an earn-out based on our post-deal business plan; all of the projections were hit and our clients received the maximum consideration. Incidentally, a return on investment (ROI) price, based on historical profits, would have been very close to the original $4.6 million offer which clearly would have been a very bad deal for our client and an exceptional deal for the buyer. What we achieved was a fair price.
Our view is that the vendor should take responsibility for ensuring transparency and help the buyer easily identify and quantify the benefits. By doing so, we create a genuine win-win situation. A poorly considered acquisition at any price is almost always a bad one. A well reasoned, considered acquisition arrived at through cooperation and openness between vendor and buyer will almost always lead to both parties achieving their aims.