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Jerry Pisani,
President and CEO of Stoneridge, Inc, retired. Associate, Automotive
Resource Institute of the SAE.
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THE
M & A PROCESS
J. Pisani - Moving From Strategy to
Implementation
The M&A process can be defined as consisting of four phases:
strategy development, candidate screening, due diligence, and integration.
In an earlier
article (July 2007), I wrote about strategic intent being the
first step in the process. I would like to continue the discussion
of the M&A process in the interest of improving your likelihood
of success. Defining best practices does not guarantee “world
class” results but reaching your destination is more likely
if you understand the route map. |
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October
2008
M & A Digest
Main Page |
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Specifically, I would like
to focus on due diligence and the integration plan because the acquisition
process is becoming more complex. Acquisitions have evolved from a
product line “bolt-on” or cost reduction driven vertical
integration to bolder strategies that expand enterprise core competence
and global reach. At the same time, regulatory and environmental issues
have diverted managements’ attention from the core business
objectives. In addition, shareholders’ expectations are higher
in terms of growth, value created and how quickly accretion to earnings
can be demonstrated.
Due diligence has traditionally been left to business planners,
financial analysts and lawyers who verify the completeness of the
data, develop a financial model and negotiate the terms and conditions
of the acquisition. Today, we need a more extensive process and
the requisite business skills resident on the acquisition team.
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All post acquisition surveys
reach the same conclusions; due diligence was inadequately planned
and executed. Common findings;
• The team lacked the expertise to analyze the acquisition’s
business plan and question the assumption and projections or assess
the potential risks.
• Not enough weight was given to the compatibility of the
two organizations, leading to turn-over, integration issues and
delays in realizing projected synergies.
• Buyer enthusiasm led to a lack of objectivity regarding
customers’ response, growth projections, cost projections
and potential synergies.
• The time and talent was inadequate for the task.
• A post acquisition plan was not in place before closing.
The objective is to expand the due diligence process to move beyond
data collection and modeling to a complete business analysis. Depending
on the complexity of the transaction, the focus should be on any
and all aspects of the business being evaluated that will impact
value creation:
Business Environment: An external
view of the growth projections for the market and regions served
and the stability of supplier and customer relationships.
Competitive Climate: Existing
and emerging threats to the base business considering commercial
and technical risks and including an objective analysis of the competitors.
Cultural Fit: The values and
management style that define the business and its compatibility
with the culture of the acquiring company.
Organizational Benchmarks:
An assessment of the executive talent, marketing/sales capability,
product strengths and weaknesses, business and manufacturing process
capability.
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Defining the scope of the
project will indicate the resources that are required. It is common
practice to under staff the due diligence team and to rely on personnel
who can verify the strategic fit and review the completeness of
the data but aren’t necessarily qualified to identify or quantify
the synergies and won’t be accountable for getting to the
expected post acquisition results. A common rationale is that operating
personnel are too busy to be included, however, while consultants
bring specialized expertise they too can not be held accountable
for delivering the projected benefits.
A team of functional experts is needed and particularly the individual
responsible for a successful integration must be included. If essential
resources are not made available for a project of this importance,
the acquiring company does not understand how shareholder value
is created. Even if the objective was to acquire an autonomous business
unit, a comprehensive business analysis is still the more rigorous
and desirerable approach.
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The acquisition team is charged
with developing a strengths, weaknesses, opportunities and threats
analysis for each aspect of the business outlined, in addition to
the traditional due diligence data collection. The goal is to identify
the tangible benefits, risks (potential deal breakers if any), and
integration issues. Usually, the major issues will stand out; seller’s
post-closing performance guarantees, expected new business awards,
competitive issues, new product launches, potential integration problems,
process deficiencies, and talent retention concerns. The team must
review the data presented but also understand the sources of the data
and its reliability.
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The summary report should provide
top management with a fact based analysis of the state of the business
as well as provide;
• Confirmation of alignment with
the stated strategic intent. • Major sources of value creation.
• Significant risks as well as risk mitigation suggestions.
• Important information that has not been obtained.
• A realistic forecast of sales and cash flow after tax for
the next five years to calculate the present value for the business.
• The integration plan and implementation schedule.
• Any additional human resources or central services required
but not included in the cost projections.
While these expectations are not surprising or innovative, all
too often they are not assigned or reported formally. The acquisition
process needs to be looked at as more than a one time event that
the team can get through but rather as a fundamental business process
that is documented and followed. If you’re already there,
congratulations, you’re ahead of most of the competition!
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