Article -> Deal On an Acquisition to Win
Date Added: January 2007
A staggering 70% of acquisitions fail to reach revenue goals.1 As a result, sellers often reap the shareholder value created after an acquisition, and buyers are left to cope with post-acquisition efforts to maximize profitability.
While acquirers hope for optimal synergies created through the blending of once separate opportunities and abilities, efforts are thwarted by limited access to information, people, suppliers, partners and customers. Plagued by a lack of acquisition experience, deal teams who make small errors in forecasting can have a huge impact on long-term success.
Recent research examines the weaknesses of acquisitions and explores the strategies involved in strengthening integration.
Reduce synergy estimates. The rationale of most acquisitions is gaining new customers, locations and business channels; yet, the higher revenues expected with these advantages is hard to achieve. Inflated revenue estimations mark the greatest error in top-line synergies. In the end, the acquirer pays more.
Diminish revenue losses. Many organizations underestimate the losses affiliated with acquisitions. Largely due to the disruption of normal business, the loss of customers must be dealt with beyond the scope of anticipated cost savings. Researching customers can positively affect financials since studies show the average acquiring company loses up to 5% of its customers.
Raise onetime expense estimates. To avoid running over budget, falling short of targets and failing to deliver on commitments throughout the integration process, scrutinize relevant facts early as part of an integration strategy. Incorporating an integration strategy during due diligence goes a long way.
Analyze projections. While pricing and market share may seem to be accurate measures of estimating combined financial results, a closer look at overall market growth may indicate otherwise. Is it realistic to project a 14% growth in profits from the acquisition while the industry average is 1.5%?
Relate cost benchmarks. Data shows that in approximately one quarter of acquisitions, leaders overestimate planned costs by 25%. This results in a valuation error of up to 10%. By applying precedents, benchmarks yield a more pragmatic approach to calculations.
Impose realistic timing. Overly simplistic assumptions and optimism have no place in acquisitions. This is the time to analyze how long it will take to capture synergies, and moreover, how long they will last. Slow-reacting leaders, for example, adversely affect quarterly results regardless of whether cost savings are spread out evenly throughout the quarter. On the other hand, quickly moving companies soon realize benefits that are not permanent and should be phased out.
Recent evidence suggests timing is so critical that bad timing can actually stop synergies from occurring at all. Unless benefits are realized within a reasonable amount of time (6 to 12 months for example), they may not materialize at all. A successful integration requires persistence.
No two deals are alike, yet, being vigilant of pervasive errors in integrations can prove instrumental in propelling a newly formed organization to reaching its goals.
1Christofferson, Scott A., McNish, Robert S. and Sias, Diane L. “Where Mergers Go Wrong.” McKinsey Quarterly, 2004 Number 2. http://www.mckinseyquarterly.com