Why acquisitions fail: Top 6 blunders
Monday, October 15, 2007/
Acquisitions are rampant in the SME universe, and even the credit squeeze has not cooled the acquisitive fires. AMANDA GOME runs through the top six mistakes entrepreneurs make when acquisition mania grips them.
By Amanda Gome
It is acquisition mania. In the last few years, many of Australia’s emerging companies have been on the prowl, searching for companies, both local and overseas, that will help them rise quickly through the middle ranks and gain economies of scale.
Predictions that the credit squeeze might cool down the acquisition market have come to naught as entrepreneurs pounce. Just in the past month there have been a number of acquisitions, particularly in the digital/content space, with online media and marketing deals playing a big part in acquisition mania.
- Listed real estate classifieds company Rea Group is buying a controlling stake in Dubai’s biggest real estate magazine and property website AlbabWorld.com from Swiss Media Group last week.
- Collins Booksellers, the franchised book chain, bought the Book City group, effectively doubling its size.
- Destra, the ASX-listed $70 million video, film and music company, bought 3D and Oyster Magazine for $1.75 million cash and $500,000 equity. Destra’s founder, Dominic Carosa, has done about 12 acquisitions in the past two years, including Magna Pacific in August, and says he will continue to look for acquisitions in the film, video and music industry.
- Wotif.com and Webjet are both trying to outbid each other for Travel.com.au.
But will these acquisitions succeed? Recent studies show that up to half the mergers and acquisitions of the last 75 years failed to create the expected value. Worse, often value was destroyed and the company’s performance was dragged much lower by the acquisition.
Here are six top acquisition blunders and how to avoid them, with advice from top entrepreneurs – including entrepreneur and academic Tom McKaskill, who has not only done several acquisitions himself but has just written an excellent book called Fast Forward: Acquisition Strategies for Entrepreneurs.
“It’s all about the deal”
No it’s not. McKaskill points out that many acquisitions are undertaken by executives who see themselves as deal makers and move on to the next deal leaving the problems of integration and management of the new acquisition in the hands of others. “In fact companies are often encouraged to seek acquisitions by advisers who might be motivated by short term personal gains than assisting the long-term success of their client,” he says.
Often line managers are not involved in the deal negotiations and are unprepared for the new responsibilities. They may be busy carrying out their own projects and do not want to be distracted.
“There are also post acquisition issues which have to be worked through before the business can be handed over to regular line management,” McKaskill says. “But this may not be given sufficient priority or resources once the deal is done.”
Greg Roebuck knows this first hand. He is chief executive of Carsales.com.au, which had a net profit rise of 100% during 2006-07 to $11.8 million and is using acquisitions to get scale.
Carsales recently bought two small companies, Carpoint and Boatpoint. Roebuck says the classic mistake buying Carpoint was not focusing on what was going to happen after the deal was done.
Carpoint and Carsales.com.au were two competing sites. “How were we going to integrate them? Where’s the line drawn between what this site does and what that site does,” he says.
“It probably took us six or 12 months to integrate the two businesses together. In hindsight, there should (have been) be more of a focus on after the deal, during those lead up months, to actually completing a deal, rather than just totally focused on the mechanics of the deal,” he says.
Destra’s Carosa, who is now a veteran at acquisitions, says he now sets up an “acquisition team” and has it in place to handle the integration. He says he doesn’t bring the team in at the start of the deal but introduces them half way through negotiations. “It is too easy to focus on usual business operations,” he says.
“We are in the same industry so we have similar cultures”
No again. Many acquisitions fail because of a clash of cultures. Sometimes there is not a lot of integration done and the new acquired company does not cause such a culture shock to its new host.
But when there is a high degree of integration, there can be trouble. “Basically individuals are attracted to organisations which support their personal values and the manner in which they prefer to interact with fellow employees,” McKaskill says. When the individual is pushed out of their comfort zone, they may resign, be uncooperative or perform badly.
Part of the change management process must focus on the individual needs, says McKaskill. Watch out for people who are stuck, in denial or moving backwards. Don’t use a herd approach. Brief all individuals separately on the changes and give them opportunities and time with their manager to raise questions about what will happen to them at a personal level.
Carosa says the biggest challenge in any acquisition is the people integration. He says customers and systems are easier to deal with after an acquisition – “but controlling (your) people is virtually impossible”.
“This is where we spend the largest chunk of time, integrating and making the people that have been acquired feel part of the Destra family.” He tries to move quickly to introduce new people to the Destra culture, which has some distinctive quirks.
“We’ve got bells – we call them the bells of success. People ring the bells when they think something positive has happened,” he says.
Also Carosa says that he always moves as quickly as possible to identify the key people and assure them they will still have a job. “Providing them with that security is really important.”
Look for a cheap buy
Entrepreneurs who set out to look for undervalued companies especially those in difficulty, could find themselves in trouble.
All too often entrepreneurs assume they can fix whatever is wrong with the business they opportunistically buy without spending the time to really appreciate how the business got into trouble in the first place. It may be that the business has lost a key customer, supplier or employee and is no longer viable, McKaskill says.
Alternatively the competitive arena may have changed and the business is no longer able to compete. “It is only by uncovering the cause of the failure that the entrepreneurs can work out whether they have the capability to bring the business back into profit and growth,” he says.
Businesses that get into trouble often strip away assets and capabilities. Equipment may be run down, safety stock sold off, intellectual property may have been disposed of and key staff may have left. The buyer may simply be unaware of how deep these problems are.
McKaskill says many acquirers fail to fully appreciate the level of disruption that an underperforming business has on group activities – turnaround situations require specialist skills that are not normally present in most management teams.
And while there may be external events that caused the target firm to get into trouble, more often than not the problems are with the management. This may be a problem if the buyer is expecting to reply on the existing management to continue to run the business.
“My new acquisition will generate the same (or more) returns it has been previously”
Maybe. But maybe not if the financial records of the company are inadequate or false. Often forecasts don’t take into account the costs and delays of the acquisition. “Often assumptions made about the external and internal environment are too optimistic,” McKaskill says.
There is an assumption that old customers will stay on once the new company is acquired. But some customers have very close ties with the old owners. Others use it as an opportunity to exit.
Carosa says one of the first things he does is visit customers and assure them that the service will stay the same or improve. But entrepreneurs report that it can take a long time to check whether inherited customers are satisfied.
“The more integration, the better”
Wrong. Many companies are looking for cost reductions in acquisitions, often through eliminating duplication. But there is no point integrating where there is no obvious benefit. Different cultures can exist within a company, says McKaskill. Sales departments look different from finance departments.
“There is a good argument that less is more when integrating, and many companies have found the less they change, the greater the likelihood of the ongoing business working,” he says.
“Due diligence means looking at all the financial statements”
It means far more than that. The main aim of due diligence is to see if the business has any major problems that you have not identified.
McKaskill’s list in his book Fast Forward says due diligence should include:
- Background checks on key executives and employees.
- Review of all company documents, including board minutes.
- An examination of all shareholder information including minority interests.
- All material agreements with external third parties.
- Any employee agreements.
- Review of all key financial information Inspection of all key contracts including leases, mortgages and debentures.
- Review of all compliance requirements including tax filings and liabilies.
- Review of all current and potential litigation.
- Review of all insurance and outstanding claims.
- Validation of all intellectual property ownership Interviews with major suppliers, customers and distributors.
- Verification of costs, expense levels and purchase commitments.
- Assessment of plant and equipment and capital expenditure items.
- Assessment of key employees.
- Review of inventory, including ageing.
To get a copy of Fast Forward: Acquisition Strategies for Entrepreneurs go to www.tommckaskill. Tom McKaskill also writes a regular column for SmartCompany.com.au on buying and selling businesses.