27 April 2020 by Paul Croft
Despite the actions of our Federal and State Governments to support SMEs during the COVID-19 pandemic, it is likely that a large number of struggling businesses won’t survive or may need an exit strategy. However, for the more resilient and liquid businesses, the crisis creates opportunities to grow through M&A, potentially on very favourable terms.
In our experience, opportunistic acquisitions can quite easily become a poisoned chalice, with value destroyed – rather than created - through the transaction. For businesses lucky enough to be considering deal opportunities, here are four tips for optimising a successful acquisition during this period of heightened volatility and uncertainty.
- Avoid “strategic” opportunities
A cheap going rate or the prospect of growing bigger are poor reasons for pursuing opportunistic acquisitions. Consider, for example, CBA’s acquisition of BankWest from its struggling UK parent, HBOS, for a “cheap” $2.1 billion (its book value at the time was $4.25 billion) at the peak of the financial crisis in 2008. With the financial regulator wanting to avoid a major financial shock during the global downturn, the acquisition was executed quickly, following an exceptionally brief period of due diligence. However, it was not until after the deal was completed that the full extent of BankWest’s impaired and troublesome loans became known to CBA, leading to a large write-down in BankWest’s loan book.
So, before moving on deal opportunities that may emerge as a consequence of coronavirus:
- Be certain about how the acquisition aligns with your current business strategy and the potential impacts of the acquisition on the overall economic logic of that strategy
- Don’t cut corners: undertake proper due diligence, and
- Don’t be pressured to make poorly or partly informed investment decisions to get a deal done quickly.
- Focus on opportunities that increase shareholder value
Buying a business introduces new risks and uncertainties: doing your pre-acquisition homework and being clear about your investment criteria are critical steps in mitigating those risks.
Equally important is understanding how the acquisition will deliver sustainable shareholder value: bigger isn’t always better and doesn’t automatically create shareholder value. There are a range of ways that M&A can create shareholder such as through vertical integration, product or market expansion, cost reduction (such as through economies of scale or scope) and purchasing a competitor’s technology. Being clear on the deal’s strategic purpose is important for a number of key reasons including:
- Helping identify the deal’s value drivers to be tested and assessed during due diligence
- Highlighting the potential synergies underpinning the deal rationale
- Informing the price (and premium) you are willing to pay for the target, and
- Allowing you determine the most effective approach for integrating the two businesses.
- Have a clear strategy for realising the potential synergies…quickly
Deals are renowned for failing to deliver the expected value because of poorly implemented or delayed integration. Speed of execution (to mitigate potential problems with customers, suppliers and employees) is essential to realising the targeted synergies. Synergies are optimised if the integration is successfully implemented within one year of acquisition; any synergies not achieved within three years are unlikely to be realised. Therefore:
- Don’t leave your integration planning until after the deal has been executed: your post-merger integration process should start with pre-integration planning during the due diligence phase, and
- Identify the business managers who will be responsible for the integration process and involve them during the due diligence process. This ensures continuity between the two phases (execution and integration) and ensures that the deal issues and dynamics are fully understood and acted on during integration.
- If you are ready, be prepared to strike quickly
We’ve been involved with deals where the buyer has been prepped and ready to flick the switch, only to miss the opportunity because it dithered too long about if, and how, it could address certain risks that were known, or knowable, at the time.
COVID-19 reaffirms the existence of black swans; it also reinforces the on-going presence of uncertainty and volatility in the economic environment. It may be one thing to be able to call the bottom of the cycle, it is certainly another to accurately predict the pace of the recovery and the direction of the next normal. If you are going to navigate that uncertainty and want to be able to act decisively on opportunities, it pays to spend time now in understanding and considering how your business may respond to a wide spectrum of possible risks and opportunities. You can do this by:
- Incorporating a broad range of potentially disruptive scenarios into your investment planning, such as those that affect continuity of supply, different aspects of demand, or the emergence of more contact-free economy and on-going social distancing, and
- Looking at a number of variables in an integrated manner, rather than considering them on an individual or linear basis. For example, in what ways could the COVID-19 restrictions be unwound, which sectors may rebound more swiftly and in what areas of the economy could our governments seek to retain varying degrees of control.
Engaging a financial due diligence specialist early in the business sale or acquisition is an effective step in the process that helps manage risk, control the outcome and cost. We aim to help, so please feel free to contact:
Paul Croft Andrew Boss
+61 418 411299 +61 0421 051 243