Corporate mergers and acquisitions are a vital part of keeping our economy vibrant.  They do this by building greater value through better leadership, management and releasing untapped potential through focused investment.  However, according to the Harvard Business Review: “Companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%.”

So how can you maximise your chances of success in M&A, particularly in the unstable global market conditions we are currently experiencing?

The Searchlight Guide to M&A

We at Searchlight have worked extensively in M&A and Private Equity led investment with a wide range of companies, from SMEs to Fortune 500 businesses.  From this experience, we have distilled some lessons learnt that we’d like to share with you over a set of three articles, covering:

1. Due Diligence:        Identify & Assess
2. Value Creation:       Design & Transform
3. Delivery:                  Optimise & Transition

Part 1:   Due Diligence:   Identify & Assess

M&A opportunities are among the largest and most complex investment cases that most companies will face.  To maximise value and minimise risk in this exercise you need to identify the main levers of value and risk, and assess the potential of each metric to affect the key decisions on buy/walk, price and conditions of purchase.

Identify the M&A Opportunity

The key tasks in identifying the best M&A opportunities are:

• Have a clear acquisition strategy: Why is inorganic growth essential? What is the business purpose for acquisition? Who has the skills and capabilities to make a success of M&A? When are these acquisitions best made for optimum value? How will the acquisitions be made and funded? Which companies should be targeted?
• Define Search Criteria for M&A targets: Financial profile – size and turnover of organisation? Market sector – increase market share or open new markets? Location – existing countries or new regions? Business profile – current competitors, supply chain organisations providing synergies?
• Begin acquisition planning: Open market – companies up for sale are easier to find but will generate more competition, typically increasing cost of acquisition. Targeted acquisition- search for companies not currently for sale and engage in initial conversation and information gathering with a view to making an amenable private bid.  Note that a hostile bid will likely trigger interest from other acquirers

Top Tip: Unless your sole business is mergers & acquisitions, you will require specialist expertise in defining your search criteria and finding appropriate targets

Assess the M&A Opportunity

Once you have identified a potential company to acquire that meets your search criteria you need to undertake a valuation analysis by assessing detailed information on its capability and performance.  Typically, this would cover Commercial, Financial and Operational due diligence.  For each you need to consider the value and risk:

• Commercial: How does this deal meet your strategic goals? What are the specific synergies that make the deal attractive?  What new markets, customers or channels will be created or enhanced by this acquisition? What intellectual property rights (patents, copyrights, trademarks) does the seller own, and how are they valued? Are there any legal or regulatory hurdles to unlocking value from the acquisition?
• Financial: How accurate are the target’s balance sheet and P&L? Do historical results match current projections for revenue and EBITDA? Are there any off-balance sheet exposures or outstanding tax implications? What value can be placed on the assets, liabilities and future potential of the acquisition?
• Operational: Are resourcing and skill levels appropriate for the levels of revenue and customer service? Do existing IT capabilities offer added value, or do they represent a risk and cost due to high technical debt? What is the separation working hypothesis and how might this impact commercial and financial dimensions? Are there any significant security or cyber risks to the data and systems of the target company?

Top Tip: Standardised questionnaires and requests for information will speed up the assessment process but beware sellers that restrict access to some of these data.

So, in summary, the due diligence stage for mergers and acquisitions requires careful preparation regarding both your identification of the right target companies, and also gaining detailed and accurate commercial, financial and operational information on their performance.  Contact us for more information on how we can support your merger or acquisition due diligence.

In the next article we will describe the value creation stage where you can maximise the potential return from the acquisition by redesigning and transforming the new business.  Follow our blog to stay updated!

Contact us today to learn more about how Searchlight Consulting can help with your digital transformation.

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