The secrets of getting acquisitions right
One acquisition is never the same as another. Growing Business speaks to those who have learned the hard way
Most acquisitions fail or fail to deliver their expected outcome, yet businesses always believe they’ll get it right. It’s a route to growth frought with complexities.
So if acquisition is part of your strategy a number of key issues are likely to keep your mind racing prior to, during and beyond the process. Is the climate right? What level of strategic planning for successful integration is necessary? Why are you acquiring? Why will the vendor sell? What should you pay? What’s the best way of financing it? And which advisers are a necessity?
No doubt this merely scratches the surface. Once you’ve done it, the benefit of hindsight might leave you with a slight swagger. But no two deals are the same, as our lunch guests have discovered, to both their glee and cost. Here, they discuss their experiences of some of the key elements.
Climate plays a huge part in determining your appetite to buy. The majority of our guests agreed today’s economic climate is a strange one to call. “For us the big driver is not that we want to make acquisitions or which ones we want to make, but the confidence in the core business while that’s going on,” confirms Stephen Woodward, executive chairman of customer relationship management company MoonRiver Group. “We’re suffering from indecision by clients. We thought it was the election, but it’s continuing. It’s not that they don’t know what to do, but they don’t know when they’re going to do it.”
Owners not adjusting their expectations to current pricing levels are exacerbating the problem. It’s holding acquisitive companies back from making offers, says contact centre company The Essentia Group’s chairman Simon Chapman. “My suspicion is that [owners of companies prepared to sell] expectations are way too high, as the economy hasn’t gone completely downhill. When it does people will be more interested because they’ll have adjusted their mindsets.”
John Milroy of Titan Airways adds that low interest rates make selling a less attractive proposition. “The vendor doesn’t have much to do with that money and depending on how much they’ve earned out of that business, 4% on £10m doesn’t sound that much, particularly when you’re paying tax at 40%,” he says. “So it’s actually very difficult unless they’ve got a good personal reason for getting out of the business.”
One solution could be structuring the deal to accommodate the expectations of the selling owner. By locking them in financially they will be able to unlock value over time. It’s a half-way house, suggests Investec’s Avron Epstein. MoonRiver’s model already reflects that approach, says Woodward: “Our acquisition model is that we buy a majority holding and leave the owners with a minority shareholding – which has an option to convert to shares in the group on sale or exit, so as to benefit from a higher multiple.”
You could have 10 targets, which match closely your strictest criteria, but even if you know exactly what you’re going to do it’s almost an inevitability that it will take longer and be a lot tougher than you anticipated.
At the outset it’s best to know why you’re planning to buy growth, says Simon Grigg, finance director of villa-with-a-pool operator James Villa Holidays. “For us the reason for making an acquisition is geographical spread and entering a new territory. We have a lot of Spanish villas, but very few French villas as France is not an easy territory to trade in. If a villa company has good management and good contacts with villa owners and perhaps an established brand, that would fit.”
For Stephen Crouch of Steer Davies Gleave, fast growth is woven into the fabric of the management team and is built into business planning. For that reason acquisitions inevitably form a key part of the strategy. “Double digit growth is addictive,” he says. “We’ve had 15% to 20% growth for four years and single digit growth would feel like failure.”
As for target-sifting, Woodward has a strict three-point criteria. “First it has to fit our business model. Second, does it have blue-chip clients? And thirdly, is the management team high quality?” He claims that during negotiations he and his team spend a lot of time with their opposite numbers, so as to ensure they don’t leave before MoonRiver wants them to. It’s an approach that has worked well, with the company making six acquisitions in two years.
Integration and people arguably represent your sternest challenge, if our guests experiences are anything to go by.
Helen Melvin, financial director of Loch Fyne Restaurants, the seafood restaurant chain famed for the alleged ‘summit’ between deputy prime minister John Prescott and chancellor Gordon Brown, was shocked at the amount of time required post-purchase. “When we took over Le Petit Blanc in 2003 we thought it would be a lot simpler than it’s turned out to be,” she says. “In fact, we’ve only just completed the integration process now, turning that business around.”
This is explained in part by the opportunistic nature of the deal. Le Petit Blanc was in administration when Loch Fyne moved to buy the assets for four of its restaurants for £1m. “We also underestimated the cultural differences of the businesses.”
Unfortunately, some of the remaining members of the management team proved more resistant to change than had been anticipated. “We walked on egg shells for a long time, so that we didn’t seem like we were coming in dictating to people,” says Melvin.
She admits a firmer stance may have been better. “In hindsight, the question is,” she adds, “is your own management team strong enough to win them round or are you going to waste too much time doing this?”
It’s an easy trap to fall into and Loch Fyne is far from alone in that respect. In order to get an acquired workforce on-board it often pays to listen and attempt to placate, where possible, to get to know the inner workings of a company. However, it becomes unhelpful without a degree of assertiveness and the generation of a strategic plan to cure any ills and achieve alignment with your own processes and objectives.
Alternatively, you could take a leaf out of Hanson Trust’s book. In the late 1980s, says Woodward, it bought Imperial Group. Of something like 90 managers in the top two grades at Imperial Tobacco, within a short period of time, only the sales director and FD remained. “Within six months the Hanson people understood that business better than those that had been running it,” says Woodward.
On the shop floor front, Grigg says deals can be equally tricky. He was part of Brighton-based Panorama’s acquisition of a London-based competitor. And while the holiday destination focus and product fit were right the company lost 90% of the bought company’s staff because they refused to move to the coast. Additionally, IT – and this is true of other guests – caused further nightmares, with management information systems and key performance indicators farremoved from Panorama’s own model.
Don’t justify the price you pay on synergies that don’t exist. That’s the advice of Investec’s Avron Epstein. Often companies overestimate the cross-selling opportunities, he says.
Equally, the idea that an acquisition equals growth can be an illusion. “Is it growth because you’ve grown your top line?” he asks. “You’re a bigger business, but you’ve also taken on more risks. The ultimate measure is whether you can enhance your profitability.”
Titan Airways’ Milroy concurs, highlighting a common pitfall. “How do you ensure keeping focus on the quality and customers if you’re so intent on fast growth? That’s the key thing that could go wrong,” he says. In Titan’s case it chose not to make a £4.5m acquisition, instead spending cash on planes and substantial start-up training costs.
If you do proceed, ensure you pay sufficient attention to fixing the right price, as opposed to some lesser factors. “A good acquisition in terms of value for money is not as much dependent on whether the funding package is half a per cent here or there, but more whether you pay the right consideration,” explains Epstein. “That’s where the deal becomes profitable or not profitable. Yet advisers tend to concentrate too much on the funding side.” The fact is, the guests conclude, that if you’re not vigilant and almost obscenely well-prepared for every aspect of the process – you could end up with a monster on your hands.