Because of the vendor warranties and indemnities contained in the ‘Sale and Purchase Agreement‘ and subsequent ‘Disclosure Letter’, some acquirers and their advisers are over reliant on them as a replacement for a thorough consideration of the merits of a deal.
A commonly held belief is that the acquirer holds ‘all the cards’ when undertaking an acquisition, however, statistics reveal that the acquirer often ends up with rather less, in terms of post-deal benefits, than they ‘hoped’ for. Research by
Société Générale (SG) (Source:Moneyweek) rather depressingly reveals that just 30% of acquisitions can be considered a success, a staggering 70%, they found, fail to deliver some or all of the expected benefits – in the worst case scenario the ‘wrong’ acquisition can destroy value entirely. I’m sure the Lloyds Banking Group board is ruing the day it allowed itself to be encouraged to acquire HBoS, the result of this acquisition was a massive destruction of value in what was a relatively healthy Lloyds TSB. Needless to say, the RBS acquisition of ABN Amro is also a high profile example of such value-destroying deals.
DRAWING CONCLUSIONS
What can we conclude from the SG findings? Interpretation of statistics is a contentious issue but you might reasonably presume that many acquirers over pay for target companies. You could equally assert that vendor management teams fail to disclose or understand material facts about their business which, when discovered post-deal, have a catastrophic effect on the combined business. This is almost certainly true of the HBoS deal, it would appear that disclosure of the extent of the toxic debt was poor, or at least, was poorly understood, and if press reports are to be believed, Lloyds TSB also went ahead with the acquisition, allegedly encouraged by Prime Minister Gordon Brown, whilst relying on a significantly truncated due diligence process. This raises another point which might be deduced from the statistics; that acquiring management teams fail to take the steps to fully understand the business they were buying and perhaps, gave insufficient thought to how the two companies might be integrated post-deal, to produce the intended benefits. The issues of risk, price and value couldn’t possibly be accurately assessed with such an approach.
Interestingly, there is another piece of research which bears a striking correlation to the SG findings mentioned above. KPMG (Source:Moneyweek) undertook research entirely independent of that conducted by SG; it produced a very revealing statistic, just 30% of acquirers were found to undertake any detailed assessment of tangible synergies with the target company. These might include, cross-sell opportunities, cost savings, properly considered forecasts for revenue and profit growth. It won’t have escaped your attention that this finding, 30% of acquirers who undertake detailed pre-deal assessment, matches exactly the 30% of acquisitions which actually succeed.
A BALANCED APPROACH
The BCMS Corporate approach to selling businesses has remained unchanged since the Company’s inception in 1987 yet remains unique; a founding principle is that the vendor must be transparent and has as much to gain from helping the acquirer understand their business, its future potential and the post-deal benefits, as the acquirer does. Our belief is that what is good for the vendor is ultimately also good for the acquirer; they have many shared objectives which traditional selling methods can overlook. ‘Deal-making’ all too often becomes an adversarial process, often due to poor communication and a mismatch of expectations, yet we know from more than twenty years experience, it is far more likely to succeed through a cooperative and open approach.
Acquiring management teams which remain detached from the process and drive their deals almost exclusively through advisers are exposed to greater risk. Here at BCMS Corporate we seek to maximise the price for the vendor. This should not be confused with selling at a price which means the acquirer overpays or is disadvantaged – what we strive for and what we achieve is a fair price for our clients and for the acquirer. This can only be achieved if we not only thoroughly understand our clients and their businesses but also recognise the acquirers’ needs. We understand and appreciate their need for clarity about what it is they are buying and its potential, so we set out a ‘conservative’ [agreed by both parties] post-deal synergy plan, bespoke to each acquirer, including a financial illustration of the cross-sell opportunities, the growth prospects, cost savings and any other such tangible gains. The acquirer can then, with much greater certainty, remove some of the risk element from their price offer for our vendor clients company. We do this for all shortlisted acquirers to be able to identify the best match-up, an acquirer where the gains are most significant.
PRICE AND UNKNOWNS
This approach often generates a dramatic uplift between first and second offers from each acquirer, the first offer heavily weighed down by the unknowns and the second revised upwards, driven by the clear business case we provide. Perhaps the most dramatic example of this is where the bid spread was a remarkable £19.6 million. The same acquirer submitted a first offer of £3 million for a company they eventually paid £22.6 million for. Skeptics among you will no doubt conclude that this might fall into the HBoS category of deals; in fact, our clients agreed to an earn-out based on our post-deal business plan. All the projections were hit and our clients received the maximum consideration. Incidentally, a return on investment (ROI) price, based on historical profits, would have been very close to the original £3million offer which, as it transpires, would have been a very bad deal for our client and an exceptional deal for the acquirer – what we achieved was a fair price.
Our view is that the vendor should take responsibility for ensuring transparency and help the acquirer to more easily identify and quantify the benefits and by so doing, create a genuine win-win. A poorly considered acquisition at any price is almost always a bad one. A well reasoned, considered acquisition arrived at through cooperation and openness between vendor and acquirer will almost always lead to both parties achieving their aims.
