Blogs/Vlogs

What are the best ways to extract value from mergers and acquisitions? Part three

30 January 2017

This blog post is the final piece of a three part series on the best ways to extract value from mergers and acquisitions. Read part one here or part two here.

Management and oversight

Leadership from the senior management is vital to integration. In our experience, it usually requires someone who projects energy, enthusiasm, clarity, and who communicates that energy to everyone. Successful senior managers walk the talk with their behavior and method of working - matching the vision and values they aspire to. They also enhance an acquisition’s competitiveness with better strategic direction, organisation, and process disciplines. Given the large number of activities and projects involved in a typical transaction, it is advisable to structure and organise the overall integration project in a manageable way that sets forth a clearly distinguishable set of roles, responsibilities and timescales.

Economies of scale

The average acquirer materially overestimates the synergies a deal will yield. These synergies can come from economies of scale, implementing best practice, sharing of capabilities and opportunities and the effect of the combination on the individual companies. However, it takes only a very small degree of error in estimating these items to cause an acquisition to fail to live up to financial expectations.

Where possible the most effective groups implement cost synergies such as in purchasing, administration and production almost immediately. Working capital is improved through benchmarking and alignment of processes.

Proper due diligence

Comprehensive due diligence covers all aspects of the target’s activities and its people, and is essential to any successful M&A deal. However, getting a complete and transparent view of the financial, operational and cultural characteristics of a target isn’t always easy and is usually time-consuming – but it is definitely worth the investment. Some of the biggest brands in the world even make mistakes. The most recent high profile example was HP’s $11.1 billion acquisition of Autonomy in 2012. HP announced it had to take an $8.8 billion write-down largely due to alleged accounting ‘improprieties’ at Autonomy. HP claimed individuals at Autonomy had willfully misled investors and HP therefore overpaid. HP had not identified the accounting errors that were not picked up in their due diligence until almost a year afterwards.

Smarter provision of capital

Creating value by being able to source equity and debt at more competitive levels with the combined group benefiting from a lower cost of capital, and access to additional funding lines if required to accelerate growth.

Buy cheap

Finally one route to create value from an acquisition is to buy the asset cheap, i.e. at a price below a company’s intrinsic value. In our experience, however, such opportunities are rare and relatively small. They often arise in cyclical industries, where assets are undervalued at the bottom of a cycle. In June 2008, for example, Tata Motors paid Ford £1.3bn for Jaguar Land Rover, the luxury car and utility vehicle group.

For further information, please contact me or your local UHY corporate finance specialist.  If you want to read more about the latest corporate finance issues, please see our other blog posts here.

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