Identify A Good Deal

Acquiring a company is not difficult, acquiring a good one is. A resent study by Bain consulting concluded that deal success is not random. There are some concrete indicators that can help identify early on whether the acquisition will be a success of a big flop. Below is a brief overview of 5 critical factors that can result in a successful or failed acquisition.

Is management experienced in deal making?

Well experience counts. But does management have the right experience and are they in tune with today's environment? Management with functional expertise in deal making knows how to buy and integrate businesses. By far the worst returns accrue to companies that do large one-off deals while companies undertaking smaller systematic acquisitions fare better.

Is the acquisition accreditive to the core business?

Scale acquisitions with obvious synergies such as operational overlaps tend to do well and generate the expected returns. On the other hand, scope deals designed to take the business in a new direction often disappoints. Before pursuing a scope deal, management should be able to clearly articulate how such a deal will favor the broad business strategy.

Did management do its homework?

Bad deals will unravel during integration. For scale deals, integration should be quick and comprehensive to unlock synergies and minimize employee unrest. Joint integration teams are preferred unless cultural differences cause disruption. Integration of scope deals should on the other hand be held to a minimum. According to Bain, the vast majority of companies involved in deals loose market share in the year of the acquisition. Hence, the first priority of management should be to make sure this does not happen (hence the need for limited business disruption caused by integration efforts).

Is the senior team prepared for the unexpected?

There is no such thing as a perfect acquisition or integration. Things will go wrong. Managements who install early problem detection systems and procedures have a much better chance of taking the adequate course correction when needed.

The inevitable success or failure of an acquisition is determined prior to the finalization of the deal. Adequate integration planning and strategic foresight is imperative for the long term success. To often deals are driven by management egos or politics. When such ingredients dominate the rational for the deal then a spectacular failure is sure to follow.

If you have any questions on the above material or want to know how KDS Capital can help you in your venture, feel free to call us at 602-490-0723 or toll free 800-880-0717.