Overview

The ultimate goal of a business entity is to produce wealth.  Value building within a company should always be at the forefront of any entrepreneur or manager’s mind.  When the idea of an acquisition or acquisition program is being considered the key question should be; will the acquisition(s) increase company value and increase shareholder wealth?

There are a number of different ways acquisitions increase shareholder wealth as a part of a company’s growth strategy.  The buyer makes the case for each acquisition or an acquisition program by determining; (1) the acquisition will be profitable or become profitable within a reasonable period, (2) the rate of return on the invested capital will be more than the company’s cost of capital and its hurdle rate of return, (3) the acquisition is a better alternative than using the same funds for internal growth and (4) the risks are manageable and more than justified by the returns.

The following are some of the benefits that have been found to justify successful acquisitions:

·                    Acquiring assets (customers, an organization, technology, intellectual property, tangible assets) already in place is cheaper and much faster than creating the same assets from scratch.

·                    Acquiring an operating business can be more profitable than building a similar business because the acquisition gives the buyer immediate access to the seller’s customers, employees, facilities, equipment, products, brand names, inventions and trade secrets.

·                    Acquiring helps the buyer make use of excess capacity or spread fixed or semi-fixed costs over additional customers, more products manufactured and greater volume.

·                    Acquiring provides access to new geographic or product markets at a fraction of the cost of building the same revenue internally and the acquisition is faster.

·                    Acquiring a customer or a supplier may provide vertical integration that stabilizes revenue or supplier prices, reduces risk and improves overall operating margins.

·                    Acquiring an operating business provides needed diversification into new markets, products or technologies which reduces financial and operating risk.

·                    Acquiring can have accounting benefits under Generally Accepted Accounting Principles (“GAAP”) compared to internal growth since the acquisition of a business, whether it is an asset or a stock transaction, is treated as a capitalized transaction on the balance sheet with the income statement feeling the impact of the transaction’s cost spread over a period of years.  On the other hand, the equivalent internal expansion of the company, say, by opening a new branch, increasing the activity in the sales program or internally developing a new product, would tend to be treated more as a period expense, resulting in greater expense and lower profit in the early years.

A well-planned, properly-financed and well-executed acquisition can greatly improve a company.  It can fuel more rapid growth, increase profitability and lead to enhanced shareholder value.  LVI believes that acquisitions should be a part of the business plan of most growth oriented companies.

However, in spite of the benefits expected by buyers when they do acquisitions, most acquisitions either fail or disappoint the buyer.  Why is this? 

There are always complicating realities that contribute to the disappointment that buyers frequently have with acquisitions and acquisition programs.  There are usually multiple causes of the underperformance.

The following are some of the common causes for acquisition underperformance:

·                    The acquisition didn’t fit into the buyer’s strategy even though the buyer thought it would at the time of the acquisition.

·                    The buyer paid too much and even with successful performance after the acquisition the rate of return was disappointing.

·                    The terms of the acquisition agreement left loopholes resulting in unanticipated losses or decreased future value.

·                    The buyer thought it bought something that was materially different from what the seller actually delivered.

·                    Going into the acquisition, the buyer’s assumptions about the performance after the acquisition were flawed or excessively optimistic; the buyer’s business plan for the acquired business was overly optimistic and there was no way to adjust to deal with the contingencies that occurred.

·                    The buyer did a great job of making the deal and closing the acquisition, but didn’t adequately plan for the post acquisition management and operation of the company; assimilation costs or employee turnover exceeded plan, customer retention was lower than expected.

·                    The buyer underestimated or didn’t allow enough time, money and management talent to assimilate or integrate the acquired business and deal with the contingencies that occurred.

·                    The buyer did not have enough resources (time, money, management talent) to complete the assimilation process properly and in a timely manner.

·                    The combination of the underperformance of the acquisition and the increased leverage, when borrowed money is used to pay for the acquisition, resulted in financial stress and loss of overall company value.

So how do you make sure your acquisition or acquisition program is successful? By being careful, thoughtful and thorough in planning and execution.  Don’t go into an acquisition unless you are confident that you have more than enough resources to drive the acquisition through to success, even when it takes longer and costs more than expected.  Make sure the proposed acquisition fits with your business strategy and make sure you have the management time and the financial flexibility to assimilate according to your plan allowing for unexpected surprises.  Remember you are never buying the customers, only the right to provide future products and services to them.  The customers will not stay unless they like the values delivered after the acquisition is assimilated.

LVI can help a buyer at every step in the acquisition process. LVI can assist by locating and developing the interest of the best acquisition targets, evaluating, performing preliminary due diligence, structuring Letters of Intent and negotiating agreements with the targets.  In addition, LVI can help during the closing phase of a transaction by coordinating and performing final due diligence, developing assimilation plans and,   in support of your legal counsel, negotiating acceptable terms of the agreement.  After the transaction is closed, LVI can help with the assimilation by coordinating and managing the process and making sure the information is available to hold the seller accountable for its responsibilities under the agreement.