Buyers beware when 'deal fever' rises

By VICKI JAYNE

One of the best ways to gain weight in the corporate food chain is to gobble up another company. Right?

Well, no. Experience suggests you are more likely to end up with indigestion than growth. Most studies on acquisitions show that half to two-thirds of them either destroy value for the buyer or fail to create it.

Although such studies mostly involve foreign public companies (whose value before and after acquisition is more easily measured), their results are just as applicable in New Zealand, says PricewaterhouseCooper partner Steve Smith.

The reasons so many fail are complex, but can often be attributed to either human error or poor management.

Many fall foul of what Smith describes as "deal fever". That is what happens when people get so caught up in the purchase that they end up paying too much.

It's not that buyers have lost the plot. "What tends to happen," says Smith, "is that in the heat of the battle people get carried away, and start justifying what can be achieved after the event."

Balancing cost of capital against the potential benefits of the purchase involves fairly complex analysis in the first place. The process is also a lengthy one, usually involving other bidders and a lot of hard work.

As in any auction, it's hardly surprising that some executives become emotionally involved in the outcome, start inflating the rationale for the purchase and put in too high a bid.

"In a competitive situation, there tends to be someone who wants [the acquisition] more than others, for all sorts of reasons," says Smith.

"That can cause them to make a risky, or certainly a stretched decision on value."

Paying too much for an acquisition is one sure way to undermine its potential to add value, but failing to protect its value once the deal is done can be just as harmful.

Any potential value can quickly melt away if the integration is not managed well and quickly.

One problem is that what looks like the acquisition finish line is actually its starting post and that, he says, can be a bit of a psychological trap.

"You've just spent a big chunk of money, the tough negotiating is done, your board has signed the deal off and announced it to the market. The acquisition is a fait accompli. Wrong.

"The deal may have been difficult but the real hard work starts the minute you sign the contract. At that point you have to take accountability and responsibility for managing the acquisition."

The very moment that champagne corks are popping, the value of your new acquisition could be heading for meltdown, warns Smith.

"What's happening inside the purchased company is that staff are uncertain about their own futures and suppliers, and customers don't know what the change will mean for them.

"Competitors are also seizing the opportunity to poach its best people or woo customers away."

The company needs strong leadership to deal with what are largely people problems, says Smith.

"The quality of your management processes during the transition and integration phases is absolutely fundamental to success."

He has a few simple words of advice.

* Start early and keep it snappy. Your post-acquisition planning should be completed before the contract is signed and involve some of the acquisition personnel. "The team needs to be structured so that people involved in the acquisition can have input and buy into future accountability for the value decisions they are making."

* Focus. There may be 1000 things to do, but ensure the important ones are done first.

* Make communications meaningful by finding out what it is people most want to hear.

* Minimise any culture clashes. If small and informal has proved successful for a new acquisition, then let it run that way - but with the addition of those strengths that size can offer in terms of capital, distribution, resources and so on.

* Avoid the sort of horse-trading in which people are given roles for political reasons, not because they are best for the job.

To help companies realise value from their acquisitions, Smith and Wellington-based PWC director Jim McElwain present seminars on the virtues and vices of the process.

Don't contemplate swallowing another company if it's a bad fit in your overall growth diet, says Smith.

Checking whether a proposed acquisition fits your strategy involves complex evaluation. You need to analyse what your company has going for it and where it is headed.

"What are its strengths, its weaknesses, its core competencies? What are the things it does well enough to consider it has a competitive advantage?"

Acquisition can be a key strategy for growth, he says, but other options may be more effective.

New Zealand companies have a fairly horrifying overseas acquisition record, says Smith. Often they have paid too high a price to get a foot in overseas markets - Air New Zealand's purchase of Ansett Australia being a high-profile example.

Valuing the strategic options around such acquisitions can be a complex analytical exercise, he says. Inevitably a certain amount of gut instinct comes into it.

"You can only do so much on a computer. At the end of the day it always boils down to a judgment call.

"There's an element of common sense sitting over all the analysis - but if you don't do the analysis, you put the whole process at risk."