Avoiding Post-Acquisition Cost Overruns

Avoiding Post-Acquisition Cost Overruns

The WSJ reported this week that the $9.3 billion acquisition by Sherwin-Williams of Valspar has hit a snag. The acquirer stated that post-acquisition integration costs would be over six times more expensive than previously anticipated.

Now this deal is related to two fellow paint makers, so the acquirer can hardly claim it’s a sector they don’t understand.

Acquiring another company is a tricky business to get right. I mean acquisitions are easy to close, you just overpay, right? The successful integration of another company and the achievement of strategic, operational and financial objectives, well that’s not so simple. PWC’s latest research sheds some light on the subject.

Firstly are acquirers achieving Strategic success? – we are getting worse, in 2010, 62% believed success had been achieved, 2013, 65%, 2016, 55%.

Secondly how about Financial success? we are getting a bit better – 2010 38% were successful, 2013, 49% and 2016, 50%.

Finally are we achieving operational success? Still a fail grade, if improving. In 2010, the number was a shocking 30% success, climbing to 35% in 2013, but still only 47% last year.

Why are these numbers so low? I believe there is a lack of focus in the pre-completion phase of the deal. The myopic focus from initial contact with the target to legal completion should be one simple objective – continually validate the post acquisition integration plan. I’m not just talking about “due diligence” in all its forms, commercial, technical, environmental, accounting and legal. I’m talking about taking an integration mindset from Day 1. You should be paranoid about your ability to truly integrate the target company. Why would this ever work?

Some deals look doomed to me right from the start, when you consider the respective websites of acquirer and target. Why? Because the cultural differences revealed by storytelling on these websites is incisively revealing. Successful acquisitions start with “Remarkable Preparation” including knowing more about the target than they know about themselves (as a parallel example, public company management teams are often shocked at the level of detail activist investors have accumulated on them prior to their investment).

In our latest book The Acquirer’s Playbook we publish numerous checklists and frameworks to ensure you nail your post-acquisition thinking. Here is a good basic list that will set you up for an initial plan:

Basic Checklist To Validate Post Acquisition Plans

  1. Who owns the shares?
  2. Where do key decision makers and contacts lie within the organizational structure?
  3. What services and products does the target sell?
  4. What market is the target trying to dominate?
  5. What is the target’s mission statement?
  6. Your post-acquisition integration plan accommodates regulatory requirements.
  7. Any recent press coverage relevant to this assessment?
  8. What is the financial performance of the target?
  9. Any change to target’s management structure recently?
  10. Who do they sell to?
  11. Do they participate in trade shows?
  12. Who do they compete against?
  13. What job openings do they list?
  14. Are they hiring? New hires or resignations.
  15. Why do they say customers should buy from them?
  16. Is the target aligned with trade organizations?
  17. Does the target have industry certifications? E.g., ISO
  18. Are they expanding?
  19. Do they distribute internationally?
  20. Latest full year forecasts?
  21. Current financial results, with a narrative explaining deviations from budget.
  22. New customer wins.
  23. Assets or shares being purchased.
  24. Any exclusions from the sale including assets, subsidiaries, patents.
  25. Personal objectives of the seller, price, service contract, role, promises he/she has made to their staff.
  26. Market and channel strategies.
  27. Status of sales pipeline.
  28. Status of cash flow.
  29. Psychology of owners? Want to stay, e.g., attractive earn-out, bigger role, access to capital to scale.
  30. All key customers will come across with the deal and find the buyer acceptable.
  31. There are no conflicts of interest between the seller’s customer list and the buyer’s list.
  32. All equipment deployed in the business is sustainable and does not require upgrade in the short term.
  33. Monthly financial routines will allow seamless integration with the buyer’s reporting requirements.
  34. As acquirer, you will be able to sell the seller’s products through your distribution network (and if relevant, you can sell your products through the seller’s network).
  35. You understand how you will integrate the differing sales commission plans between both sides. The commercial salaries and bonuses you will offer the sellers and the key managers post completion are acceptable.
  36. The next 12 months under your ownership is reflected in a motivational business plan including monthly cash flow forecasts.

This is just a basic list. These are the facts you should have accumulated prior to due diligence. These facts will allow you to design a successful post-acquisition plan. The main objective of due diligence is to find flaws in this post-acquisition plan and the cost of fixing them. It will also expose the fact you should walk away from the deal. The price of an acquisition is never just the number you give to the sellers. It must include the total cost of making the target an integrated part of your business moving forward.

The Portfolio Partnership assists acquirers build world-class processes into their business to ensure that only the right deals at the right price are integrated seamlessly. We automate this process using our partner Midaxo’s award winning software platform.

Further Reading:

The Acquirer’s Playbook

PWC Report Link

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