How not to "crash and burn"
In the current environment, consolidations have become increasingly common, most of which have been successful. However, the industry has also seen its fair share of mergers &acquisitions going pear-shaped. We consider the pitfalls that businesses should avoid
Regardless of whether a company is only contemplating a merger or it has already begun implementing policies for a takeover, M&As are treacherous territory. Luckily, most hazards can be avoided if a business familiarises itself with the route it is taking, is aware of common pitfalls, and exercises a bit of caution and common sense.
Judging the gap
According to Firstfolio CEO Mark Forsyth, 80% of failing mergers do not succeed as a result of conflicting cultures. So, before a business sets its sights on a target company, it should consider how well the two will fit with each other.
"The mistake most people make is not aligning the culture and values of the two businesses," Forsyth says. In order to avoid this, he adds, businesses should carefully consider what their target company wants and expects.
"What are their hopes, desires, fears and aspirations? Do they fit in with yours?" he asks.
Ben McLaughlin, legal partner at law firm Baker & McKenzie, echoes this sentiment: "A lot of [successful M&A deals rely on] getting the right fit - selecting the company that will fit well with your company."
In fact, according to Forsyth, it is more important for a business to recognise a gap which cannot be breached and back out of the deal, rather than force a merger.
"Businesses should be known for the deals that they don't do rather than the deals that they actually complete," he claims.
Checking for blind spots
Another common hazard is met when companies head into a merger without having assessed the situation thoroughly.
"From a buyer's perspective, a big [pitfall] is paying too much," says NAB head of partnership programs John Flavell, who advises businesses to consider what they are actually purchasing before they commit - whether it is a business, a customer base or a bunch of assets associated with the target company. This includes taking into account all of the elements that become part of the purchase and the costs they may incur - for example, branding that might be redundant, office equipment, obligations in terms of leases and other pieces of equipment, as well as the handling of business-specific issues such as clawbacks and whether provisions need to be made for these.
Flavell adds that companies should be careful not to focus too heavily on revenue, and he reminds businesses that the due diligence process needs to cover everything that falls within the acquisition.
"I think that sometimes people overestimate some of the logistic benefits, so '1+1 = 3' doesn't always work," he explains. "I think it's easy to be very optimistic in relation to some of those things. [But] there are potential downfalls, liabilities, potential liabilities - those things should be considered."
Flavell also mentions contractual issues, listing 'restraints' as some of the most commonly overlooked and problematic aspects.
"If I'm acquiring a business from another party, what's going to preclude them from opening up across the road and, if not across the road, than down the road - and over what period of time?" he explains. "What kinds of measures or limitations are there on an individual going back and marketing to a consumer base that you've just purchased as part of a business?"
Flavell goes even further, saying there should be instructions that if people contact the former proprietor, these enquiries should be redirected to the new business owner.
Driving solo at first
According to the experts, in order to succeed, a company should avoid prematurely involving third parties.
During the initial stages of a merger, Flavell claims that a company needs to concentrate on itself internally and think about the sort of impact the merger will have, not only on the target but also on the existing business. "That's something that you have to answer for yourself; you may be able to get assistance or clarification through having a chat to some external third parties."
Flavell does advise, however, that anyone considering a merger should talk to people who have gone through the same or similar process. "But the first person you should consult is yourself," he adds.
Likewise, Forsyth advises companies to initially work internally, by drafting the essence of the merger, before seeking outside help.
"I believe that if you and your in-house team can't write an articulate deal in its broadest essence on two A4 sheets of paper, double spaced, that deal is going to end up being too complicated," he explains. "And if you involve lawyers before you do that, then it'll be 45 pages and then the problem is that you won't be able to involve the headspace of the people that you're dealing with - because nine times out of 10 they're not lawyers either.
"My view is that by forcing [yourself] to write the essence of the deal and crystallise it, you've agreed to the emotionally and culturally-high level two-page deal, and the rest should flow on from that. Then you should have lawyers involved in terms of the rest of the detail."
Flavell backs this up by saying that advice at the appropriate time is essential. "Typically where you see people run into challenges is when they're acting alone and not taking advice. There are a lot of experts that you can work with at every opportunity that counts - whether it be accountants, solicitors or lender services," he says.
The right backseat driver
When seeking advice from third parties, it is imperative that the chosen advisors fit in with and understand the culture and values of the business.
"Far, far too often, in your best interest, advisors can be adversarial - they try to score points for you over the people on the other side of the table. My view is that that [method] is just going to start the deal off on a bad foot, and you've both entered the deal on a higher level (unless it's a hostile takeover) and you want to work together," Forsyth explains.
"If you then let both sides of lawyers run the deal and 'ding dong' against each other, then I don't think that's necessarily going to end up as a good starting point - and it's probably going to take too long."
McLaughlin adds that when searching for the right legal specialist, it is important for companies to make enquiries into a law firm's track record - its history of executing similar transactions, degree of experience, and third party referees from other clients as well as investment banks.
Speed limit
According to the CEO of Firstfolio, Mark Forsyth, a successful merger should be a fairly quick process.
"I've done this a few times so I pride myself and my guys on being able to articulate the [initial two-page deal document] within a week - and I figure if we can't, then we have a problem," he says. "In terms of legalities, I've set the hurdle between four to eight weeks at a maximum."
However, he adds: "That doesn't meant to say that the people we're acquiring have got all of their tax and legal structures and personnel in place, but in terms of the deal between the two physical entities - and operating as a joint party, legally - four to eight weeks is do-able."
Touching base
A big part of ensuring that different cultures are being catered for is how you treat existing staff.
"The source of angst that our acquisition team has come across is that people underestimate a lot of the transition and the effect this has on the customer base," explains NAB Broker's head of partnership programs, John Flavell.
"If you're buying a business [you should think about] how key the people who have built the relationships with that customer base are. How key are they to maintaining those relationships? What's your strategy in terms of retaining staff and, by doing that, maintaining the customer base as well?"
Law factsheet
Baker & McKenzie partner and M&A specialist Ben McLaughlin outlines the legal basics:
Initial advice
Legal advice can be engaged at the initial conception of a merger, during company negotiations or at the drafting of documents. If an acquisition has to go via an investment bank, lawyers facilitate this process by speaking with the bank on how best to proceed and listing the available alternatives.
Discussion
Lawyers may be brought in to help a business ascertain how it should handle the acquisition. For example, in the case of a takeover, a company might get advice about whether this should be friendly or hostile and whether or not they should buy a percentage of the target company. Legal advice can also assist in discussions with the target company.
Implementation
The final step is a lengthy, detailed process of implementing the acquisition and usually takes three to six months to complete - at this stage lawyers work on composing all necessary transactions and documents in order to comply with the law.
Costs
McLaughlin admits that costs are hard to put a figure on. "As a ballpark [figure], say you had a $100m acquisition, the legal fees might be $200,000-500,000," he says.
