As the chances of failure in an acquisition can be high, it should be planned carefully. It pays to develop a disciplined acquisition program consisting of the following steps:
1. Manage the pre-acquisition phase
2. Screen candidates
3. Evaluate the remaining candidates
4. Determine the mode of acquisition
5. Negotiate and consummate the deal
6. Manage the post acquisition integration
Step 1: Manage the Pre-acquisition Phase: A good starting point of a merger and acquisition program for an acquiring company is to institute a thorough valuation of the company itself. This will enable the acquiring company understand well its strengths and weaknesses and deepen the acquirers’ insights into the structure of its industry. It will also help in identifying ways and means of enhancing the value of the acquiring firm so that the firm can minimize the chances of becoming a potential acquisition candidate itself.
Step 2: Screen Candidates: The ideas generated in the brainstorming sessions and the suggestions received from various quarters (merchant bankers, consultants, corporate planners an so on) will have to be filtered. Screening criteria that make sense from the acquiring company’s perspective need to be used.
A company should be well prepared before the acquisition opportunity actually arises. It should do advance analysis of possible acquisition candidates so that it can rapidly initiate action, no sooner an opportunity surfaces without succumbing to the temptation of making expensive mistakes.
Step3: Evaluate the remaining Candidates: The screening criteria applied in step 2 will narrow down the list of candidates to a fairly small number. Each of them should be examined thoroughly. A comprehensive evaluation must cover in great detail the following aspects: operations plant facilities distribution network sales, personnel and finances (including hidden and contingent liabilities). Special attention should be paid to the quality of management. Experienced, competent and dedicated management is a scarce resource. When a company is acquired the quality of its management is as, if not more, important than the rest of its assets.
Acquisitions are unique investments decisions because there are no dry runs, the entire money has to be paid up front exit costs after integration are prohibitively high, and managing a synergy in many ways is akin to managing complex new ventures. No wonder, acquirers have lost with impunity billions of dollars in their pursuit of poorly understood acquisitions.
Step 4: Determine the Mode of Acquisition: As discussed earlier, the three major modes of acquisition and merger, purchase of a unit, and takeover. In addition one may look at leasing a facility or entering into a management contact. Though these do not tantamount to acquisition, they give the right to use and manage a complex of assets at a much lesser cost commitment. They may eventually lead to acquisition.
Step 5: Negotiate and Consummate the Deal: The process of negotiating acquisitions is notoriously susceptible to rising commitments. The thrill of the chase may blind the acquirer to the outcome of it. Given this inherent pitfall it makes sense to divide the task of acquisitions analysis and negotiation between two teams. The first team should evaluate the acquisition target from the strategic operating and organizational points of view and prepare a game plan of what needs to be done to improve the overall performance. Ideally it should consist of operating managers who would be entrusted with the responsibility of actually running the business if the deal goes through. The second team should consist of financial and legal persons entrusted with the task of carrying the actual negotiations. It must retain the emotional capacity to withdraw from the deal unless the financial and legal terms are attractive.
In general, acquirers gain a toehold in the target company by buying up to 15 percent of its stock somewhat stealthily in the open market or through privately negotiated deals. Once the 15 per cent limit is reached, SEBI guidelines require disclosure which almost invariably leads to a run up in the price. Thus, the relatively lower cost of pre-announcement purchase helps in reducing the average Cost of acquisition.
Step 6: Manage the post acquisition Integration: Generally, after the acquisition, the new controlling group tends to be much more ambitious and is inclined to assume a higher degree of risk. It seeks to (1) quicken the pace of action in an otherwise staid organization, (2) encourage a proactive rather than a relative stance towards external developments and (3) emphasize achievements over adherence to organizational procedures.
Anticipate and Solve Problems early: The path of acquisitions is strewn to problems. They may arise on account of differences in administrative procedures, accounting systems, and production methods and standards. More important they stem from the reaction of people affected by the merger.
While acquiring a company treat people – management, employees, creditors, suppliers and customers with dignity and concern. Efforts should be made to rock the boat as little as possible. Try to retain the management with minimal interference, and assure employees about their future with the organization, and maintain relations with suppliers customers and others. If some changes are envisaged disseminate information effectively. Clarity is the most potent antidote against morbid imagination. When people are informed clearly about how their interests will be affected in the new set up their fears are allayed.