Recent studies have found that over half of mergers and acquisitions ('M&A') have destroyed shareholder value, and a further third made no discernible difference to the performance of the merged companies. Despite this, worldwide M&A activity is at an all time high, and Slovakia is no exception to this trend.
Some of the reasons contributing to the increase in M&A activity in Slovakia include the opening of the Slovak market to international companies looking to increase growth by accessing new markets, tax incentives, geographic position, a cheap and well qualified workforce and expectations of EU accession.
Any merger or acquisition is an extremely complex procedure from pre-deal planning and deal completion through to post deal integration and the extraction of value. However, there are several critical components of the M&A process which have the most impact in unlocking value from a deal.
A broad-based investigation which should comprise legal, tax, financial, environmental and commercial investigations in the pre-deal period is essential to give you an assessment of the risks, benefits and operational impact of the deal. Each target will have different risks associated with it, however, in general, key areas to address include:
* past performance;
* relationships with key customers and suppliers;
* unrecorded liabilities;
* quality and ownership of assets;
* tax compliance;
* key employees;
* future legal commitments and related party transactions.
This vital intelligence will strengthen your hand during negotiations and place you in a good position to assist in a successful integration.
It is imperative that you obtain an understanding early in the pre-deal phase of 'what' and 'where' value can be obtained from improvements made when the target is integrated. As these synergies will impact your valuation, you must be sure they are realistic and attainable. It is not uncommon for acquirers to overestimate the value of synergies. The most common synergies result from cost savings, revenue enhancements, process improvements, financial engineering and tax benefits.
Integration project planning
Having identified 'what' and 'where' value can be attained, the mechanics of 'how' you integrate your acquisition must be evaluated. You must make certain you preserve current value and ensure that one plus one does not make less than two. The 'how' process must commence during the pre deal evaluation. It is all too common that after the heat of the deal the integration process is not given the required attention.
One of the most difficult questions to answer in a M&A is should the management of the acquired company be asked to leave? The process for appointing management of the acquired entity must be seen to be transparent, logical, rational and above all fair. Research has shown that for a 'bolt-on' business, success rates will be improved if the management team is replaced. On the other hand, for a fully integrated business, success rates are enhanced if managers in the acquired company are retained and incorporated into the new management structure. During the pre-deal analysis, the competencies of current management should be assessed and a decision made as to the structure of the new management team.
As every employee knows, M&A tends to mean job losses. No sooner is the announcement made than the most marketable and valuable members of staff send out their resumes. Therefore, unless key parties are appropriately informed during the merger process, their positive buy-in is likely to be lost and the process may be derailed. To avoid the loss of key employees, they should be offered a financial interest in making the acquisition work. This can be achieved by offering performance bonuses or, in the case of owner-managers, by linking the purchase price into future profitability.
In cross border M&A, which is currently the most prevalent form in Slovakia, linguistic disparities, different working practices and a lack of cultural understanding are the most common obstacles to uniting the workforce of the acquired company behind a common vision. It is critical to anticipate and plan for this early on in the process. Recent studies indicate the use of reward systems to stimulate cultural integration or cooperation are the most effective, as opposed to more informal methods.
Irrational exuberance about the strategic importance of a deal built up during the excitement of negotiations can result in too high a price being paid. The key to success is knowing the maximum price you can pay, and then having the discipline not to pay a penny more. Even experienced acquirers, who should know better, sometimes get too attached to a deal. When this happens it is important to have organisational disciplines in place that will rein in the emotion.
It will be obvious from what we have said that the key to a successful acquisition is not to view each component in isolation, but to bring all components together within a single process. This enables you to maximise the value of pre-deal investigation work and ensure the process will provide the necessary intelligence to help in price negotiations and to plan for the post-deal integration, which will ultimately ensure your acquisition is successful. Experience is invaluable when acquiring a business. By using an experienced project team and external advisors who are objective and not as emotionally involved, your chances of success are greatly enhanced.
Kenneth Ryan is Senior Manager in Financial Advisory Services at KPMG Slovakia