Guide to Business Acquisition

The crucial aspects of an acquisition include:

• The company that is making the acquisition is usually in a more favourable financial position than the business it is targeting
• It must buy at least 51 per cent of the target company’s stock to take absolute control of it
• The acquisition can proceed regardless of whether the target company supports it. The term “hostile takeover” is used to describe situations where there is not consent from the organisation being purchased
• The target company may be allowed to continue trading under its own name – but in many cases will operate under the name of the acquiring organisation.

It is highly advisable to draw up a comprehensive contract for a proposed business acquisition as there is a lot at stake for both parties. The acquiring company is proposing to part with a large amount of money and/or shares and commit to putting a structure in place that will enable the new organisation to achieve greater profitability. For their part, the owners of the target company are faced with the prospect of giving up control of an organisation they may have spent many years building.

Both sides are likely to have numerous complex terms and conditions they wish to apply to the merger. Having a comprehensive contract drafted by a legal expert gives both parties the chance to set out the issues that are important to them and can form the basis for subsequent negotiations.

Once a contract has been agreed and signed it offers clarity over what the future arrangements will be.

A contract should contain a number of points including:

• Details of the planned acquisition – these should include the name of the target company and any subsidiaries
• Information of how and when payment will be made
• List of any conditions which either party must fulfil between the signing of the contract and completion of the acquisition
• Representations and Warranties – these relate to statements made by either party to persuade the other to agree to the acquisition – and the measures that will apply if a statement proves to be false
• Indemnities against potential problems that were flagged up by the due diligence process prior to the acquisition being agreed

In February 2000, the British company Vodaphone AirTouch PLC purchased Mannesmann AG, a German industrial conglomerate, in an unsolicited acquisition for around $US190 billion.

This was a record deal for a business acquisition at the time and brought about the creation of the world’s largest mobile telecom provider.

The company seeking to make the business acquisition will take the lead in the process.

It will make a decision on whether to go ahead with the potential deal after carrying out detailed research on the target organisation.

Due to the complexity of many acquisition deals and the large amount of money that is often involved, it is vital that the process is carried out in a methodical and strategic manner.

Any company planning an acquisition must ensure it has a bespoke team in place which has the requisite skills to see the process through to a successful conclusion. This team should include experts in fields including the law, finance, IT, HR and marketing.

Another important preliminary stage is to carry out detailed research to establish whether a potential target company would make a suitable business acquisition. This could include studying accounts and other documents relating to its activities as well as potentially visiting the organisation and speaking to its leadership team.

Should the research prove encouraging then the acquiring company may decide to press ahead with the deal. This could see it make a formal offer and hold detailed negotiations over the precise terms and conditions of the deal before reaching agreement.

One estimate has put the total time frame for a company acquisition at between six and twelve months. This entails the preliminary stages (including carrying out detailed research) right the way through to signing the contract and completing the deal.

It is important that any business contemplating a company acquisition recognises that it is a process that takes time and has a realistic understanding of when it might be able to take control of the target company.

If an acquiring company is able to purchase 51 per cent of the target company’s shares it has control of the organisation. This means that it can decide how the company will be run and what will happen to its resources without the agreement of other shareholders.

One practical consequence of a change of control following a business acquisition could include the acquired company’s leadership team (including the CEO) being made redundant.

This could be because the acquiring company wishes to put its own people in charge or simply that the roles are no longer required.

It is important to be aware that an acquisition contract may include an agreement that certain jobs at the target company will be protected after the deal is completed.

Once a company is acquired, its shares cease to have any value. In these circumstances shareholders will receive compensation in the form of either money, shares in the purchasing company or a combination of the two.

The method of payment can give an indication of how the acquiring company views its immediate prospects. If it expects its share price to rise, it may be keen to offer cash compensation whereas its preference will be for shares should it predict that their value will fall.

As we have seen, acquiring a company can be a lengthy and expensive process. To be able to justify going ahead with an attempted acquisition, therefore, an organisation must be satisfied that the resulting benefits will make the process worthwhile.

The potential advantages of acquiring a business include:

Synergies

These are the effects of a business acquisition that result in the value of the newly created larger company being worth more than the combined value of the two separate organisations prior to the deal. Synergies can result, for example, from the sharing of patents, information technology, and research and development. They can also come via savings with the new company able to exploit economies of scale in many areas of its operations.

Access to new markets

Should the target company have already been well established in a particular market, the business that has acquired it can take advantage of its status and reputation to avoid many of the obstacles that may have existed if it was trying to enter the market prior to the acquisition.

Strategic advantage

The acquisition may result in the enlarged organisation being able to use its increased market share and synergies as the basis for growth and gaining a competitive edge over its rivals.

Enhanced capitalisation

A restraining factor on the growth of smaller companies is their ability to access the finance they require to expand their operations. In many cases the owners of such businesses may need to invest their own savings or plough back profits into the company – neither of which may provide the amount of capital they are ideally seeking to invest. Larger companies, however, will generally find it easier to access loans from the financial sector and thus avoid the constraints on growth that affect smaller organisations.

Pooling of talents

A company may be rich in talent in certain areas but not in others. A business acquisition can enable the purchasing company to augment its own resources where necessary from the target company so that it has strengths in a wide range of areas – for example, finance, legal, IT, research and marketing. Likewise bringing in employees from the target company may provide new and creative thinking which can help to drive the organisation forward.

While an acquisition can bring many advantages that add great value to a company it is important to be aware that there can also be disadvantages to such a deal.

These may include:

Inefficiency

A company acquisition can result in a situation where two people are fulfilling the same role in many areas of the business. This can result in a bloated wage bill and even reduced effectiveness should lots of employees be unclear of their exact responsibilities.

A clear new structure to reflect the changed nature of the company could avoid duplication and provide clarity. This could create problems of its own, however, should the necessary redundancies lead to decreased morale within the workforce as well as negative publicity and reputational damage.

Incompatibility

We have seen how in some cases the merging of two separate workforces creates a positive dynamic that drives innovation and enterprise. On other occasions, however, a company acquisition may result in tensions between the two sets of employees. Problems could arise on both an individual level or more generally if the cultures and objectives of the two organisations prove hard to reconcile.

For example, there may have been a widespread view at the target company that expansion into overseas markets was the best way to proceed while the acquiring business wishes to consolidate its domestic operations. The lack of harmony that results could lead to issues such as low morale and productivity as well as increased absenteeism and staff turnover.

Supply chain problems

Should the acquisition lead to a rapid expansion of operations by the acquiring company, its suppliers may struggle to meet the increased demand, causing operational disruption. In drawing up a strategic plan for how the business will operate following the acquisition, therefore, it is vital that measures are put in place to ensure raw materials, components and so on will be readily available when required.

Research in the USA suggests that the failure rate of acquisitions is between 70 and 90 per cent.

Failure in this context relates to acquisitions which take place but do not result in the expected benefits.

Acquisitions can bring major advantages to a company in the form of lower costs and higher revenue and profits. We have seen, however, that the acquisition process can be complex with no guarantee of success.

Any company attempting to acquire another business, therefore, runs the risk of expanding significant resources on a deal that fails to materialise or does not bring the desired benefits.

It is imperative that companies do all they can to increase the chances of a successful takeover by engaging in effective planning and taking expert advice.