Planning and making the best of a business acquisition

Contents
Introduction

1. Factors which present an opportunity for business acquisition
2. Evaluating a business for acquisition.
3. Fashioning out strategies to enhance the acquisition
4. Issues in Management of a business after acquisition
5. Conclusion

Introduction

Many businesses have effected expansion and entered new markets without going through a learning curve, through mergers or acquisitions.
It has also helped some to secure and influence production in upstream segments of an industry, or enhance distribution outlets in downstream operations through vertical integration.
Among the many benefits of such actions, resources have been optimized and there is synergy In operations.

This kind of operation takes place with the following strategies in mind:

1. Those acquired to establish a businesses presence in another segment of the industry such as upstream or downstream, eg, Google's recent acquisition of Motorola Mobility.
2. Those acquired to give a competitive edge in the same segment. (Horizontal integration).

And they also come in many forms:

1. Wholly owned independent subsidiary with own corporate status
2. Wholly owned subsidiary whose corporate status changes to that of the parent and becomes a division.
3. An associated company with representation on the board of Directors.

However many of such mergers and acquisitions have also failed to achieve these goals, with a separation (in the cases of mergers) or selling off (in the case of acquisitions) after a few years of the union. Examples are in the cases of Ford/Jaguar, and Daimler/Chrysler.

We will focus on acquisitions, as most of the points raised here also apply to mergers in all economies, with the activities applying also to their subsidiaries in the third world.

This topic will now discuss ways to make a success of acquisitions and handling related issues under four broad headings:

• Factors which present an opportunity.
• Evaluating a business for acquisition.
• Fashioning out strategies to enhance the acquisition
• Issues in the management of the business after acquisition

1. Factors which present an opportunity


While main targets of acquisitions are usually troubled businesses, It is not unusual for successful ones to become targets themselves.

An owner may, for example, in the process of growing a business, spot an opportunity in taking over a flourishing existing business or one with potentials and ability to fulfil the conceived strategy or vision.
Troubled companies however, are main targets of takeovers, as owners are willing to offer compromises to get out of a trouble.

A new parent company may inject the needed capital or carry out a reorganization to ensure profitability.
Some others look at financial statements for comparison with businesses in similar industry, to determine if some hidden advantages are present. It is then decided if it is overvalued or not.

In some other instances, a well positioned company in terms of assets or market opportunity may suffer from some of the following problems which, if solved, may give a buyer value for investment usually in a horizontal integration.

These factors are:-
1. mismanagement and fraud
2. Ego centric leadership
3. Opportunity mismanagement
4. Bloated management structure and the attendant slow decision making process.
5. Bloated overhead running costs. Some executives may not be retained after acquisition.
6. Crises of confidence:- rumors, customer defections, scandals etc.
7. High labor turnover as a result of poor human resources management,
8. Succession problems

A business may also possess some qualities which may provide some opportunities to a buyer, such as
1. Valuable assets and patents
2. Dominance in a market
3. Famous brand
4. Implementation of economies of scale
5. Surplus production capacity
6. Greater latitude in tax avoidance especially when the acquired subsidiary resides in another tax regime. (Risk: Tax authorities may impose arbitrary taxes based on opportunity costs).

The owners/shareholders of the business being bought would try to exploit these advantages to extract a premium from the buyer, which forms goodwill in their (buyer's) books.

In addition, a business willing to take over another may see itself as having some capabilities the other lacks, such as a substantial working capital capable of enduring economic shocks and knowledge of a bigger market.
Vertical integration offers additional advantages as mentioned before.

2. Evaluating the business in the intended acquisition.


In many instances, the buyer fails to maximally utilize these advantages for which a premium has been paid. They are now faced with having to write off the premium, or selling off the new subsidiary especially in a horizontal integration. Buyers may only gain an insight to a business through published financial statements.
They may have to poll consumers in a market to assess the value of a brand.

Financial ratios and data can be compared across industries. In a horizontal integration for example, marginal production costs, can be compared to the buyer's own data.
Additional insight can be obtained if the takeover is not hostile, as questions may be asked and points clarified in both formal and informal settings with the relevant staff of the organization.

Areas for caution:

• Inaccurate cost allocation in financial statements.
  This makes it difficult, if not impossible to verify the success of a brand, which may be incapable of competing profitably in its market. Costs associated with its production and marketing may be disguised or hidden under some other heading therefore exaggerating its profitability.


• A connected or unfair market.
  One may want to find out if the market at which the brand is famous is really open. Some business owners and marketers are able to extract favors from influential persons to limit access to a market by competitors, a very important factor in many third world environments.

  In some other instances, brand loyalty may actually arise as a result of location of the industry, or convenience. A typical example may be in services such as banking and insurance.
  These are not solid platforms on which a brand can be evaluated as the gains may be temporary.

• Fear of disruptive change.
  Selling off may constitute a convenient exit strategy for a business when faced with an impending disruptive change, especially in vertical integration.
  A copper producer for example, must expect his market to shrink now when the communication industry is shifting to the use of fiber optic cables and wireless communication from the use of the venerable copper cables coupled with competition from cables made from aluminium.
  The producer may want to sell the business to a telecom company.

  It may also be that production facilities in a business may actually be obsolete and the seller may not be able to raise the required capital to modernize its facilities.
  A buyer has to study and discern the trends to know if such acquisition will benefit the group in the near future.

  It is not out of place for a prospective buyer to commission independent auditors or valuers to go through the books or value the assets
  

Finally, the intending buyer must now decide if, while operating in a group, its own business processes can bring out the best in the new subsidiary. If not, can such be done with some modifications? A honest answer will determine if the union will work out.

How do you reconcile cultural differences? A very good example was the takeover by Compaq of Digital Equipment Corporiation (DEC) a major minicomputer corporation. DEC produced expensive mainframe computers while Compaq mass produced cheaper PCs.
Some of the issues would include the substitution of big minicomputers by a network of cheaper servers, workstations or PCs where practicable, how the boarding costs of Digital customers' big iron infrastructure would be borne when the substitutions take place,
How the retained ones would be maintained or upgraded, how to use existing Digital software with some modifications for Compaq's products and how Digital's production facilities could be optimized for production of cheaper PCs, how to optimize or adapt Digital's market to the group's benefit.

Buying out a business just to eliminate competition may backfire, as the displaced executives can regroup, and improve on the mistakes that made the acquisition imperative, thereby establishing even a greater competition than what was eliminated.

3. Fashioning out strategies to enhance the acquisition
   

A business, trying to take over another must understand the benefits the acquisition will afford as enumerated earlier, and move to actualize such. It must roll out processes to utilize, for example, surplus production capacity and the assets, such as patents, or the other benefits which form the greatest attraction in the takeover.
Must identify the strengths of the business, and may adopt specialization for each member or shift group operation or production among them, and make a decision on which of the processes within the new group to delete, adopt or modify, to guarantee optimum productivity.

Must decide if a brand should be discarded. This should only be done if:

1. the brand is associated with a horrible past, a scandal, or poor quality.
2. When image rebranding may be too expensive
It must decide if compensation structure will be uniform across the new group, or specific to each subsidiary. Buyer must evaluate the effect a uniform compensation structure will have on the personnel of the acquired business.
Can also explore some inexpensive benefits which may now be available in the group as a result of the new acquisition.

4. Issues in managing a new subsidiary after acquisition.

After the acquisition, the managers should now ensure that every subsidiary contributes profitability to the group, rather than constitute a drain on resources.
Such issues include:
1. Transfer pricing:
in cases where an acquired business makes products which form the main input of another member in a vertical integration, a reasonable transfer price must be fixed so as to pragmatically estimate the profitability of the members or divisions.
Most managers will settle on the prevailing market price at which such products will be sold to outsiders. Some savings should however be quantified when invoicing divisions or subsidiaries such as:
1. Advertising, marketing or selling costs which will not be required when despatched to group member or division.
2. Inexpensive feedback infrastructure. Such can even be communicated informally to the appropriate section or division.
3. centralized or unnecessary customer care
4. adequate provision for large scale discount, which should be available even if component was to be purchased from outside of the group
5. Limited packaging required although costs are normally reduced through bulk packagings as in the case of intermediate products
6. No value added tax calculations and payments where applicable
7. Central fixed overhead costs and
8. information on market conditions of intermediate products, which is now dependent on actions of competitors who can easily mislead the group, especially if competitors' market share is smaller or in the onset of a price war.


2. If the above mentioned factors will not be reflected in the transfer prices then a bigger issue arises as regards overcoming the “special status syndrome” (Insecurity of other customers over the new status of a rival as subsidiary), where the acquired business also has external customers.

   The group must make concerted efforts to assure them. Google, for example, must assure other mobile companies who use the Android operating system that it will not enhance its new mobile subsidiary at their expense.

3. Integration of a business competing in the same industry and in the same market.
4. Managing competing technologies. A communications outfit for example, acquires an internet broad band provider which may offer VoIP (internet) calls in direct competition with its long distance and international calls.
5. Strategy for action during a lull in downstream business without necessarily pampering upstream subsidiary or division.
6. Additional strategies to discipline the subsidiary through competition with outside suppliers after the acquisition.



5. Conclusion,

Mergers and acquisitions require deeper and more careful study than what obtains at present to be successful. Reasons for such steps must be carefully evaluated, and the focus must not be lost after the formal union.
The same principles apply to the management of subsidiaries and divisions, especially when located in another Country.