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Maximising value from M&A

07 November 2017 by Jeremy Small

Maximising value from M&A - Read more

Careful preparation is key to delivering real value on corporate actions

Mergers and acquisitions are something that many company secretaries will experience during their career and present several challenges for the board.

Interestingly, I have found that the scale of any deal is of relatively minor concern, something that surprised me having worked on transactions ranging in size from £500,000 to almost £3 billion, in both regulated and non-regulated industries.

A large, expensive acquisition or sale is likely to be more complicated in terms of its execution and the associated process; however, the fundamental principles that underlie each transaction tend to be much alike.

Start as you mean to go on

It is important to consider the lead up to a transaction when trying to understand what might lead to failure to deliver ‘real value’.

Harvard Business School research suggests between 70% and 90% of transactions subsequently fail to realise their real value – which is staggeringly high – and the reasons often have their origins at, or near, the start of the process.

It is vital to consider leadership at the earliest possible stage. The acquisition team will require leadership in negotiations and technical input, while post-completion leadership will be at its most critical as on-boarding, integration and ‘synergies’ will all need to be dealt with.

‘Synergy’ is a term that tends to be widely used in the context of transactions, however, it seems to be rare that anyone is clear about what it means, with a range of understanding, from cost saving, to realising additional value from newly-acquired assets.

“If the rationale is unclear to the leadership, it is unlikely to be understood by others”

Synergy is really about creating something stronger than the sum of its parts, but it is easy for projected synergies to morph into opportunities to increase costs, create losses and ultimately destroy value.

To avoid this occurring, the board and the company’s leadership need to be clear about the reasons and objectives for any transaction. These can be considered in terms of how it links to and supports the company’s strategy, and why it is a good use of valuable capital.

It is then vital to be clear about what is to be acquired. This may be technical capability, an income stream, market position, people, technology or, perhaps, a foothold in a new sector. If this cannot be described clearly in a sentence or two, my advice is not to proceed any further until it can be.

Also, if the rationale is unclear to the board or leadership team, it is unlikely it will be understood by employees, let alone external stakeholders, and the chances of successful integration decrease significantly.

Have an exit strategy

When considering any transaction, there are four fundamental questions to address, covering what is expected; what success is worth; and to whom; and what the exit plan is.

This last question is arguably the most critical, because if the transaction does not go to plan it is important to know the best way out. This also has a benefit because consideration of an escape route may change the board’s view of the proposed transaction before it has proceeded too far.

Look before leaping

Many people will be familiar with the concept of a post-event review; however, fewer people are likely to have come across a formal before-action review, something which can help to clarify thinking about the proposed transaction and provide structure and objectivity.

There are another three major questions to consider for this: problems that might be anticipated; what has been learned from similar situations; and what would make the transaction successful.

Where this review is performed sufficiently rigorously, it should materially increase the chances of a transaction being a success, providing a clear structure and approach, and – probably more importantly – create agreement among the board and leadership team as to what is wanted, how it will be measured, what challenges or obstacles exist and how they might be overcome.

The board should now have a clear, common understanding about the transaction.

Our role as company secretaries in all of this is critical, as we will be attuned to the dynamics of the board and leadership team, and are well-placed to observe whether there are matters that are not being discussed and assess if they are significant in relation to the transaction, as well as to understand who is influencing decisions.

From the board’s perspective, it is important to ensure that there is a clear record, either in a report to the board or summarised in the minutes, that shows which criteria are being used in relation to the transaction.

These are likely to include strategic fit, key personnel, due diligence, representations and warranties, and possibly deferred consideration as well.

Diligence and deferral

Due diligence is a critical element of any transaction, particularly in relation to an acquisition. It is essential to be clear whether due diligence is really worth anything or if, in fact, it is simply a ritual because the board has decided to undertake the transaction regardless.

It is also important to understand who is providing representations and warranties, along with any indemnities, to establish the circumstances in which they can be relied upon, and when they will cease to be of real value.

“‘Deal fever’ can happen when people treat it as inconceivable that the deal will stall”

Deferred consideration can be very helpful, particularly in the acquisition of an owner-managed business. However, it must be handled extremely carefully to avoid having to pursue an outdated strategy.

An example of this is where the business or market has changed substantially, and it is not possible to re-align the strategy without a significant payout. This may reduce the internal rate of return or hurdle rates that underpinned the original rationale for the transaction.

This means that it is important to consider carefully when it might be appropriate to use deferred consideration.

If the intention is, in fact, related to retention, then I would recommend an alternative that is more closely aligned to the ongoing business and its performance, rather than use what is effectively a projection of past performance.

Keep the advisors in check

Advisors have to be managed and led. Although they add otherwise unobtainable insight, and can provide exceptional support, advice and technical input, it is important to remember that it is not their transaction.

Poorly-managed advisers can usurp decision rights, alter the dynamics between the contracting parties, and succumb to the temptation to score points against each other, possibly even causing a deal to collapse.

It is to the benefit of everyone involved to ensure that they all understand why the deal is being done, how it fits with the company’s strategy and other relevant information.

In addition, it is vital to be extremely clear about the limits of any authority granted to advisors to negotiate and agree matters on the company’s behalf.

Nearly there

It is always worth evaluating scenarios and circumstances in which it would be best to cease negotiations and withdraw from a proposed transaction.

This is critical to avoid ‘deal fever’ taking over, which can happen when people treat it as inconceivable that the deal will not go ahead and incorporate the projected benefits into future plans prematurely, or where too much is considered to have been invested or too many reputations are at stake to consider withdrawal.


There are several additional matters to deal with once the transaction has completed successfully. Ideally, these should have been considered well before completion to increase the overall chances of success.

It is very important to establish who will be accountable for the new business, what the performance targets and other key measures are, which personnel are to be changed, whether the business is to be integrated or run separately, formal reporting and management information requirements, and the broader accounting treatment.

The two most important points relate to accountability and where profits are reported. Poorly thought out structures and accounting tend to lead to difficult political issues and result in sub-optimal treatment of profits.

“Sometimes events simply occur that no-one can foresee and which derail even the best-planned transactions”

This may not only be to the detriment of the newly-bought business but may also damage the established business. Unless these are quickly addressed and made clear, they can rapidly destroy goodwill, in every sense, damage the business overall and eliminate any potential synergies, perhaps permanently.

The before-action review can be very helpful in encouraging people to think concretely about these issues and decide in advance how best to deal with them.

The post-event review, covering process, people, measures and measurement, accountability, short versus long-term, and roles, is an essential part of the overall transaction process.

It is important to adapt this to the company’s specific circumstances, industry sector and technical requirements. This will help to avoid repeating past mistakes and enable the entire organisation to learn from the transaction.

Ideally, the output from the post-event review should be fed directly into the next before-action review.

No one is omniscient

Sometimes events simply occur that no-one can foresee and which derail even the best-planned transactions.

These might be competitors’ actions, regulatory changes, supplier issues, market crashes, economic slowdowns, and, increasingly, political uncertainty. In these circumstances, it may be prudent to delay a transaction, accelerate it or perhaps pursue a different target.

Although the detailed effects might not be predictable, often certain indicators may be present well ahead of events transpiring that suggest how likely they are to occur and their severity if they do.

This is why monitoring emerging risks, changes in market, economic and political conditions are all valuable in providing context in which to consider transaction plans.

Even with that noted, fundamental to increasing the chances of obtaining real value from transactions are leadership, preparation, clear accountability and – of course – luck.

Jeremy Small is group company secretary at AXA UK plc

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