How to create value, not headlines (Second of four parts)

SUNDAY, 21 AUGUST 2011 18:52 KPMG PERSPECTIVES

Second of four parts

EVEN though 8 out of 10 acquisitions fail, many firms still look to them for growth. Here are eight steps to get it right.

1. Don’t start with the deal. With every acquisition in the balance until it’s completed, the temptation is not to risk wasting resources by deferring any study of how you will extract value from a deal until the last minute. Yet most managers, analyzing their purchases in KPMG’s 2010 mergers and acquisitions (M&A) study, wished they’d started their integration planning sooner. If the bidder doesn’t understand what and where value can be obtained, how can they be sure they are not paying over the odds? And how can they decide how best to unlock the value they acquire? This planning process goes far beyond crunching data.

The bidder needs to understand the mechanics of how synergies can be obtained, what cultural challenges they face and how compatible their IT and reporting systems are. KPMG research suggests that acquirers have a 100-day honeymoon period to take hold of a business and start delivering benefits. Unless they can make the hard changes necessary in that period, they will lose value. The sooner they start planning integration, the easier it will be to focus on the initiatives that help extract value, mitigate risk and maintain momentum.

2. Define your strategy. Why are you trying to buy? Cisco Systems, which has bought 145 companies since 1993, divides its potential acquisitions into three categories: those that expand the market, take it into new markets or accelerate the market. For every company it buys, it has researched 100 and entered into serious conversation with 10. Yet even Cisco’s M&A specialists say acquisitions are as much art as science.

And sometimes, Kelly suggests, a deal makes sense even if the rationale sounds unspectacular. United Biscuits, he points out, beat Golden Wonder to acquire Jacob’s Biscuits from Danone in 2004. Within two years, Golden Wonder was in receivership and United had bought two of its rival’s core brands. (The Golden Wonder brand is now owned by the Northern Irish group Tayto.) “The difference between a number two and a distant three is a big deal,” says Kelly. Sometimes, the simplest rationale—this purchase protects our position in the market—is the best.

3. Don’t just focus on costs. If you are to convince investors one and one won’t equal less than two, you need, Kelly says, to broaden your focus: “Companies often give very bland statements about the potential revenue synergies, but they need to quantify what those might be if they are to give investors the best opportunity to understand the value of a transaction.“

Markets don’t value revenue synergies and people tend to focus on cost so suddenly, instead of being a strategic, value-enhancing deal, you start slashing and burning. Buyers often invoke the millions to be gained from synergies in R&D, product development and cross-selling but find it easier to cut cost. There’s a bizarre paradox at work here. Because investors are skeptical about revenue synergies, businesses put less effort into them—yet investors, though they have more faith in cost reductions, are more excited by deals that deliver new revenues. CFOs need to talk credibly, in detail, about revenue synergies, giving a fully rounded view that may increase valuations.

This article is written by Paul Simpson. This article was taken from the publication Agenda Magazine, April-May 2011, produced by KPMG’s Global Advisor Services Practice.

For comments or inquiries, please e-mail Roberto G. Manabat at rgmanabat@kpmg.com or manila@kpmg.com.