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The buy-side of a deal

It takes nitty-gritty hard work to make an acquisition soar

CompassImproving a company’s odds of a successful acquisition takes clear goals and a detailed, defined strategy that allows for the inevitable surprises. It should involve the early-on input and support of the company’s board of directors.

These were among “buy-side” tips from panelists gathered for a fall 2018 Private Directors Association (PDA) event hosted by PDA sponsor Grant Thornton. Panelists included Eileen Kamerick, a member of several boards of directors who described herself as a “serial CFO,” having held that role at BP Amoco America, Leo Burnett and other organizations; Joe Feldman, founder and president of Joseph Feldman Associates, which consults with companies to support their growth strategies; Frank Jaehnert, former president and CEO of Brady Corporation, a manufacturer of products for identifying workplace components; and Carl Warschausky, who played a key role in the successful sale of World Kitchen when he was president and CEO of the manufacturer and marketer of consumer houseware brands. The moderator was Dan Lantry, vice president and associate general counsel of the American Medical Association.

Where to begin The process starts with the buyer’s business strategy, which aligns with and bolsters the separate acquisition strategy that a board typically helps to guide. Elements include determining the criteria and the plan, pinpointing targets, evaluating and valuing, negotiating deal terms, performing due diligence, purchasing and financing, and implementing/integrating.

Warschausky advised, “Probably the most important thing in driving you to develop an acquisition strategy is to ensure alignment between management and the board of directors.” If a target is presented, he said, “you don’t want the board to say, ‘Where in the world did this come from? I’ve never heard the name. How does it even fit?’” Such a reaction means it’s time for management to assess how well the strategy was conveyed, or even to rethink it.

Make sure the shiny penny keeps its luster Your company is looking to do an acquisition, and there’s some “shiny penny” out there that seems attractive. Maybe the target is very innovative, which is part of its appeal. To what extent do those qualities give the target a strategic advantage and become key to the value you’ve placed on it? And to what extent should you seek to integrate its culture into yours?

These types of questions were posed by Joe Feldman, founder and president of Joseph Feldman Associates, who spoke at an event presented by the Grant Thornton-sponsored Private Directors Association.

Feldman started with the assertion that culture is not so much what is written on paper as part of a company’s “key values,” but rather more about “how the company actually behaves in terms of communicating with and among the management team and their employees, their customers and their vendors — what sort of relationships they have, whether they’re honest or not, how they make decisions, how dissent is dealt with.”

Assessing an organization’s “true culture” is complex and ongoing, and may even require outside resources to gain a more realistic picture. This is where boards can step in and emphasize to management that culture is extremely relevant to deal success.

“Where you find breakdowns and buyer risks,” said Feldman, “is when there’s a gap between how a company talks about business and how it actually works.” The last thing a buyer wants, he said, is to end up with a culture “reality” that is destructive to deal value.
Strategizing a strategy Similar scenarios can be mitigated by putting together a strategy even before you are ready to do a deal. The strategy outlines your rationale and the criteria for what is appropriate. Do you want to change market perceptions of your business, get bigger, own and control key suppliers or accelerate a business strategy? Identify geographies and categories you want to expand into (e.g., to increase market share, enhance products and services, etc.) and companies that would be good fits, whether or not they are for sale.

Onboard with valuations Once the board is onboard with a buy, the valuation process begins. The board should understand how the management team and the external advisers came up with a value for the company and how this impacts negotiating strategy. Said Jaehnert, “The board is there to ask questions to be sure the strategy is sound. You don’t want to have a situation where the board thinks 100 million is a good price, and then the management team agrees to 125 million.”

He advised asking a lot of questions about an acquisition and gave these examples:

  • What ERP system does the target have, and is it the same as ours or different?
  • Is the target going to migrate to our system, are we going to migrate to its system, or do we keep two systems?
  • What about key management — how do we retain them?
  • More generally, who is going to stay, and who is going to go?
  • How do we consolidate facilities? What are the steps?

Due diligence should cover the usual legal, environmental, tax and financial considerations, but it should also include an assessment of risk. The company should not be overly surprised — for example, when a big asbestos liability surfaces — and should also have a back-up plan if a risk seems too great.

Feldman cautioned that it doesn’t make sense to think you will know exactly how a business will perform when you don’t know it intimately. “Ask management to consider some qualitative scenarios. What happens if you lose a key supplier? What happens if you lose a key customer? What happens if the new market entry strategy that you have in mind takes 24 months longer? What does that do to the business?”

“Integration is really messy, and it’s not fun and it’s not sexy.”

−Dan Lantry, vice president and associate general counsel, American Medical Association
All in the details Having a detailed integration plan is critical and should be part of acquisition approval, said Kamerick. “You have to recognize whether you have the internal resources to get this done or you need to push management to take somebody [or a team] off the line. If so, who’s going to step in in their day job? And then, does that person have the resources necessary, or should you bring in a third party to help build a project management office?” The next task is to focus on the key performance indicators for judging that office.

Kamerick said management and the board should have “an agreed-upon set of expectations and a timeline that says what success will look like three months from now, six months from now, a year from now — and how we will adjust if what we expect is going to happen doesn’t materialize or there’s another opportunity that actually could provide more value, or we have some tsunami hit us and we have to change our risk management profile.”

A Day One strategy should include having all employees on your benefits plan and your email system, with their names on business cards that show the company logo and address. “That sort of thing makes a huge difference in terms of integrating people into your firm to maintain the value of the business that you bought,” said Kamerick.

“I think everybody has a tendency to be so focused on the last negotiating points that everybody gets exhausted, goes out and has a big meal and drinks, and then says, ‘Oh, now we’ve got to actually make this work.’”

–Ellen Kamerick, board member, Associated Bank, Hochschild Mining, AIG Funds
Assessing as you go Even after a deal is done, the company needs to assess how it is doing against its objectives, monitoring progress such as sales growth, profit growth and synergies. An integration manager should monitor how fast you’re moving, to understand when you can spend money, for example on new product development or upgrading the ERP or HR system.

Once a deal is “done,” you usually don’t want the asset to just sit there, potentially losing value, Kamerick said. Go back to the reasons you bought it and make decisions quickly that will get you to your goals.

The Private Directors Association (PDA) is a national network in which executives and professionals interested in board service can find and meet with those interested in securing exceptional board members. Grant Thornton is a PDA sponsor.

Contacts Paul MelvillePaul Melville
Principal, Corporate Advisory & Restructuring Services
T +1 312 602 8360

No image availableDavid Heinke
Business Development Executive, Grant Thornton
T +1 312 602 8952