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Abstract

This paper will explore some of the key practical issues encountered in developing and
implementing merger and acquisition (M&A) strategies. The critical success factors and how
failure can be avoided will be examined.

In terms of achieving intended increases in shareholder value, the M&A track record is poor; a
fact repeatedly highlighted by research. Key determinants of success in realising value include:

Achieving sufficient M&A process cohesion cohesion: see adhesion and cohesion.

Cohesion (physics)

The tendency of atoms or molecules to coalesce into extended condensed states. This tendency is
practically universal. avoiding fragmentation ë
Storing data in non-contiguous areas on disk.
As files are updated, new data are stored in available free space, which may not be contiguous.
Fragmented files cause extra head movement, slowing disk accesses. A defragger program is
used to rewrite and reorder all the files. and multiple hand-off

Using a structured targeting process a purely top-down focus may fail, especially in international
situations, to take account of local knowledge, cultural issues and the need for ownership by
local operating management

Getting the mix of specialist due diligenceResearch; analysis; your homework. This term has
caught on in all industries, because it sounds so "wired." Who would want to do analysis or
research when they can do due diligence. See wired.
 Click the link for more information. right in order to understand the situation-specific
operational value drivers, value potential, constraints 
 - A language for solving
constraints using value inference.

["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J.

Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. , and risks

Applying early a holisticHolistic

A practice of medicine that focuses on the whole patient, and addresses the social, emotional,
and spiritual needs of a patient as well as their physical treatment.

Mentioned in: Aromatherapy, Stress Reduction, Traditional Chinese Medicine

 Click the link for more information. perspective to integration planning and implementation
that addresses both technical and people issues.

Introduction
Companies are driven by shareholders (and indirectly by other investors such as banks) to
increase shareholder value. The holders of an organisations equity capital seek a return to
compensate them for the relatively high risks that they are taking with their money. All being
well, this desired return would take the form of some combination of two components -
dividends received and capital growth.

To corporately combine with another company offers a route to rapid growth. This growth will
be immediately evident on the top line (sales/revenues) of the combined business, however
growth in the joint bottom line (the profit available to shareholders), and thus shareholder value,
can be much more illusory il·lu·so·ry
|

Produced by, based on, or having the nature of an illusion; deceptive: "Secret activities offer
presidents the alluring but often illusory promise that they can achieve foreign policy goals
without the . Nevertheless mergers and acquisitions remain, in varying degrees over time, a very
popular way of achieving growth. The principal reason being that the alternative route is the
much slower, and often also perilous, organic growth.

There has been much research into the success/failure rate of M&As over many years, the|



the seven decades of Eleanor Pargiter¶s life. [Br. Lit.: Benét, 1109]

See : Time
 Click the link for more information. results of which are not encouraging. There are of course
practical limitations upon how accurate the research findings can be and the extent to which
smaller deals, which may be below the line of sight in the work, are successful. Even so it is
difficult to avoid the conclusion that mergers and acquisitions are inherently risky. However, in
the world of investment, risk and reward are inextricably in·ex·tri·ca·ble
|


So intricate or entangled as to make escape impossible: an inextricable maze; an inextricable
web of deceit.

 linked and the good news is that whilst always a difficult and imperfect imperfect: see tense.
area, there is much that can be done operationally to maximise value and minimise risk resulting
from corporate transactions.

This introductory paper assumes little M&A experience and sets out to explore key critical
success factors and pitfalls to help the reader enter the fray fray 1
Y
A scuffle; a brawl. See Synonyms at brawl.

A heated dispute or contest.

÷ O , O , O  ?

| 
 To alarm; frighten.

 with eyes open and equipped to improve the general M&A track record. The intention is to
provide a practical guide to adding shareholder value through mergers and acquisitions, rather
than to create an academic treatise ?
|| |÷ YY÷| Y Y|÷
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| Criminal Law  Land-Use Control.

Lawyers commonly use treatises in order to review the law and update their knowledge of
pertinent case decisions and statutes. . After exploring some background and strategic context,
the subject matter is broken down into four key areas - M&A process cohesion, targeting, due
diligence, and integration planning. The depth of exploration is inevitably constrained con·strain
÷ V  , V  , V  
To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See
Synonyms at force.

 by the time allocated to the topic and the required length of the paper. Working definitions
(rather than full technical descriptions) of the terms shown in Italics are provided at the end.

In reality corporate combinations, whether described technically as a merger or an acquisition,

are usually acquisitions in as much that one of the parties/cultures is eventually dominant. For
brevity Brevity
Adonis¶ garden

of short life. [Br. Lit.: =Y= ]

bubbles

symbolic of transitoriness of life. [Art: Hall, 54]

cherry fair

cherry orchards where fruit was briefly sold; symbolic of transience. , and recognising this
reality, the word acquisition is used throughout this paper as shorthand shorthand, any brief,
rapid system of writing that may be used in transcribing, or recording, the spoken word. Such
systems, many having characters based on the letters of the alphabet, were used in ancient times;
the shorthand of Tiro, Cicero's amanuensis, was used for either scenario. The abbreviation
abbreviation, in writing, arbitrary shortening of a word, usually by cutting off letters from the
end, as in U.S. and Gen. (General). Contraction serves the same purpose but is understood
strictly to be the shortening of a word by cutting out letters in the middle, M&A and the terms
corporate transaction[broken (vertical) bar] and corporate/business combination are also used
interchangeably INTERCHANGEABLY. Formerly when deeds of land were made, where there
Were covenants to be performed on both sides, it was usual to make two deeds exactly similar to
each other, and to exchange them; in the attesting clause, the words, In witness whereof the
parties have hereunto with the same interpretation.

Shareholder Value Analysis

Shareholder value analysis is explored briefly here in order to more fully answer the question
"Why do companies merge and acquire?"

The term shareholder value is of course the current mantra mantra (măn`trԥ, mŭn±), in Hinduism
and Buddhism, mystic words used in ritual and meditation. A mantra is believed to be the sound
form of reality, having the power to bring into being the reality it represents. in corporate
performance measurement. However it is also, when appropriately applied, a very useful and
practical conceptual framework For the concept in aesthetics and art criticism, see .

A V VO 
is used in research to outline possible courses of action or to present a

preferred approach to a system analysis project. for understanding and monitoring how value is,
or is not, being added by a business enterprise. It is also quite often used for motivating
management and incentivising them accordingly. Shareholder value analysis may be defined as:

"An approach to financial management which focuses on the creation of economic value for
shareholders, as measured by share price performance and flow of dividends."

Source: The Chartered Institute on Management Accountants (CIMA) Official Terminology

There are various interpretations of shareholder value analysis into techniques for measuring and
managing corporate performance. These variants do not concern us here, however the Value
Maximising Framework in Figure 1 offers a pictorial and straightforward model for
understanding the main operational drivers of, and constraints upon, increasing shareholder value
in practice.

Among other things, this interpretation removes various technical complications encountered in
the application of shareholder value analysis. (Such as, for example, arriving at a share price for
a company without a quotation QUOTATION, practice. The allegation of some authority or
case, or passage of some law, in support of a position which it is desired to establish.
2. Quotations when properly made, assist the reader, but when misplaced, they are inconvenient.
on a public stock exchange, and adjusting relatively readily available accounting profit to be
more meaningful in the context.) The model also serves to help explore the M&A rationale
rationale (rash´ nal´),
Y the fundamental reasons used as the basis for a decision or action. .

Figure 1

The basic premise here is that no shareholder value will be added until such time as the cash
thrown off by the business (after all operating costs operating costs Y ĺ gastos 
operacionales , charges and investments have been met) exceeds the cost of the finance being
used to fund it. The high-level operational value drivers shown are the main factors that serve to
drive the free cash flow up above the cost of capital and the high-level constraints indicated will
tend to prevent this highly desirable outcome.

The combined effect of the drivers and constraints is to hold the free cash flow of the enterprise
in a sub-optimal balance. Once improvement activity in the business has optimised the free cash
flow to the extent that is practically possible in the circumstances CIRCUMSTANCES,
evidence. The particulars which accompany a fact.
2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and
improbable, recent or ancient; they may have happened near us, or afar off; they are public or ,
the company will have to look elsewhere to satisfy the appetite of shareholders for ever greater
returns on their investment. Acquisitions are, arguably ar·gu·a·ble
|

Open to argument: an arguable question, still unresolved.

That can be argued plausibly; defensible in argument: three arguable points of law. , the only
way to achieve rapid (and potentially profitable) growth.

M&A Process Cohesion

Viewing the M&A process holistically at the outset (as it applies in the particular circumstances,
rather than formulaically) is the first way to avoid many of the difficulties encountered
downstream From the provider to the customer. Downloading files and Web pages from the
Internet is the downstream side. The upstream is from the customer to the provider (requesting a
Web page, sending e-mail, etc.). in business combinations. In practice, the process tends to be
dealt with as if it were a sequential and fragmented frag·ment
Y
A small part broken off or detached.

An incomplete or isolated portion; a bit: overheard fragments of their conversation; extant

fragments of an old manuscript.

 exercise, rather than a parallel and cohesive cohesive,

Y the capability to cohere or stick together to form a mass. one. There tend to be multiple hand-
offs between different advisors, who can sometimes exacerbate the problem, and the variously
skilled managers involved along the process steps. The problems stored up along the way tend to
manifest manifest 1) adj., adv. completely obvious or evident. 2) n. a written list of goods in a
shipment.

MANIFEST, com. law. A written instrument containing a true account of the cargo of a ship or
commercial vessel.
2. at the later stages, by which time their impact is greater and often much more difficult to deal
with.

Figure 2 contrasts the two perspectives on the M&A process.

Figure 2

The planning and integration of acquisitions involves a complex mix of technical and people
issues. This should be recognised early on so that a holistic view is taken from the very
beginning of the exercise, the appropriate resources are brought to bear, and sufficient team
continuity and people involvement are provided for.

Importantly, learning and capturing (organisationally) the lessons from each experience must be
part of the process. Even groups of companies that become serial acquirers (usually over a
considerable period of time) and private equity houses (who back acquisitions for a living - via
later growth-stage management buy-outs, buy-ins, etc.) admit that their track record could still be
much better. Hegel!'s observations about leaning from history may well also apply, at least in
part, to companies and the world of corporate combinations:

"What experience and history teach us is this !V that nations and governments have never
learned anything from history, or acted upon any lessons they might have drawn from it"

G W F Hegel 1842

Targeting

All stages of the acquisition process tend to suffer from the application of an evolved formulaic
approach that has not necessarily been adapted well to take account of specific circumstances.
Targeting is certainly no exception to this tendency - for example applying an approach that has
worked successfully in the UK may not be nearly so effective in international / multinational
circumstances. Indeed if local knowledge, level of national economic maturity, and culture
(national as well as organisational) are not adequately taken into account, the consequences can
be severe.

One of the keys to getting the approach to targeting right is to develop a sound set of strategic
parameters that are owned, through appropriate involvement, by the right people given the
specific circumstances. Ranked strategic parameters and, importantly, the process of developing
them will answer or start to answer certain vital questions. Using Rudyard   is a lakeside
village in the county of Staffordshire, England, west of Leek, Staffordshire and on the shore of
Rudyard Lake.

The lake was built in 1797 by the engineer John Rennie to provide water for the Caldon Canal.
Kipling![broken (vertical) bar]s six honest serving men: What do we want? - Why do we want
it/them?When do we want it? - How will we acquire and integrate it? Where will it be? Who do
we need to involve? While these questions seem obvious enough, they are often not asked or
answered, if at all, early enough or collectively by the right people.

As a starting point       - earliest limiting point

terminus a quo

commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first -
the time at which something is supposed to begin; "they got an early start"; "she knew from the
in developing and prioritising specific strategic parameters, the desired growth and financial
outcomes for any merger or acquisition should be fully explored. To further stimulate the
development process, other classic justifications for national and international business
combinations are, at a high level:

Increase portfolio balance related core skills (family) or unrelated financially driven
(conglomerate V    
conglomerate, corporation whose asset growth, often very rapid, comes largely through the
acquisition of, or merger with, other firms whose products are largely unrelated to each other or
to that of the parent company. )

Build on common technology or know-how know-how

Y
The knowledge and skill required to do something correctly. See Synonyms at art1.

know-how
Y

=Y
| the ability to do something that is difficult or technical share resources in technology,
equipment, product markets, distribution channels economies of scale
Increase market share - by acquiring a competitor

Capture a particular customer(s) by acquiring its supplier

Enter a new market platform for buy and build

Move up, down, or across the supply chain.

Often a purely high-level identification approach to targeting is taken. However, in many

situations there is great benefit in complementing this with a tailored, structured, facilitated
process that includes the development and utilisation of ranked strategic parameters. The
principal benefits of such a process being that the acquisition pipeline is filled with desired
targets, omissions and gaps in understanding are avoided, and integration/improvement issues
are understood early-on and owned by the right people.

Identification Only Approach

This is usually a top-down approach Top-down approach

A method of security selection that starts with asset allocation and works systematically through
sector and industry allocation to individual security selection. to targeting, involving a close
group of senior managers and their advisors. The industry's demand and supply evolution, in
conjunction with the acquiring company's position in it, is analysed. High level strategic
objectives and parameters are explored and a value creation/synergy plan created for ideas that
emerge. Advisors are usually briefed to carry out a desk-research analysis and use
databases/networking to opportunistically target companies for acquisition. A professional M&A
transaction typically ensues, with varying degrees of involvement of the operating management
who will eventually be charged with the integration of the resultant This article is about the
resultant of polynomials. For the result of adding two or more vectors, see Parallelogram rule.
For the technique in organ building, see Resultant (organ).

In mathematics, the  of two monic polynomials acquisition(s).

Structured Facilitated Process

This approach to targeting is less common and accommodates the identification process well but
is also designed to fill the gaps in understanding that can appear when using a top-down
approach. These gaps are usually around the stage of technology/market development, the
interplay in·ter·play
Y
Reciprocal action and reaction; interaction.

Y÷  ,  ,  

To act or react on each other; interact. between corporate and operations strategy, and the
involvement of people who have detailed local knowledge and will be charged with making the
business combination work in practice.

The example targeting process guide in Figure 3 illustrates the structured

facilitated process concept.

Figure 3

Factors that will determine the approach taken to targeting include:

The number and scale of acquisitions to be made

Whether the acquisitions are strategic or tactical in nature

Whether the acquisition will be national or international/multinational

The degree of confidentiality/ease of deduction deduction, in logic, form of inference such that
the conclusion must be true if the premises are true. For example, if we know that all men have
two legs and that John is a man, it is then logical to deduce that John has two legs. of the
acquirer's intentions

The degree of integration that is appropriate.

Due Diligence

Due diligence may be defined as the process of investigating and understanding the asset to be
acquired. Basically this is the opportunity to build on the earlier research, that should have been
done, with the objective of developing a detailed understanding of what you are actually buying.

Again this area tends to be approached in a formulaic manner. The most common types of
specialist due diligence carried out in practice are legal, financial and commercial/market. What
is actually included is brief-specific and varies from acquirer to acquirer as well as from deal to
deal. Important as these areas clearly are, usually they do not surface the situation-specific
operational value drivers and risks that exist in the target/combination. The implication of this
being that the business is not always understood at the operational level, nor are integration /
improvement issues and risk mitigation MITIGATION. To make less rigorous or penal.
2. Crimes are frequently committed under circumstances which are not justifiable nor excusable,
yet they show that the offender has been greatly tempted; as, for example, when a starving man
steals bread to satisfy possibilities identified in all cases.

There are of course practical limitations to executing due diligence, such as the degree of access
and time available in what may well be a competitive bid situation. However this makes it all the
more important that the right work is done at this stage, and earlier, on understanding just what
you are buying. Some common issues that arise post acquisition that should have been
understood earlier are around the following areas:
Linkage 


In mechanical engineering, a system of solid, usually metallic, links (bars) connected to two or
more other links by pin joints (hinges), sliding joints, or ball-and-socket joints to form a closed
chain or a series of closed chains. of the operations strategy to the business plan

Operational capability, condition and state of development

Likelihood of successful plan implementation

Improvement and rationalisation       - (psychiatry) a defense mechanism by

which your true motivation is concealed by explaining your actions and feelings in a way that is
not threatening
rationalization potential

People and technical barriers.

One of the keys to success in this area is to rapidly scope the mix of due diligence that will be
most effective in the particular circumstances. In practice this usually has to be done under
considerable time pressure and in appropriate depth depending on whether the exercise is being
carried out pre and/or post exclusivity. This becomes much easier to do if the earlier stages of the
acquisition process have been executed well.

The Value Maximising Framework graphic in Figure 1 above serves well as a high-level
checklist for getting the mix of due diligence right.

Integration Planning

The approach taken to integration will depend on a number of factors. Such as the nature and
complexity of the business, the number of countries and sites involved, the degree of
compatibility of the organisations, the business plans and corporate intentions, and whether the
combination is seen as a merger or an acquisition. Depending on the specific situation, of course,
a formulaic approach to integration planning is unlikely to be inappropriate.

Working with both corporate acquirers and private equity houses provides an interesting
perspective on the M&A process. A key to getting the integration/improvement plan right is to
take a holistic and tailored approach to the exercise and involve the right people at the right time.
The approach taken should focus on:

Getting the best out of the combined operations For the department of the British War Office
during World War II, see .
In the military, V      are operations conducted by forces of two or more allied
nations acting together for the accomplishment of a single mission. 
Joint warfare
Maximising value and mitigating mit·i·gate
 , , 

÷
To moderate (a quality or condition) in force or intensity; alleviate. See Synonyms at relieve.

 Y÷
To become milder. risk

Surfacing issues before they become problems

Improvement and rationalisation potential

People and technical barriers.

Listed below are the aspects of the plan that will need to be considered in a large and complex
integration. The list can also be used to help ensure comprehensiveness in smaller and less
complicated cases.

The first 100 days of the business combination will be absolutely critical, and it is of key
importance that the right things are done in the right sequence. Two of the essential early
activities necessary in practice are around the retention of key employees and customers. Again,
getting the earlier stages of the acquisition process right will pay substantial dividends here and
help very significantly in the integration and improvement of the combined business.

Conclusion

By way of conclusion, below are some Dos and Don'ts in acquisitions.

Working Definitions

Acquisition: A business combination in which one company is acquired by another.

Cost of capital: The blended cost of all the forms of finance used to invest in operating capital
    V - capital available for the operations of a firm (e.g. manufacturing or
transportation) as distinct from financial transactions and long-term improvements
capital, working capital - assets available for use in the production of further assets required for a
business.

Equity capital: The investment in a company by the ordinary shareholders. (It is the equity part
of the financial structure of a company that is most at risk.)

Exclusivity: The period during which a bidder for a target is granted exclusive access to carry out
due diligence etc. with a view to advancing the transaction.

Free cash flow: The operating cash flow Operating cash flow
Earnings before depreciation minus taxes. Measures the cash generated from operations, not
counting capital spending or working capital requirements. generated by a business after all
charges and investments have been met.

Merger: A union of two or more firms in a transaction by which one absorbs the other(s), or a
new firm is created utilising the assets of the absorbed firms.

Private equity: The term generally used to describe equity investments in unquoted companies
(both buy-outs and venture capital) often accompanied by the provision of loans and other forms
of finance.

Private equity house: A firm that makes private equity investments in companies and usually
plays a central co-ordinating role in a deal.

Shareholder value: The value of the investment made by shareholders in the business.

Shareholder value analysis: An approach to financial management which focuses on the creation
of economic value for shareholders, as measured by share price performance and flow of
dividends.

Strategic acquisition: An acquisition that is of importance to the business's strategy in general.

Tactical acquisition: An acquisition that is carried out to achieve a particular, shorter-term aim.
(Such as acquiring a company to in-fill a gap in the acquirer's product or service portfolio.)

The content of this article does not constitute legal advice and should not be relied on in that
way. Specific advice should be sought about your specific circumstances.

Mr Ian Hackett

Rossmore Group