M&A Insights from Acquiring Company

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In our last article, we highlighted how a startup acquired company founder felt after the acquisition and following the merger.  From the same Forbes article, we’ll hear from Sanat Rao, the director of corporate business development at Intel.  His viewpoint is from that of the acquiring company.  Here’s what he had to say:

His experience is in the technology sector and is based only on acquisitions, because mergers rarely happen in technology.  He said, “M&A is a tactic to execute strategy.  It is not a strategy itself.”  He advises companies to create a clear, well-defined strategy for their specific business vertical.  The CEO or VP needs to consider all the possibilities:  to build in-house, licensing, partnering, co-investing, or acquiring.

Rao said, “There are two primary motivations for companies to make acquisitions.”  He feels that companies want to fill a strategic gap in their product, resources, and capabilities.  They also want to enter a new market and prefer to have a revenue stream.  Other issues such as economies of scale and reducing taxes are secondary motivations.

Rao stated, “Financial viability is as important as strategic fit.”  He continues that it’s essential for a deal to make financial sense.  Using a simplistic model, he said that most acquirers will model the base case (revenue/MSS/net income with both companies as separate entities) and the acquisition case (revenue/MSS/net income upside due to synergies after cost of acquisition/integration).

Rao continued, “Knowing the value drivers of the deal is a critical element to success.”  The acquirer needs to spend a lot of time on the due diligence effort and identify what the sources of value are. Is it the intellectual property, people, brand, etc.?  It’s important that the acquirer structure the deal and the resources to maximize these value drivers.  The acquirer also needs to create a financial model of the DCFs based on the value drivers.

Rao said, “More than half of all M&A’s fail.”  According to research, which is measured by creation of post-merger financial value, the failure rate is more than 50 percent.  He feels that the key reasons are obvious: high valuations, lack of understanding the value drivers, cultural clashes, etc.

Rao concluded, “Employee turnover in target companies is usually high in the years after the merger.”  He advises companies to create retention programs to keep key employees that drive the sources of value.

Although these insights may hold true for the technology sector in the acquisition of targets, other sectors also acquire companies for the same reasons.  It’s true that the majority of M&A’s fail.  This is why the due diligence process is of significant importance.  Equally as important is planning the company strategy with a model that reflects the strategic goal of the acquisition.

Source: www.forbes.com

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