Timely takeover tips from the trenches

HAVING completed 40 acquisitions since founding his business, iiNet managing director Michael Malone has developed some very clear rules for the game.

Speaking at a WA Corporate Acquisition Register seminar last week, he concluded with some firm advice.

“You need to be very clear about what you want to achieve for your business, you need to do lots of homework up front, and you need to ensure you are prepared for the integration,” Mr Malone said.

And he acknowledged that communicating with staff after completing each takeover was the most difficult aspect. 

The speakers at the seminar, held jointly with the American Chamber of Commerce, agreed that bidders needed to ensure they had their own house in order before pursuing takeovers.

BDO Corporate Finance partner Simon Cook advised that the directors and management team at the bidding company firstly needed to ensure they agreed on their growth strategy.

Similarly, HHG Legal Group associate Darryl Stewart said bidders needed to complete a due diligence review of their own company before thinking about launching a takeover.

Once takeover negotiations have commenced, one of the key tasks is estimating the future earnings of the merged group.

Mr Malone said the chief financial officer often undertook this task using estimates of potential synergies and integration gains, but a common mistake was failing to get operational staff to evaluate the numbers.

“Bringing the operational experts into the bid team as early as possible is absolutely vital,” Mr Malone told the seminar.

He also advised that bidders needed to be wary if they wanted the vendor and their key staff to work in the merged group.

“If you want people to be involved in the business after the transaction, be very, very clear about what you expect them to do,” Mr Malone said.

“The kind of person who starts and builds their own business isn’t always the type of person you want inside your own business.”

Mr Stewart also highlighted the importance of clear documentation, to remove the risk of misunderstandings and later disputes.

“Write it down, write everything down,” Mr Stewart told the seminar.

He said the documentation should include confidentiality agreements that needed to be signed by all relevant parties, including the board, management, advisers, financiers and relevant staff.

Mr Malone agreed, saying that every time iiNet pursued an acquisition, it brought all relevant staff into its boardroom for a formal signing of confidentiality agreements.

He acknowledged this could be a sombre occasion but it reinforced the need for all people to be discrete, even in casual conversations with family and friends. 

One of the more surprising pieces of advice was to ensure that both parties had good quality advisers.

While it may be tempting to think that having weak advisers in the opposing camp could result in a more lucrative deal, the speakers agreed that poor quality advisers could result in a deal unravelling. For instance, many businesses may still use the same suburban accountant they started with many years earlier, yet that person probably has no experience with mergers.

Mr Cook highlighted the importance of undertaking a business-risk assessment. This would include a review of the takeover target’s top customers to establish how reliant the business is on its top customers and how credit-worthy they are.

Speakers at the seminar said signing an agreed merger deal was just the start of a long process; there also needed to be a focus on integration.

“An accepted offer is good, a completed sale is better, a fully integrated acquisition is best,” WA Corporate Acquisition Register founder Clinton Bradbury said.

Mr Malone said bidders should assemble and prepare an integration team well before any transaction was completed.

They should also have an integration plan that was clear, fully costed and documented. 

Mr Bradbury agreed, saying bidders should monitor the performance of each transaction, and report back to their board.

“There should be measures that allow you to evaluate the success of the acquisition,” he said.

Mr Malone said this process would encourage advisers and staff to be realistic when estimating the potential benefits of a merger.

Mr Cook cautioned that many small businesses had complex structures that may need to be untangled after an acquisition.

For instance, they may use trusts, may have properties inside the company or in a self-managed superannuation fund, and may have an unclear separation of personal and business expenses.