Working to deliver the best outcome

In his third article on mergers and acquisitions, Mark Beyer examines the importance of early planning by the key players.

LAWYERS and accountants don’t always see eye to eye, but two experienced managers in mergers and acquisitions (M&A) have come to very similar views about successful transactions.

KPMG Transaction Services director Matthew Kelly and Jackson McDonald partner Ken Mildwaters both believe early planning by all of the key people in an M&A transaction is a critical step to success.

Mr Kelly also recommends robust and ongoing assessment of M&A transactions.

“Sometimes people get wedded to a transaction, even though circum-stances may change and the business case may weaken,” he said.

“There can be too much focus on getting the deal done and not enough focus on doing the right deal.”

Mr Kelly said international research by KPMG had identified a series of key practices to maximise the prospect of a successful M&A transaction. The first is early action by all members of the transaction team to implement key activities.

A related practice is development of a formal plan that sets out clear roles and responsibilities for all people involved in the proposed transaction.

KPMG recommends leadership at the board level, to support buy-in by all people who are involved.

It also recommends that a senior executive with appropriate skills should be appointed at an early stage to manage M&A transactions through their entire life cycle.

The executive should be em-powered with responsibility for key activities, including risk and issue management, deal assessment, negotiations and implementation.

Dr Mildwaters agrees that de-fining the leadership roles is very important.

“Getting the ground rules right from the start is absolutely crucial,” he said.

KPMG also recommends a rigorous assessment of the target company and the proposed deal prior to launching a bid.

This includes assessing the risks and developing a detailed understanding of value drivers, so that the bidder can define the maximum acceptable takeover price.

The acquiring company needs to understand not only what it is buying, but how it will manage the combined operations after acquisition.

Mr Kelly said it was not the individual practices themselves but their combination that led to successful transactions.

A company that adopted all practices at an early stage was more likely to increase shareholder value through M&A transactions, he said.

Mr Kelly recommends that companies planning an M&A transaction should adopt a broad view of the due diligence process.

“A lot of people think of due diligence as a check-list approach, but a lot of things on a check list will not be fundamental to the success of a transaction,” he said.

Mr Kelly defines due diligence as the analysis and identification of issues, so directors can make an informed assessment of a proposed transaction.

This includes analysis of both upside opportunities, such as revenue and cost synergies, and down-side risks. These might include issues such as possible product liability or environmental claims, but normally will focus on the ability of the business to achieve the projected operating cash flows supporting the valuation.

Mr Kelly said these risks would usually be dealt with through price adjustments but could become ‘deal breakers’, particularly where they were difficult to quantify.

In such cases, warranties and indemnities offer some protection to the buyer, though vendors are usually reluctant to give them and they create their own problems. 

Claims are time consuming and costly to pursue and the buyer must consider carefully the vendor’s capacity to honour them at a later time. 

Post-deal price adjustment mechanisms can also remove uncertainty from the valuation but are not practical in all instances and must be worded very carefully.  

“In summary, warranties and indemnities are no substitute for thorough due diligence and reliance on them should be considered a last resort,” Mr Kelly said.

Dr Mildwaters said much of the success arising from M&A trans-actions was found in the ability to move quickly and smoothly through the transaction and integration process.

“Like it or not, the process takes place in the ‘shadow of the law’,” he said.

“By involving the lawyer along with other key advisers, such as the corporate advisers, accountants and human resources, in the process from the outset, the parties can develop a coherent and comprehensive strategy that addresses all the interests of stakeholders.”

Dr Mildwaters said some companies have created difficulties for themselves by bringing in lawyers only after they had reached agreement in principle on the parameters of a transaction.

“Too often this means that the lawyer then spends an inordinate amount of time trying to shoe-horn the agreement in principle into some form of a binding agreement that is effective, efficient and durable,” he said.

 “The shoe-horning can lead to mounting tension between the parties and a break down in their relationship.”