Back in the early 2000s, the Wall Street Journal stated that only 10% of acquisitions achieved their pre-acquisition financial projections. That means that ninety percent of companies will experience a financial strain on their core business, at least in the short term. If the acquirer is to survive or even thrive, they need to stay in control of the business and ahead of any pitfalls.
So, why could a company be at risk of losing financial control post-acquisition?
First, if the company borrowed funds to pay for the acquisition, their borrowing capacity that may be required to pay for expenses during its ordinary course of business may now be limited.
Secondly, if the acquiree does not generate profits as they expected to post-acquisition, they will rely on working capital generated by other divisions. In this case, the strain on cash flow creates added pressure on the core business to generate profits that compensate for the shortfall of profits (or losses) from the acquisition. The margin for risk is now slim.
Here are some solutions for avoiding these pitfalls:
For starters, identify critical stages and manage through them. For example, at the time of acquisition, there is a lot of ‘spending’ that includes acquisition and transition costs such as legal, IT, and restructuring costs for severances, etc. For accounting purposes, these costs are capitalized and amortized as goodwill over a 20–year period. Therefore, particularly at this stage, it is important for the company to pay attention to cashflows and not be misguided by what is being presented in the Income Statement.
Secondly, it is important to monitor and review segmented data. By separating the core business from the acquisition, financial statements can be reviewed for trends in profit or loss that will help senior management monitor the effect of the merger on other segments, be it positive, negative, or neutral. At a minimum, the company will want to ensure that the acquisition has not been a distraction from the operation of the core business.
Finally, the adverse effects of an underperforming acquisition can have negative intangible effects such as damaging publicity due to layoffs or demoralization of the other divisions due to the cash drain needed to support the acquisition. To minimize these negative effects, the organization may consider providing bonuses to divisions that have met their targets even though the company itself may not have met theirs. Also, the organization will need to communicate and reinforce the long-term benefits of the merger and will keep people informed about when the situation is expected to turnaround.
Having had experience with acquisitions at all stages including due diligence, closing, transition and post–merger monitoring, I can assist any organization in avoiding pitfalls and help them gain optimal benefit from a merger or acquisition. For any follow-up comments or questions, I can be reached at [email protected].