Acquisitions that are rushed can result in problems and challenges after closing in a transaction:
Some of the reasons why M&As go wrong are:
1. Assumption Asymmetry
Leaders and owners may over value a target by making assumptions including over-valuation, over-optimistic assumptions in revenue, cross-selling and cost synergies by the target may create expectations higher than the real value of the business or company. These may be contrary to what a due diligence or post-integration may reveal. If the former address the asymmetry, it will address some issues. But if it occurs post-integration, then it would be too late.
Most legal issues center around disclosures and reps and warranties during and after DD. But some interesting legal questions are whether a buyer should provide his assumptions to the seller or can a party can be held legally responsible if the facts do not match the assumptions. This is what leads to moral hazards where a party to the transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or attempts to earn a profit in a questionable manner. While such legal considerations may be covered in the NDA (and the Overture Documentation – discussed later) signed in the initial stage, actual control over assumptions and facts and enforceability thereto may become sticky issues.
The Parties need to have honest approaches during negotiations in their expectations, disclosures, representations and warranties on both sides to make a successful M&A.
2. Having a “take” mentality
M&A is a bi-lateral proposition. Both parties need to be honest and should share equally in the responsibility of making the M&A work. M&A to merely increase share price or increase of income and status of acquirer’s management or professionals can create hurdles and challenges. Such approach reduces shareholder wealth largely over a period of time.
Post-integration, the acquirer should take care to ensure it contributes to the target company and not merely exhaust the latter’s resources.
3. Lack of emphasis on post M&A integration
Acquisitions do not end with Closing. It is a continuing process of business building. As part of post-integration will be corporate policies, new HC related contracts, replace as opposed to displace employees, active management alignment and participation. These documents should have corporate sanctions for non-compliance. However, deep consideration should be given to local laws.
Many acquirers slack off once Closing has taken place and leave it to the rank and file to take care of integration. Lack of emphasis or poorly executed steps on post M&A integration will not reap dividends, but create issues that gradually builds up to sure failure. Post M&A integration between the acquirer and target includes not only bringing harmony and coordination, but efficiencies in management, change and cultural integration, application of corporate psychology, adaptation to common vision and equitable distribution of resources. The original leaders and teams of the two companies need to continue work closely together to implement the vision and strategies.
Most M&As fail due to a lack of a sound post-integration plan.
4. Shareholder issues
There are two stages. Before and after an M&A. Existing and new shareholders’ expectations need to be brought in alignment to the objective of the M&A in both stages. Some issues would include buying out existing shareholders, reclassification, exchange or combination of shares. The expectations may also need sensitive alignment amongst cross-border shareholders.
5. Employee issues
Analogous to shareholder issues are employee treatment. In an ideal scenario, no employees are displaced, but are successfully reallocated. However, where employees have to be let go despite efforts, clear negotiation objectives need to be in place before the M&A takes place. In addition to this, there will be matters relating to key employee or key management personnel. Negotiations need to cover retention of such persons to ensure successful transition in the acquirer-target combine.
The legal consideration from the seller point of view is whether there has been any effect on the contracts entered into between the main business owner / founder – in particular if there are earn-outs.
When there is no i-contact – both in terms of seeing eye to eye and discarding egos, the M&A may be doomed at the start; or if it were to sound legalese, mortuus ab initio. In most M&A discussions, getting the parties to agree is a daunting task. There will be differences in terms of valuations, revenues or profits, or potential growth. When the captains of the business come to an understanding, the professionals or advisers will come in with their own set of needs and wants to potentially scuttle the deal. The M&A negotiations should be devoid of emotional baggage. In negotiations, it is not enough to merely have the leaders discuss. The leader should develop a good team that can work in parallel. Personal relationships and persuasive skills between the teams should be balanced. A good legal “team” need not necessarily play bad cop all the time and can assist in diplomacy and righting wrong assumptions.
In addition to the aforegoing, consideration should be given to media attention. The higher the media attention during the negotiations, the larger the variation in price. Smaller deals create more value than bigger deals where expectations are high. Another consideration during negotiations is that even if the M&A goes through despite the above, it can lead to litigation.
2iB Partners in brief
2iB Partners is a specialist M&A and management consultancy firm that has extensive networks with strategic buyers, MNCs, listed companies, investment networks and funds from US, UK, China, Philippines, India, Vietnam, Myanmar, etc.
2iB Partners help companies scale up and internationalize through inorganic growth, joint ventures or management consultancy. Through Singapore as a strategic base, 2iB Partners helps companies outside of Asia gain market access and companies in Asia expand internationally and regionally. 2iB Partners also provide ad-hoc entrenchment of highly qualified professionals and experienced businessmen to solve complex business problems through experience and insight.
For partnerships, speaker and general business enquiries with 2iB Partners:
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