It has been widely reported that many acquisitions do not enhance shareholder value. There can be many reasons for this. Overpaying for the target, implementing cost cutting measures that impact the quality of the product or customer service, or ignoring the integration process are just a few.
Each of these risks can be managed to increase the chances of a successful acquisition. One that earns its cost of capital and enhances shareholder value.
Don’t let the lack of actively managing the integration process be the pitfall to success. Every acquisition should be based on significant financial and operational due diligence. This due diligence is important to building the financial forecasts that are used to price a transaction. Key metrics will be identified that are used to build these financial models, such as:
- Synergies from cross-selling new products to existing customers,
- Synergies from introducing existing products to new customers,
- Cost savings from eliminating redundant cost centers,
- Annual revenue growth from existing and new customers,
- Product margins and more.
Key business drivers and factors driving the development of the deal price in a transaction will differ for every acquisition. The important next step in the deal process is to memorialize these critical business assumptions and develop a “merger integration dashboard” that tracks the actual performance against that which was projected in the deal model. This discipline is important to increasing the success of any transaction and increasing the chance of enhancing shareholder value.
