It could be over-optimism that explains why countless acquisitions fail to meet expectations.
“People get a rush of blood sometimes and these things are not thought out. Often the strategies are fine, it’s actually the execution that goes wrong,” says Andrew Hartley, joint managing director of August Equity, a private equity firm that has helped portfolio company Healthcare Homes make nine acquisitions since 2005.
The seafood chain FishWorks was a textbook example of how buy-and-build strategies can go awry. Now steadied by the ever-dependable Gary Ashworth, the company lost its way after opening seven restaurants within ten months. “FishWorks is a good idea that was poorly managed,” comments Ashworth. “The business model will stay the same, but you need to get the staff right. Some of them had taken their eye off the ball.”
Roger Parry, currently the executive chairman of marketing services group Media Square, has “done hundreds” of acquisitions in his various roles at other companies over the years. He believes the acquiring concern must have a person in the senior management team who is the “champion” of a takeover.
“Acquisitions that are done on an opportunistic basis, such as a company looking cheap, normally fail as there is no rationale for pushing them through. Often, they don’t have a real champion,” he says.
Barrie Brien, chief operating and financial officer at another marketing services outfit, Creston, argues that there has to be a view on what the acquired entity will be giving to the overall company for the next ten to 15 years. “It must be a company that fits in strategically with your growth, otherwise it’ll unravel within five years.”
Various figures are thrown up, but it’s generally agreed that somewhere around 75 per cent of acquisitions don’t deliver on expectations. Creston has acquired ten companies over the past 13 years and, according to Brien, they’ve been integrated relatively smoothly because brands as opposed to personalities were purchased. “Brands can’t walk out the door as easily as personalities,” he says.
Buy-outs frequently end badly due to a lack of planning and integration or because too much was paid. Says Parry: “Typically a company will be looking for a 15 per cent return on investment (ROI). So if you invest £10 million, you would expect £1.5 million of cash flow per year. The majority of acquisitions fail that test.”
At Media Square, Parry is relishing the challenge of putting the company back on track after the previous leadership embarked on more than 30 acquisitions in two years. “It was a diverse range of businesses, and that created three problems: there was no strategic rationale so the purchases were opportunistic; no individual champions tried to make them work; and the management was too stretched. If you have that many balls in the air at once, it’s difficult to control them all.”
Whether you’re seeking to acquire through the public markets, or opting for a straight debt or equity play, additional care will be required when deciding how to expand.
For Parry at Media Square, the company is in recovery mode. “I’m telling people that acquisitions are not on the table. I want them to fix the operating economics of the existing businesses. We’ve already closed or sold 11 companies and there will be a number of others closed, sold or merged over the next few months… You don’t want to do acquisitions until you have a very stable operating base.”
Provided your affairs are in order, bargains will be there for the taking. “If you’re a trade buyer looking for deals then I think it’s a good time,” says Donaldson. “Putting aside the economic uncertainty about a recession, which is increasingly likely, the thing that has changed is the competitive landscape for the buyer. They’re in a much stronger position if they’re cash rich than they were before.”