Four Ways to Avoid a Net-Negative Acquisition

Whether you are executing a strategic acquisition in a corp dev office or acquiring a roll-up for a portfolio company, synergies are one of the best ways to increase shareholder value. Synergies can create additional income, reduce expenses, result in acquisition of critical talent, or result in other benefits, often allowing strategic acquirers to pay a little more for the given opportunity.

But synergies — while offering strong benefits — can also bring new risks into your acquisition. To learn more about these risks, and ways to mitigate them, we spoke with Steve Brown, Vice President of Business Development at Standex International Corporation.

Brown explained that there are four major risks in any strategic acquisition covering customers, partners, talent, and loss of focus. With thorough, proactive mitigation, the consequences of these risks can be significantly reduced.

A) Loss of Customers:

One of the most common — and impactful — risks in a synergistic acquisition is the potential loss of customers. If an acquirer purchases a company in a similar industry, there will likely be an overlap of customers. A minimal overlap yields the greatest number of new customers.

However, if the overlap is too large, or existing customers disapprove of the acquisition, the acquired company can quickly lose its value.

As Brown explained, “One of the larger risks to worry about post-closing is loss of customers. On occasion, the customers of the acquired company will have no interest in doing business with you, and right off the bat, you are experiencing customer loss and a decline in anticipated revenue.” This risk if not properly mitigated can challenge the existing business model, shareholder value, and revenue expectations.

To mitigate these risks, and preserve as many customers as possible, Brown encouraged taking proactive measures during Due Diligence. “Just prior to the closing date, it is important to speak with as many of the larger customers as possible and ensure that you will continue to service their accounts, and that the existing relationships will be honored,” says Brown.

B) Loss of Distribution Channels:

Like customer loss, a strategic acquisition also runs the risk of alienating your distributors — both current and future. Brown explained, “Your existing distributors may want to leave after learning you have acquired another company, feeling threatened that their channel will be eliminated.”

Like the customers, it is important to speak with the distributors as part of the Due Diligence process to clear up any concerns. “It is important to give your distributors the assurances they need — tell them you will keep the products and that they will continue to be made available to the distributors.”

However, since most acquisitions are done with great privacy — especially for public companies like Standex — it can be nearly impossible to guarantee complete customer and distributor retention. Given this uncertainty, it is important to “include situational sensitivity modeling into your business plan. For example, you need to account for the possibility of 10% customer loss, or 20% distributor loss, or that sales could be flat for a year post-closing, etc.”

C) Loss of Talent:

According to Brown, a third risk in an acquisition is the inability to retain valuable talent from the acquired company. This concern is particularly important if the acquirer has a dramatically different corporate culture than the acquired company. “If you acquire a company with a radically different culture, it could cause some key players to leave,” says Brown. “For example, if the acquired company has a very liberal employee benefits package and very flexible work hours, you will threaten that culture by taking away employee benefits and implementing rigid hours of employment.”

Changes, however, do not need to be seen to be impactful. Brown explained, “You can kill the spirit of a culture if you are not careful. Take, for example, if the acquired company has a tradition of being extremely entrepreneurial and encouraging individual creativity. If the acquirer brings a very regimented and controlled corporate culture with the acquisition, it runs the risk of breaking that entrepreneurial spirit. This transition could not only cause top talent to leave, it runs the risk of destroying shareholder value.”

To prevent such culture clash and talent loss, Brown explained that it is important to carefully consider culture during your due diligence. Does the culture between the two companies match? Could two different cultures be sustained? Considering these types of questions early on can help retain key talent.

D) Loss of Focus and Self-Identity:

Misaligned cultures and mismatched strategies can have more serious consequences than lost employees. If a company performs a poorly aligned acquisition “the acquirer runs the risk of losing focus of their primary strategy,” explains Brown. Losing this focus can devalue both the individual acquisition and the company overall.

Like Brown, Stenning Schueppert of Total Safety recognized the importance of strategic alignment in an acquisition. Schueppert explained, “If you buy a company that doesn’t fit into your strategy, you — as a company — may suffer from reverse multiple arbitrage since investors will no longer be able to identify your true brand or mission.” He added, “It will become increasingly difficult to explain what and/or who [you] are to future investors.”

Brown explained, “To execute a successful acquisition, to prevent reverse multiple arbitrage and to maintain a focused strategy, it is important to carefully plan the acquisition and your due diligence — both operational and transactional.” In addition, synergies can often serve as a great indicator of strategic alignment. “Usually, the greater the number of identifiable synergies, the greater the strategic fit,” says Brown. “If you think something is a strategic fit, but there are no readily identifiable synergies, something is definitely wrong with your analysis that the acquisition is strategic.”