Corporate Acquistions - Avoiding The '7 Deadly Sins'

Business owners and executives sometimes look to acquire another company as a means of growing their business. While corporate acquisitions can help in achieving growth objectives, it is important to avoid those things that can significantly erode shareholder value, and possibly be disastrous.

While there are numerous reasons that acquisitions fail to yield the results anticipated, this article addresses some of the most common reasons for failure. These "7 deadly sins" are summarized in Exhibit 1:

Exhibit 1

The 7 Deadly Sins of Corporate Acquisitions

Lack of strategic fit

Inadequate analysis

Too much emphasis on EBITDA

Ignoring the balance sheet

Overpaying for synergies

Focusing only on price

Poor integration

Lack of Strategic Fit

Many business owners take a reactive, as opposed to a proactive, approach to acquisitions. That is, they wait for opportunities to present themselves rather than actively seeking out prospective targets that meet established criteria. The risk in a reactive approach is that acquisition opportunities might be pursued because they are available, as opposed to representing a strategic fit for the buyer.

Corporate acquisitions must fit into a company's long-term strategic plan. Based on its strategic plan, prospective buyers should be able to compile a list of acquisition criteria, in terms of target company size, product and service offerings, markets served and other

pertinent criteria. Having well-developed criteria beforehand will help the buyer to avoid expending time and effort on acquisition opportunities that are clearly not a fit. The buyer's strategic plan should also address other key elements, such as when it would be better to build vs. buy, or when a joint venture might be considered.

Taking a proactive approach can assist the buyer in creating new opportunities and may allow the buyer to avoid a long drawn-out auction process. This is not to suggest that a proactive approach will result in a buyer paying less than fair value for an acquisition target, but rather it can allow the buyer and seller to work together in an expedited and confidential manner that facilitates structuring a deal that meets the needs of all parties involved.

Inadequate Analysis

Many buyers do not expend sufficient effort to conduct a thorough analysis of the target company. There are many reasons for this, including constraints due to time, cost or other resources. In some cases, buyers look to rely on the seller's representations and warranties to compensate for shortfalls in due diligence. However, such a strategy seldom works out as planned. Inevitably, buyers that do not conduct sufficient analysis on the target...