Wednesday, April 18, 2007

Post deal carping

One of my distinct character traits is my ability to go-with-the-flow. But of late the goings-on in the PE industry in India and the way they changed the scale of M&A activity is a bit off putting.

It’s manifesting in the way our companies have the appetite and the financial muscle to make global acquisitions, of companies which are several times their size and value. How many of those transactions make economic sense, to the acquirer as well as its investors? Employee morale downturn is almost a given if the cultural mismatch simmers up too soon and drives the best brains out for a walk. I don’t think the apparatus is ready to calibrate it and M&A firms can’t care less. For them, it’s just another deal.

In the US, there are several examples of multi billion dollar acquisitions that didn’t quite click. Mitchell Madison-Whitman Hart, HP-Compaq, AOL-Time Warner and many more. Learning from all that, Indian companies could do well to undertake extensive post deal planning prior to completion of transaction – perhpas immediately after the due diligence is completed and in principle decision made.

In a recent survey by KPMG, 80% of the companies surveyed were not well prepared to handle the smooth transition and integration of two businesses post deal. Yet we only get to hear more about *culture conflicts* which only rank second biggest challenge in it. Another interesting finding was that it took on an average, nine months for companies to get a grip over post-deal issues. Nearly two thirds of the acquirers failed to realize the synergy target, even as 43% of the synergy target was built into the purchase price. Well, competitive pressures can explain why premiums are justified as there could be many bidders to a deal. But astute deal makers will have to apprise the management and make them see more value in the transaction than the asking price and convince themselves why the price is right.

Acquisitive ego can never be allowed to out-compete valuation math, and that sets a great deal maker apart from a good one. I will always argue that a good deal maker should be quick on the uptake where it comes to understanding the client’s business in under an hour. He can learn as he diligences, but should be making early calls on the expediency of the transaction to the acquirer’s business and compare it with their goal. Private Equity houses are found to be adept handlers of post deal issues than corporations. As per the report, 95% of PE houses surveyed have started post deal planning prior to signing as compared to Corporations with 59% score.

It is important for Indian Companies scouting for acquisitions globally to do their homework on post deal issues well in advance. In default, they will be choking on the buy without being able to run with it, especially if it is funded by high cost debt. When managed well, acquisition of global corporations by Indian companies would be seen as a normal business decision.

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