The transaction process
Transactions can sometimes seem to be at the more exciting end of corporate activity. But in order for them to be truly successful, for either buyers or sellers, they need to be prepared and planned for. So, what are the questions to consider when contemplating a transaction?
There is a sobering fact to bear in mind here – that research consistently suggests that some 75 per cent of all transactions fail to deliver any improvement in shareholder value for the acquirer. Indeed, many of them actually reduce shareholder value. Part of the problem, I think, is the relative dullness, both of thinking through beforehand the rationale for a transaction and post completion, integrating it; as opposed to the excitement of completing a deal.
What exacerbates this is that many of the issues to consider before embarking on a transaction, either buying or selling, are not rocket science and actually seem blindingly obvious. But it is because of this that perhaps they are not properly considered and hence future problems can arise.
I think it is useful to think of your proposed transaction being at the centre of a ring of uncertainty.
Starting at one o’clock, the most important question to answer is why are you contemplating a transaction? This requires you to clearly understand where you currently are and where you want to be, by when, and how the deal will help move you towards those goals. Unfortunately, for many of these questions, the answers to them are also shrouded in a degree of uncertainty or risk. But then risk free rewards are few and far between.
Next, we need to ponder what would be the best target, to buy or to be bought by, for you? That introduces a further level of uncertainty in that you have to try and decide why a deal makes sense to the target.
How do you know this? What about other opportunities such as new market entrants for instance? Research and analysis of this, in as dispassionate manner as possible, is fundamental to this stage.
Where is the value, and the risk, in the proposed deal? For you and the other side? Are these adequately balanced? How can you carry out appropriate levels of due diligence on your target or potential acquirer? How can you structure the deal to manage your exposure to risk, yet still make it deliverable?
When is the right time for your transaction? Is your business in the right shape to be sold? Is it in the right shape to successfully integrate an acquisition? Are the market conditions appropriate? How can we be sure? The short answer is, only time will tell.
How much is the business worth? What are the relevant market trends? If buying, can you take the risk of paying a premium because of the synergies? (Remember the 75 per cent). What does the dispassionate view suggest is an ‘appropriate’ value?
Who might fund the transaction? And, given the current funding environment, what is the size of any funding gap? Is the gap bridgeable? At what risk to the seller and the buyer? Be objective about what the art of the possible is when it comes to funding.
There are very rarely easy answers to all of the above questions – indeed, there may well be some where there doesn’t appear to be even a difficult answer to be had. But this makes it all the more imperative to ask and reflect on those questions before setting off on the journey.