How Many Years & How Much Money?

How many years and how much money should a board allow management to invest before questioning process and capability of the corporate acquisition team?

Can your board define success or failure?

What do you recommend if change is needed?

Where do you go to find out?

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10 thoughts on “How Many Years & How Much Money?

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  1. I am always amazed at how many companies get run into the ground while the board or executives pillage the company, or at the very least drain it if its resources. Recently I have watched many private companies lose there value through poor management (they will remain unnamed at this point but review the companies that have gone under or lost significant brand and share in the last several yeard and you can figure out who I am talking about.
    Asking how much time should go by would imply that there is no correlation between the time and the implementation plan. It should not be time dependent data but rather process driven and results driven. The real question is “was due dilegence done” and what are the parameters and metrics used? Are they within plan and budget, and what are the milestones.
    I am always amazed that there is less thought put into a companies resttruction adn even less control than the average person would spend on car repair!
    #1 I beleive zero time and resource shoudl be applied unless there is solid and well defined plan that can be documented understood and followed.
    #2 All key metrics data should be followed and reviewed ith milesstones and measurable outputs.
    #3 All personnel should be accountable for their performance.
    While you cannot be short sighted and overly focused on small variation or cyclical changes within the market place or even “market noise” A well defined plan should account for these items. Further anyone who would tell you otherwise is simply riding a trend and depending on the “complexity” to push you back while they continue on with business as usual.
    Remember- all boats are lifted by a rising tide!
    Lee Dwyer

  2. Mike,

    Based on my corporate M&A experience at Fiskars, I’d say that the min is three and the max is five years. The money part of your question is hard to answer but from benchmarking analyses that I completed, I’d be wary if goodwill became greater than 30% of Total Assets.

    As an aside, this week I ceased my search for a small company to acquire and am now seeking employment. Please let me know if you become aware of any Corporate M&A, President or CEO positions that may be a fit. Based on your post it sounds like you know someone that needs a new quarterback!

    Best regards,

    Steve

  3. Because of the high risk and cost associated with acquisitions, I would expect the board to be asking questions at every step. That does not mean criticizing and punishing management too quickly without justification. It does, however, mean asking questions to ensure that all material risks have been considered, that contingency plans are in place, that the strategic direction for maximizing the value of the acquisition is in place, and post closing support is in place to ensure that the acquisition will fit into the acquiring company.

  4. I would expect that a Risk Management – ERM as opposed to just within finance – Policy and Process was in place within the organisation as a pre-requisite.

    That provision was in place for external review feeding outcomes to the board at least annually and whenever any agreed objective was either not met or was indicated as likely to fail. Using a COBIT maturity model for instance.

    That the board should be in reciept of a Risk Management Root Cause Analysis as standard where ever objectives are not achieved.

    Not draconian just good practice

  5. Companies make acquisition for multiple reasons. It is not always to make a killing with a bought product. They might buy a product to increase their spectrum of offering and try to be the ‘one stop-have all’ company or they may buy a product to open doors to selling something else to their customers.

    I think you have to think what the corporate acquisition team is selling to the BoDs. I have seen companies buy business even though we have advised against it. I have seen this happen for two reasons. Either it is one of the reasons mentioned above or it is the sales team quoting big returns. We do Technical Due Diligence for acquisition and we have found that the smarter acquisitions are the ones that perform more Due Diligence in every aspect possible.

    I heard the quote “Luck is when preparation meets opportunity”
    Seneca
    Roman dramatist, philosopher, & politician (5 BC – 65 AD)

  6. About 30 days! My experience leads me to believe that you can see if there will be problems right away. Of course hindsight is always 20/20. During the transition period, 30 days pre-close and 30 days post close, you can pick up tremendous insight in regards to how the acquisition team conducts themselves. It’s the little things that you turn a blind eye to that become the BIG things down the road. Often boards see these little things and turn a blind eye at the time hoping things will get better. In addition, there is fear of making dramatic changes. The board never wants to make the tough decision, the easier decision is to leave the team in place. The tough decision is to cut your losses with the current team and re-set with a new one. Tremenduous talent and knowledge exist within companies just below the senior team! The board needs to sort thru the BS given to them and search for the cultural problems that prohibit the team from succeeding, which is usually driven by the existing leadership.

  7. Mike,
    An acquisition is a strategic activity that demands the full attention and involvement of the board. Having successfully led numerous transactions (both buy and sell side), my experience has taught me the board’s proper role in M&A activity is to: (1) review and approve management’s rational for the deal, (2) assess the suitability of the selected target with respect to the deal rational, (3) ensure the integration process/objectives are sound and (4) carefully monitor/measure the acquisition and integration activities against agreed upon milestones – not limited to financial metrics, include key employee retention as well as achievement of the strategic and operational goals.

    I also strongly believe the board should conduct a ‘one year later’ analysis to compare initial financial projections to actual results and determine what should be changed/improved in future transactions. The modern effective board must have the will, industry savvy, and ability to debate and approve management’s strategic plan.

  8. Philosophically, the Board should always question, and never accept at face value what any committee or management team says.

    On a more operational level:

    1. The Board must approve both capital and operating budgets. When management operates within those budget (with their embedded assumptions, hurdle rates, and constraints), then management should be allowed to operate to those agreed levels.

    2. When assumptions, hurdle rates or constraints change, then the Board is warranted (must) review the budgets (or specific deals/opportunities) to satisfy themselves that they are still commercial, relevant and carry suitable risk exposure.

    3. The Board should continuously review the competency of the corporate acquisition team – and the best way to do that is by the team’s ability to deliver to promise (i.e. capital and operating budgets).

    4. Any/all acquisition variation from budget must be approved by the Board. The Board should then review the root cause of the variation – some variations are legitimate while some surface inefficiency, lack of experience or poor judgement.

    5. Even highly experienced and capable acquisition teams make mistakes when they are forced to deal with a situation in which they have no or little experience – hence the need for on-going monitoring.

    6. One strategy is to have the Board form an Acqusitions sub-committee if acquisitions are sufficiently large or sufficiently frequent. One or two Board members participate in the deliberations of the Acquisition team (most often as observers) but receiving all minutes, reports and evaluations. Thus Board oversight becomes more focussed; board representation becomes more transparent; and accountability more evident.

    7. Board oversight assumes that the Board has the experience necessary to provide relevant oversight – that is not always the case.

  9. A good board should always question investments and acquisitions so that they fully understand what is going on. Unfortunately many board members today are simply yes men as they enjoy the stature, perks, and visibility of being board members. Then they can’t understand why all the brouhaha when companies fail or find themselves in financial and/or legal trouble.

    Corporate management should also be on top of investments and acquisitions. However, they are often part of the problem. A good board will question management about the decision making process and should demand detailed information on the proposed or completed transaction. If they can’t get the information in a timely manner, then it needs to be determined if management is making informed decisions and if not why. If change is needed, then both internal and external candidates must be sought to either replace some management positions and/or to create an oversight position.

  10. Prior to any investment, management should present the Board a plan for the acquisition that will include risk management, performance expectations, synergies with existing corporate assets, capital and debt financing requirements and marketplace impact.

    Once the acquisition is made, the Board should be monitoring the results against the plan to assure that expected results are being achieved. To the extent that milestones are not being met, the Board should advise on the revision of the plan or make the changes necessary to assure that milestones are achieved.

    The answer to your question is that the Board questions the process before the acquisition is made. It is not a matter of years, but hours.

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