MERGERS & ACQUISITIONS

Mergers & Acquisitions

Toolkit
 M &A T O O L K I T
Introduction
With the increasing intensity of
today’s business environment
redefining business success, it can be
difficult to know how decisions can
maximise your company’s growth. The
following document seeks to uncover
the various issues that need to be
considered when planning growth by
acquisition and various steps that need
Develop a corporate to be taken.
business plan
Strategic Issues
detailing objectives
1. When an organisation is planning
of acquisitions. expansion by acquisition, it must
undertake a thorough selection and
acceptance process. Any acquisition
should be based solely on sound
strategic or financial benefits to
the organisation.
2. Examine in detail the motives for
the acquisition
 Develop a corporate business plan
detailing objectives of acquisitions
 Compare the relevant features of
the desired target to your stated
acquisition objectives
Planned
Never sure vendor will sell. Could incur
significant time and costs with no result.
More likely to fit criteria and more time to
assess.
May have to pay a premium price as you
have often approached target.
Table One. The key considerations for Planned and Opportunistic Acquisitions.
(Source: Ernst & Young Mergers & Acquisitions)
2 E R N S T Y O U N G | 2005
 Consider also the ability of the
management team to
integrate/operate the enlarged
business
3. Some acquisitions will be more
opportunistic than planned and will
need to be approached differently in
each case. Approach should remain
flexible however even opportunistic
opportunities need to be analysed in
line with planned stated objectives to
minimise the risk of being caught up
in the moment and making a wrong
acquisition. Should also have
guidelines in place to manage the
short time frame requirements often
imposed in an opportunistic process.
Identifying potential targets
1. Establish the ‘population’ through
the following sources:
 Database
 Competitors
 Advisors
 Internal referrers
Opportunistic
Opportunity arises as vendor has made
decision to sell and has asked for
expressions of interest
Usually only a 6 to 8 week period to make
decision.
Usually competitive situation ensuring
price is reflective of market.
 Determine strategy Create deal Execute

Strategic Formulate
Discussion with Understand preliminary Acquisition
assessment select target expectations proposal criteria

Develop Acquisition Acquisition Preliminary Target Due diligence

criteria criteria due diligence information

Identify & List of Preliminary Financial Refine pricing Pro forma

screen targets targets pricing modelling Price financials Financial
analysis modelling

Contact targets Preliminary Preliminary Structuring

structuring proposal Integration
issues & plan

Determine level Preliminary Negotiations Draft

of interest negotiations agreement

NO YES Execute
Proceed ? Finance
contracts agreement Purchase
NO YES agreement
Proceed ?
Close

Implement

Table Two. The Acquisition Process

(Source: Ernst & Young Mergers & Acquisitions)

2. Screen the ‘population’ in line with
stated acquisition objectives and
knowledge of likelihood of vendor
to be interested to sell.
3. Often a good place to start is
competitors or customers in closely
related industries.
Valuation Issues
Common methodologies include
discounted cash flow (DCF), multiples
of earnings (EBIT, EBITDA, price to
earnings). Valuation is never an exact
science and the primary methodology
should always be cross checked by
either a secondary methodology, rule of
thumb, asset backing and/or gut feel.
Understand the difference when buying
assets as opposed to shares/equity.
Differences lie in working capital, debt
assumed (ie. if using an earnings
multiple basis don’t forget to deduct
the debt!), tax liabilities, assets not
acquired, surplus assets acquired and
contingent liabilities
Understand where the value drivers
are and undertake a sensitivity analysis
to ensure any risks are understood and
can be mitigated.
Be mindful that if you pay for all the
synergies and cost savings you bring
to the business, you bear the risk if
they are not realised.
All costs of integrating and growing
the business should be factored into
the assessment of what you are willing
to pay.

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 M &A T O O L K I T

Due diligence  Undertake a detailed analysis of

Due diligence is the process of
establishing that you are buying what
you think you are buying.
Identifying risk issues
 Deal breakers – risks too great to
continue with the acquisition
 Price adjustments – basis for
Identify and renegotiation
address cultural Due diligence is also critical to the
post-acquisition integration planning
issues. process and must be seen as adding
value to the asset being acquired.
Post acquisition integration
When preparing for the post
acquisition integration, the following
steps should be considered;
 Select a focused management team
which should include individuals
who negotiated the deal who will
be responsible for the integration
and future performance of the
acquisition.
expected synergies and measures to
achieve those synergies to ensure
they can be realised as anticipated.
Synergies include cost-cutting, asset
rationalisation, economies of scale
and other revenue or cross-selling
opportunities.
 Evaluate internal controls
throughout newly acquired
operating environment. Assess
accounting and financial controls,
policies and procedures and
implement best practices to ensure
timely flow of information to assess
and address performance issues.
 Identify and address cultural issues.
 Establish a communication plan for
employees and stakeholders.
 Identify key people and positions
and consider measures for retention
of these people through integration
and beyond.
 Establish an integration strategy for
human resources generally.

Board
Approval

Integration Due Diligence Financial Sale and Purchase

Plan Committee Model Agreement

Governance Operational Information Financial

& Management & Technical Commercial Technology Taxation Model Financial Legal

KEY RISKS AND ISSUES

Table Three. Integrated team approach to Due Diligence

(Source: Ernst & Young Transaction Advisory Services)

4 E R N S T Y O U N G | 2005
 Integration strategy Analysis and planning Integration Execution
and Monitoring

Perform first strike Gather and Perform integration

planning session analyse data activities

Identify integration Recommend and Execute expense

prioritise integration reduction plans
risk and priority areas activities
Identify synergies Develop Execute revenue
and integration integration structure growth plans
focus areas

Integration Prepare master plan Execute capital

and detailed efficiency plans
readiness functional plans
DAY ONE

Assess integration Develop master Hand off

readiness scorecard integration activities

Initiate integration Launch integration Management is

management office focus areas and responsible for execution
synergy teams
and implementation
Determine integration Integration
focus area and execution
synergy teams

Focus on operational
stabilisation

Execute day one

detailed work
plan tasks

Day one readiness

Communications
Organisational Structure

Integration management office

Table Four. Post Acquisition Integration

(Source: Ernst & Young Mergers & Acquisitions)

 Assess information systems  Over-estimation of the value and/or

capabilities and ability to support under-estimation of the time to
expanded operations/upgrades. realise synergies/savings. Accept
 Identify improvement and growth computer valuation model as fact.
initiatives with aplan to implement  Over pay for the business because
once integration issues have the acquirer uses its cost of capital
subsided. rather than market price.
 Undervalue the ‘goodwill’ in the
Common errors made in mergers employees and a retention plan is
and acquisitions not undertaken.
The common mistakes made at a  Lack of, or poorly implemented,
macro level include: integration plan.

 Wrong deal undertaken for the  Wrong deal structure and paying
wrong reason. upfront instead of an earn-out.

 Lack of sufficient due diligence

investigations.

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 M &A T O O L K I T

The common mistakes at a micro The merger and acquisition

level include: process – How to get it right
 Egos get in the way before, during
First: pre-acquisition
and after the transaction – the deal
becomes a game.  Acquisition planning
 Deal ‘fever’ or ‘it’s not my money’  Integration planning
attitude and lack of experienced  Due diligence
personnel on the team.
 Negotiation strategy
 Do not accept that you can always
Do not accept learn from the target company, ie, Second: post-acquisition / merger
‘its our way or no way’ attitude. implementation
that you can
 Don’t get external advice.  Success post acquisition depends on
always learn from time spent on pre-acquisition issues.
 Change the business model too
the target.. soon after acquisition.
Third: measure success and
 Too positive or too negative on understand what went right and
forecasts. wrong.
 Inventory valuation methodology
not considered in sufficient detail.
 Loss of staff – loss of
entrepreneurial skills and culture.
 Confusion on valuation principles
and issues.

6 E R N S T Y O U N G | 2005
Summary 4. Make sure there is a team
approach – not just one or two
1. Planning – more the better on individuals – greater scope to
targets, integration and risk areas
recognise risks.
prior to proceeding.
5. Accountability is paramount to
2. Reconcile price paid to various ensure acquisition takes on ‘hurt
sources – don’t just accept the money feel.
computer model.
3. Over conservative approach is just
as bad as over optimism.

Contact
James Joughin Roger Walsh
Partner Partner

Ernst & Young Ernst & Young

Mergers & Acquisitions Transaction Advisory Services
james.joughin@au.ey.com roger.walsh@au.ey.com
tel: +613 9288 8663 tel: +613 9288 8604

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© Ernst & Young Australia 2005.

This communication provides general information current as at the time of production. It is not intended that the
information provide advice and should not be relied on as such. Professional advice should be sought prior to acting
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