Acquisition Success is in the Planning

Cape Fear Advisors, LLC Growth Strategies for Tech Enabled Service Companies

The oft-used rule of thumb is that 2/3rds of acquisitions fail to achieve their objectives. There is value in the old adage: Thinking through the downside probably changes the odds.

What if there were ways to improve success rates?

A review of 3 acquisitions by the same company, in the same time period, proves it can be done:

A

B

C

Type

Strategic

Strategic

Tuck-in

CFA Involvement?

Yes

Yes

No

Prior EBIT

3.0

1.5

2.0

Year 1 Plan EBIT

3.0

6.7

2.0

Actual Year 1 EBIT

(% of Plan)

120%

116%

50%

Several observations:

  • Two of the deals were considered strategic. They were bolstering the company’s overall growth strategy, and acquiring new capabilities or significant new operations. The third acquisition (C) was a tuck-in deal, intended to build upon existing resources and locations.
  • The company involved Cape Fear Advisors, LLC significantly in the two strategic deals. Internal resources marshaled the tuck-in deal through the process (though we did complete customer interviews on behalf of the company).
  • In all cases, the company put together integration plans and an integration team to complete the outlined tasks.
  • The two strategic deals overachieved plan in their first year. Deal B was a real stretch on paper, because it included a 4.5x anticipated improvement in EBIT. Results were more than 5x. Deal C, the more straightforward tuck-in transaction, limped through its first year, achieving 50% of its plan.

Keys to success are simple enough:

  1. Take the acquisition seriously. The more important the deal, and the greater the visibility, the better the results. If we look at Deal C objectively, it’s fair to say that the management team took some items for granted and relied a bit too much on the reputation of the seller and the company’s comfort in the transaction. A more disciplined, objective eye might have lowered expectations. Conversely, board discussions and reviews, and outside help, clearly enabled Deals A and B to be sharpened and to succeed.
  2. Use expert help to maintain objectivity and drive the process. The analysis speaks to the value of the upfront investment. Cape Fear Advisors, LLC’s involvement enabled our client to build a complete understanding of the opportunity, resulting in better negotiating  favorable terms and communicating future plans, and playing a key role in the two successes. The investment of time and money upfront made the difference.
  3. Baseline, foundation plans are best for ensuring achievable goals and building a detailed execution plan. Both A and B included financial and executional plans that were built from the ground-up. We knew exactly what needed to be done, and took many of the necessary steps prior to the completion of the transaction. That investment made a difference.

In total, these transactions paid significant dividends to our client, and continue to outperform expectations. They are doing a great job managing the businesses.

And, we are confident our services made a real difference in the outcomes.