A major acquisition can boost optimism in a business and its potential for growth but this can be short lived, and shareholder value can ultimately be eroded. There are two common reasons for this; either the acquisition doesn’t achieve market growth expectations or the underlying risks associated with the target company or integration challenges aren’t fully understood.
Isentia Group and Inabox Group are just two listed companies that recently suffered significant share price falls following profit warnings regarding the performance of recently acquired businesses and subsequent market announcements regarding impairment of goodwill associated with these assets.
Isentia Group, a provider of media intelligence services, acquired King Content for $48m in August 2015 at a time Isentia’s market capitalisation was growing fast and management held bullish growth expectations. Market sentiment towards Isentia shifted significantly following Isentia’s announcement in February 2017 that King Content was negatively impacting full year earnings, resulting in a share price plunge of more than 30%. Isentia’s share price fell by 21% in August 2017 when it announced the complete write down of King Content’s goodwill and brand, and the company’s exit from the content marketing space as it did not align with Isentia’s strategy.
Inabox Group, a provider of IT, telco and cloud services, acquired Hostworks in February 2017 to accelerate the Group’s cloud capabilities and services and provide significant cross-selling opportunities. Inabox’s share price fell by 48% in November 2017 following the announcement its acquisition of Hostworks had not gone to plan and would contribute revenue and earnings significantly below its expectations at acquisition. Inabox subsequently wrote off all goodwill associated with Hostworks in August 2018.
The market reaction to the two examples above highlights the risk of significant value erosion arising from the poor performance of recent acquisitions. In the case of Isentia poor performance was attributed to a mismatch in the two types of businesses and for Inabox it partially resulted from customer losses and a failure to realise expected cross selling synergies with its existing customer base. These two companies are not alone, historical M&A research shows that at least two thirds of acquisitions don’t generate the value anticipated.
Given the opportunities and risks associated with potential business changing acquisitions, a well-planned approach to business integration involving both financial and operational team members provides the best opportunity to achieve forecast acquisition synergies and avoid the risks.
Business integration considerations should be addressed as part of acquisition strategy and throughout due diligence to increase the likelihood of successfully integrating an acquisition and realising synergy value. Furthermore those responsible for the integration need to be involved throughout due diligence and should be able to articulate the steps being taken to track and deliver the value expected.
Given the critical nature of Day One, management must consider the following questions well ahead of completion:
- At what point do you begin planning for Day One readiness?
- Do you consider the level of planning undertaken appropriate?
- Is there appropriate focus on priority activities which will generate the greatest value in the near term?
- Do you have a clear accountability framework for the integration timeline and achievement of synergies?
- Have all integration workstreams been identified and is there a plan that can be determined?