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The Secret FD on how to avoid merger indigestion

THE RECENT STORY of the hostile takeover attempt of AstraZeneca must have raised FDs’ awareness of their obligations when involved with mergers, acquisitions and takeovers.

I have led countless acquisitions and disposals and, despite the claim by Deloitte that only 30% of acquisitions achieve integration success, hardly any of mine have failed. However, there have been some difficulties with accidental acquisitions that came as part of larger deals. My role as FD was different to when we were disposing.

Whenever I made an acquisition, I took the lead role not only in the financial due diligence but in defining and co-ordinating the approach to other forms of due diligence. But the due diligence is the easy part; the more difficult and risky areas include the valuation of the target and the negotiation with the seller. There are so many things to be wary of. Window dressing is common, off-balance sheet liabilities and pent-up capital expenditure needs can be deal killers, and nobody is interested in the various technicalities that face the FD. I was once faced with a situation late in an acquisition process where the management team of the target business revealed that they had agreed a lucrative change of control arrangement which would pay out regardless of whether they left the business.

Then there is the exuberance of the management team, and the naïve notion that the costs do not really matter as they will be lost within the overall transaction. This enthusiasm can isolate the FD when considering affordability and funding, as the presumption is that the target is strategically important so the valuation and business modelling are just annoying distractions. The FD will have to obtain the funding regardless, and previous decisions on capital allocation priorities are quickly forgotten. However, the FD should be the voice of reason in these cases.

Some deals contain challenging complexities, and it is expected that the FD should be the expert in these areas, tasked with the unreasonable obligation to optimise the outcomes.

My deals have always attracted a large cast of characters who describe themselves as ‘advisers’. The scope tends to creep and the costs escalate uncontrollably. Nevertheless, nothing substantive seems to get done, deadlines are ignored, and then, suddenly, we are all called upon to work on a series of overnight sessions by the macho investment bankers and lawyers. Why does this happen every time?

The post-acquisition phase calls for careful planning. However, the FD is in a uniquely vulnerable position because the responsibilities begin immediately, although the systems and people may not be in place, so this is another area ripe for attracting an army of advisers.

In private equity-backed deals, the role of the FD in the acquiring business can be quite restricted in scope. The private equity teams tend to do the deal financing, modelling and negotiation but they set high performance targets for the management teams, leaving the FD to do what remains of the day job. Being on the wrong end of a takeover at an early stage of my career enabled me to progress from a relatively junior position to a larger role in the enlarged group. This is rare nowadays: the conquering heroes tend to favour their own people. The FD of a target business is especially vulnerable, with certain private equity firms overtly appointing their own preferred FD because “that is what we do”.

Spare a thought for one business that I came across which had been on the block for three years. It was in a state of permanent due diligence, had lost control of its central costs as a consequence, and had lost many of its best people. Its private equity owners persisted and lost value when it was eventually sold but the management was happy because they, too, had negotiated both a stay bonus and a change-of-control protection agreement. ?

Last month the SFD was at the Royal Albert Hall to see a 50 year tour date concert by The Seekers, an entity which still remains in its original ownership

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