Morning:
8°c
Most acquisitions fail - roughly three quarters of them, according to research, do not add value to the acquiring firm nor benefit to its shareholders. Yet there are a few companies that make a mockery of these odds and become successful serial acquirers.
But even for these there are some rules. First, there is the issue of scale - it is much easier for a large business to integrate a small business without coming unstuck. Mistakes can still be made. It often happens the small firm has a unique culture that is destroyed by the application of big-company processes and the arrival of professional managers who know how to do it from the textbook but have no real understanding of what it is they have taken over. But even with those caveats, a small deal remains less likely to inflict lasting damage on the acquirer.
Second is the issue of competence. When the bidding company buys a business that is in the same line of work, or something close to it, it is again more likely to understand the issues and challenges. That is why what they call bolt-on acquisitions tend to be less risky.
The other aspect of a bolt-on is geographic proximity. If a business is in a country or a region where the acquirer already has operations, it has a better chance of success. Boards frequently fail to appreciate how business culture changes between countries. If they are not geared up for it, they often fail to exercise proper oversight and control of something in a different time zone. This problem is particularly acute with transatlantic deals because normally Americans will only sell to foreigners after they have tried and failed to find an American buyer. Local management then keeps the new owner at arm's length because as a rule US-based managers don't like working for foreign-owned companies.
Next, there is the nature of the business being bought. Firms where the major asset is people - where the business goes down in the lift every night - are much more challenging to take over than firms that are fixed-asset and process driven. If people are upset, they leave. A large bit of machinery does not get upset and if those minding it leave, they usually are easier to replace.
Finally, they need experience. Firms that make a success of acquisitions make a lot of them, and have dedicated teams which move into the new business the moment it is bought. They have a clear strategy and make clear from the earliest moment what needs to be changed, who is going and who is staying, and who is in charge. It may be brutal but it removes the corrosive, damaging uncertainty, and people understand immediately how they have to adjust to the new regime.
Now set these criteria for success against the deal announced at the end of last week by Balfour Beatty, the construction group, and which it plans to finance through a £350 million rights issue. It proposes to buy Parsons Brinckerhoff, a US-based employee-owned construction services company
First, the deal is described as transformational by chief executive Ian Tyler - "it is not about cost synergies, its about growing our position in the US". Perhaps, but he needs to be aware that "transformational" is one of those words used by investment bankers when they can't think of any other reason to do a deal they know to be hugely risky. Last time it was bandied about with such enthusiasm was when Lloyds bought HBOS.
Second, it is not just a people business but one owned by the employees. All its senior people will be made rich by the deal, so it is naive to expect them all to stay and remain as motivated as they were before.
Third, it is in America so a long way from head office, which means if there are problems, they will be slow to come to light.
Fourth, it is big - accounting potentially for a quarter of group revenue and, given that the margins are higher, even more of the profits.
Fifth, Balfour Beatty has no experience of making acquisitions, and certainly nothing on this scale, so it must put further pressure on management, which one would imagine is already stretched in dealing with the recession.
Interestingly, the shares rose when the deal was announced, so clearly the market has no qualms about the deal. Let us hope the above concerns are unfounded and that it is indeed transformational in a good way, not as a prelude to disaster. But to be realistic is to have doubts.
Solving the Peel Hunt problem
Mid-cap broking firm KBC Peel Hunt has spent nine years trying to convince the world that Belgian bank KBC does exist and is a major European bank committed to supporting the UK arm it acquired in 2000.
Now just as the message is getting through, KBC has fallen victim to the financial crisis, and as a consequence Peel Hunt is up for sale. There is no longer any big balance sheet to be mobilised for the benefit of mid-sized British clients.
What happens now is anyone's guess. Peel Hunt boss Simon Hayes has built a good business, which provides a much-needed service to the UK mid-cap market. Though these have been difficult times for firms such as his, he has kept the flag flying with a series of deals. Word now is that he is trying to organise a management buyout. If he can, that would surely be the happiest solution.
The section of the market in which he operates is pretty cut-throat, but he has surely done enough to deserve support and the opportunity to try his luck as an independent house.
