Identifying the return on investment (ROI) in terms of strategy and value, and having the right people with strong communicative abilities are the two most important elements for a positive acquisition.
Companies must be "sober" in their perspective when making acquisitions, Michael Yoshikami, CEO and founder of Destination Wealth Management, observed.
A diligent and thorough analysis process must be undertake before making any decisions, as it is a significant risk to purchase a company without adequate investigations, he explained.
"One cannot hope the business results can be seen right after the acquisition. Instead, [companies] should have audits done from multiple perspectives in order to have accurate data as well as reasonableness of the integration with the acquiring of a company," the CEO said.
Yoshikami's comments come after HP revealed in its fourth quarter earnings report that it recorded a charge of US$8.8 billion in its software unit, and claimed its recently acquired Autonomy Software had "serious accounting improprieties, disclosure failures and outright misrepresentations".
Most companies undertake a list of standard processes before any merger and acquisition processes take place, Ajay Sunder, ICT Practice senior director at Frost & Sullivan, observed.
These include examining the industry landscape pertaining to market conditions and regulatory requirements, auditing the company's financials and operations, examining the form of acquisition--whether it is cash plus equity or debt consolidation, and understanding the legal implications and approvals needed, he explained.
Calculating ROI necessary
Figuring out the return on investment (ROI) of the target company when it comes to acquisitions is one of the key checks, Yoshikami noted.
Different companies have different methods of assessing ROI, he explained. A company for example can provide direct additional market share which then lowers the overall costs and increases its economy of scale, he noted.
Another potential return on investment benefit might be that the company provides key technology allowing a company to operate more effectively, or purchasing intellectual property that can be utilized forward to companies' own initiatives and kept away from competition, he added.
All in all, ROI for acquisitions must include the strategic component and the ability to value that component in terms of what it brings to the buyer over a certain time period, Michel Birnbaum, general partner of iGlobe Partners, advised.
There are times when acquiring young technology companies, strategic intent trumps financial figures where the purchase does not meet the internal rate of return, the Singapore-based venture capitalist, noted. If there is a strong strategic agenda, then it does not really matter whether it is accretive to earnings or not, he pointed out.
Right people for negotiations, relationships
As mergers and acquisitions (M&A) is heavily process-driven--from the due diligence process to the drafting and execution of the legal documentation, having the right people at the negotiating table for both sides is crucial, Birnbaum pointed out.
The people in the team must have the ability to manage personalities, egos and communicate professionally with a potential acquirer, he explained. The general partner added negotiations should strive to arrive at a mutually beneficial outcome.
If there is an environment of animosity, this can degenerate quickly and all communications start having varying degrees of hostility, Birnbaum remarked.