I was working for a multinational company and was responsible
for the sale of the French business to a group of investors. The
investors carried out the usual due diligence, looking at
contracts, physical assets, inventory and so on. Eventually, after
a lot of posturing, the deal was agreed. The price was based on a
formula which included an earnings multiple – but it became clear
that the real purpose of the due diligence was to look for hidden
liabilities or unidentified risks.
The company employed 48 people and had an experienced senior
management team. In most of its history of five years of trading,
it had not been profitable and so there was probably an assumption
that that team was not as effective as it might have been. Little
effort was made to retain or motivate the senior management to stay
with the new parent.
The assumption could have been wrong: as the French operation of
a global business, from my perspective they were sub-scale and
constrained by regulation for most of their history. Poor
performance may not have been the consequence of bad
management.
By the third month after merger, 20% of the staff had left
including three of the most senior managers. That was a problem,
not just because of the cost of staff turnover. In my view, the
narrow approach to the acquisition and the loss of senior
executives together meant that much of the hidden value of the
business was not protected and was subsequently lost.
What was this value? Let’s look at what the business had. Under
the heading of people, it had some real experts in the buying
habits of both major French customers and of the international
market. The tacit, or unwritten knowledge of these people was
considerable but was not investigated, assessed or captured. The
skills of the people were not considered either, in terms of
transferable skills or unique skills.
Finally, the personality fit of people for new roles was also
overlooked. Think of an excellent customer service manager with
great problem-solving skills who can work across international
boundaries. Now try finding another in a hurry.
Internal processes can also be hidden assets. Whether in
innovation, product management, sales or service delivery, it is
much easier to modify a working end-to-end process than to design
and implement one. Getting IT systems and manual process elements
working together is an even harder thing to do quickly.
Intellectual Property is also often massively under-valued and
was in this case. This is not because investors don’t value IP but
rather because their definition is too narrow. IP may also not
feature strongly in the valuation, but there is another reason.
Unless the acquired business is a research-based business, then
the people aspects of the acquisition are often thought of too
simplistically and as either the Board, in which case the
question is mostly about severance terms, or resources, in which
case the acquirer needs enough to keep the business running. Rarely
is the human value to the new business taken into account; and yet
this is the key to everything else.
In the example of the French company the target had unused
trademarks, it had IT systems (and evaluation insights), critical
knowledge of the international market, especially in Europe,
and people poorly utilised in their current roles. All of
this was hidden value and was not assessed or managed. Instead it
was lost in the rush to impose the acquirer’s culture and
values.
Although my example is French, the problems are commonplace in
the UK and elsewhere. An over-simplified understanding of a target
company can result in money wasted. But taking time to value the
hidden assets, that don't necessarily feature on the balance sheet,
can pay significant dividends.
By Kevin Parry, Managing Director of Cogenic, a Glasshoughton,
West Yorkshire-based change and transformation consultancy. Before
founding Cogenic, Kevin lead international joint ventures and
mergers for British Telecommunications plc, working in Asia, Europe
and the US.
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