SMT007 Magazine

SMT-May2017

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14 SMT Magazine • May 2017 does a board ensure management's proposal is aligned with company strategy? Can this ac- quisition change the company's growth trajec- tory? Can the resources of the acquired compa- ny (or assets) substantially improve the prod- uct/service in ways that customers would pay more for (profit margin increase)? What are common pitfalls in initiating and executing an acquisition? When considering an acquisition, the in- tent, thus the approach, can be divergent, rang- ing from the long-term sustainability to the short-term gain. The preparation also varies with the company's historical track record— companies that have "routinely" conducted ac- quisitions with all lessons learned vs. compa- nies that have not. Long-term goals are the differentiating es- sence in this process, meaning beyond a CEO's tenure with the company. Some acquisitions that are carried out are intended to boost im- mediate earnings per share (EPS) without hav- ing the well-thought-out study and more im- portantly, the necessary knowledge about fu- ture potentials of the acquired entity vis-a-vis anticipated market, technology , and competi- tiveness. As an acquisition moves through the four main phases—target selection, pricing evalu- ation/negotiation, due diligence, and integra- tion, the following top five essential elements are to be brought to the center stage: • Articulation of the sound purpose with clarity • Value determination by calculating the impact on profits from the acquisition vs. weighted-average cost of capital along with other metrics • Validation of assumptions • Ability to pull the plug in due diligence • CEO's broad vision, holistic knowledge and well-rounded ability Prior to pursuing an acquisition strategy, it is desirable to position the company to aspire to the culture of long-term growth. When there is a proposed acquisition target on the table, the board and management need to: • Ensure the understanding of the fundamental reason for this acquisition and how and why it is aligned with strategy (even revisiting the current strategy, is it valid and effective?) • Have a deeper deliberation on the reason and the purpose of an acquisition • Ask how to avoid, "It looks good, but not really." • Define when/who/what: timing, resource capability, what-to-do after transaction (a plan) • Verify the perception of fit: comprehensive plan, rationale and narrative to be understood • Deliberate on how to avoid common pitfalls The top common pitfalls that are likely en- countered in an acquisition endeavor, which could exert deleterious effects on the company's long-term performance include: • Overpaying • Overleveraging • Company (asset) purchased for the wrong purpose • Company (asset) purchased for the wrong reason • New businesses integrated into misfit business models When the acquired entity is bought at too high a price, everything else becomes less im- portant and it can hardly be a good investment. In order to eschew the common pitfalls, what questions should be asked and answered to ensure a deal is a good decision? Below are some examples of questions to be addressed: • Is this for cost-saving (in fixed cost, in scale or for cross-selling)? • Is this for footprint expansion (strategic geographic locales)? • Is this for gaining a greater market share to achieve greater efficiency (improved market reach and industry visibility)? DO ACQUISITIONS BEAR FRUIT? A PRAGMATIC PERSPECTIVE

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