What are the best methods of determining a successful company post-acquisition?

What share valuations/tests are there that involve data?

What methods/tests are there of determining if a company acquisition has been successful?

I have found various academic articles etc suggesting that there are many subjective assessment methods by managers/experts but I need to use data/figures in my answer.

Are there accounting balance sheet tests pre/post acquistion which can determine success? I have researched on share price increases and CAR's but need to use something more manageable for my particular case study.

Thanks for any help

Bedejuit,

Couple of points that might help. If they don't make sense let me know.

If we are talking about a quoted vehicle being acquired, it is normally going to be subsumed by the acquirer, and any analysis of share price is going to be difficult.

You would need to try and get information on the acquired business say, 12 months and 24 months post compled deal. If you can get hold of accounts, management accounts and management info you will probably be able to say whether it has been a successful transaction financially.

However I think you are looking for a range of tests. So assuming you can get you hands on the acquired businesses information you could look at EBITDA. Again this is difficult to substantiate as there are acquisition and integration costs that will have to be born, and these are usually levied on the acquired business by the purchaser.

Depending on the sector the business is in, you could look at client satisfaction post deal. We do post merger and acquisition consultancy to assess the success of deals, and this is a key feature. If it is a b2c business then you can contact the key clients post deal and ask them what was wrong with the previous service offered, and how it could be improved. Then contact the same clients in a years time, and ask them the same question. Has service levels improved, and do they feel they are receiving better value for money.

Another factor to look at might be staff. Have staff remained with the business post deal, or have they become disincentivised by the new acquirer? If there are rafts of people exiting, then it doesn't look good.

Shareholder income/ dividend income

The success of an acquistion very much depends on the perspective you look at it from. Shareholders of the acquired business might perceive a successful acq to be one where they capitalise their goodwill, and receive a significant amount of cash. Alternatively if it is a family business or owner managed business they may be more concerned with the future level of service their clients receive.

Clients will judge success on what they 'get out of the deal'

Acquirers will have to justify the deal to shareholder interms of earnings growth and accumulation of underlying assets.

I could go on and on, but hope this helps.

Good luck

Is this right,

Thank you for your advise, perhaps I should have explained the acquisition more clearly!

The case study I am looking at is a major automotive retailer acquiring a smaller UK automotive retailer. The acquisition was completed in Jan 07 so I have the company accounts for the acquirer (they are both listed companys). It is a piece of coursework so I don't have access to clients etc.

Basically the question I am trying to answer is; Was this particular acquisition successful?(by examining data)

I am trying to find accounting methods of determining this. So far I have found subjective assessments (questionnaires) from academic articles but obviously I cannot implement them myself on the case.

Are there specific accounting ratios I could examine? You mentioned earnings before interest and tax, how would that change for the parent company if the acquisition was successful or not? Are there any other key measures?

Basically I am looking for several tests/methods that I can apply numberically to my case (the company accounts) to draw a conclusion on the question.

Thanks

Bedejuit,

Firstly I caveat everything I say below by saying that the 2 year perios MAY be too short a period to make this type of analysis, however:

EBITDA is a good measure, as it will strip out the amortisation costs of the acquistion. i.e. it is a profit figure illustrating (obviously), the profit of the business, taking into account cost of integrating the acquisition, but not take into account the future deal related costs(usually deferred payments) Sorry if you aware of all this and it is too simplistic, just don't know how far to define all of this for you.

NAV Net asset value. Has this changed. You should be able to calculate the net asset value of the company from the balance sheet pre and post deal. That is; fixed assets (value of showrooms, stock etc) plus current assets (debtors who owe the company money) less creditors (people the company owes money to). If this has grown, then it could be argued it has been a success. Although the value of stock, given the current motor indusrty downturn has collapsed. And the value of the showrooms, if owned, will have also dropped.

P/e Ratio. This is the key one, as it assess the return an investor will get on every share he buys. Therfore a poor acquisition may depress the P/E ratio of a company. Equally there may be other factors(economic) that effect the P/E as well. But in principle the price earnings ratio pre and post the deal may well indicate whether it was a good acquisition.


Hope these help

You explanation is definitely NOT too simplistic, my knowledge on the subject is quite low. So any further explanation of your points would be great!

EBITDA; what would I do with this figure? Compare it between the two companies pre/post acquisition?

Do you know of any acadmeic articles/theorists that I could use to back up/support these ideas?

Without collecting reliable sources it is difficult to justify the points you have raised. Also I need to write approximately 6000-8000 words on the subject so any help would be greatly appreciated!

bedejuit,

Let me think about where to point you.

I will come back to you after the weekend if that is cool.

Where are you based and what level of knoledge are we talking? i.e what type of exam/work University level?

Let me know and I will find some sites for you to read etc etc.

Thank you,

It is a university level piece of work so I an looking for academic articles or strong theory to back up my work.

Bedejuit,

Let me answer your previous questions first.

EBITDA. Yes if you can compare the respective companies EBITDA pre and post deal, and you have financials on the acquired business 1 year post deal, then great. However from what you said, you do not have data on the 'ring fenced' acquired business post completion.

A comparison would be good, but you could evaluate the EBITDA of the Acquirer pre and post deal. Has it increased? If it has, why? Reduced costs? Increased levels of income?

read: Acquisition Advisors : EBIT - EBITDA - Acquisition Advisors

As mentioned previously NAV (net asset value) is a good measure of the underlying 'worth' of a business. This could be calculated pre and post deal on the acquirer. The comparison would indicate whether the underlying 'value' of the business has increased. If this is a hypothetical case study, you will have to work this out from total number of shares issued from the accounts, and there should be a provision for dividends in the accounts. If it is a real case study, great, you can pick all this up online.

I also mentioned P/E ratios, which again, compares the price of the shares to the EPS (earnings per share). This is probably one of the best and most recognised indicators of 'success' of a deal; as if the shareholders (owners) do not benefit from the deal, you can mount a strong argument that it was not successful.

You may also want to look at dividend cover. This is (in simple terms-sorry) the number of times a company could pay out its entire dividend commitments to shareholders from it’s profit. If a company had a div cover of 1. All of its earnings(profit) is going to shareholders and it may struggle in the future. If it had a div cover of 6, then it can comfortably pay dividends to shareholders. A pre and post deal assessment of div cover may show that the deal has been successful as the div cover has increased. This provides shareholder comfort/security.

Taking this on a step, listed companies (and non listed for that matter) should only pay a dividend if it is unable to reinvest that cash at a higher rate than the shareholders could do so if the cash were in their hands. e.g. if a company is making a 40% return on equity by using £1M cash for an acquisition, then it should not pay a dividend, as shareholders are not going to be able to find another investment opportunity that could offer that level of return.
If the acquisition does not result in at least maintaining the same level of dividend income for shareholders, or underpin the share price(keep it constant in the medium term, then the cash should have been dividend-did out to shareholders.


Without wanting to complicate issues, was the acquired firm loss making pre completion? Might be worth considering. In some circumstances, loss making companies can command a higher value than profitable companies as the losses they have made in previous years can be carried forward either by themselves, or a company that acquires them. These losses are then offset against future profits, and are (again in basic terms) non taxable up the value of the accrued losses. So in basic terms the business being acquired may not provide the acquirer with exactly what he is looking for, but because it is loss making the acquirer will be able to offset some of his profit in the next few financial years, against the loss sitting in the acquired firm. This could produce a massive profit initially (normally no more than 2 consecutive years) and would then taper off, say, over 5 years. So, successful for all shareholders, and a good acquisition, as you can get pre tax profit out of the company at a reduced or nil band tax rate. More cash by way of dividends for shareholders, but doesn’t necessarily sell more cars, nor make the production of them cheaper.

You may also want to consider looking at financial benchmarking. Again, from the sounds of it, you will not have enough info to do this, but might be worth a mention. Financial benchmarking is effectively a comparison of a business against its peers in a number of categories. Trade bodies normally carry out this type of research. The acquirer may have performed poorly against its peers pre deal in terms of profit, or income, or dividend payment, or cost per employee, but post deal, it may perform above the market benchmark in one or all of those categories.

Introduction to Benchmarking for the Layman
http://www.bcsmanagementservices.com...iness_Post.pdf
Benchmarking - Automotive Suppliers Benchmarking Association


Putting all other issues to one side, and I do not know if you have background info on why they wanted to expand the business, but it can really only be for 2 or 3 reasons. To acquire a beneficial technology or market knowledge, to take out a competitor, to improve cash flow, improve underlying assets (NAV) or to boost medium to long term profit- in doing so, underpinning the value/goodwill of the business. The latter, especially for listed vehicles, is the main driver to pursue an acquisition strategy, as the board is tasked with improving stakeholder value, and shareholder value and income.

I don't know enough about this assignment, but you need to question what determines a successful acquisition? A company may make an acquisition of a business that makes(earnings i.e. profit) bucket loads of cash. But the acquirer may hold that profit as a cash reserve, or fund other acquisitions with it, or reduce debt, or increase staff pay. This is a successful acq, but in the medium term shareholders may not think so!!
I think you need to address this at an early stage before talking about accounting methods etc.

If I were you I would touch upon BITDA and look at a comparison pre and post to either justify or disprove your other arguments. Then look at EPS and P/E in greater depth.

The bottom line in all this is... the bottom line(net income). Sorry to sound obtuse, but bottom line growth via an acquisition cannot be disputed, it is a success.

I have put a few links below, and listed other theories you might want to consider:

Marginal Cost
Economies of scale
Short and long run costs (most importantly Variable costs)


http://www.investcomoxvalley.com/bus...cquisition.pdf

I know you are looking for theories and tests. You will only find these in an economic analysis of the accounts (suggestions listed above). If you want to assess the financials on a purely accounting basis, you will not find theories but methods. – unless you want to quote me!

Good luck.

Let me know how you get on.