HOW TO MANAGE THE RISK OF ACQUISITIONS

Shareholders growth does not come without risks; however, every organization needs to be well prepared and informed to make an acquisition successful. Consequently one of the fastest ways to grow shareholders value is through acquisitions. Thus cross-business synergies and market power expansion, by performing under one management, can lead to expand the size and the market area and achieve economies of scale. Although, there are many other strategic issues to consider before we must decide to pursue an acquisition strategy. Consequently it can be recommended the following steps before implementation of any diversification through acquisition strategy:

Effects of Acquisition

We need to determine how an acquisition strategy may affect financial and strategic objectives for growth. In order to determine the diversification’s strategy profit potential we must be taking into account not only records from corporate financial statements, but evidence that will increase Economic Value Added (EVA) and Market Value Added (MVA). Achieving satisfactory financial performance is not enough, thus managers of the best performing companies tend to set objectives that required stretch and disciplined effort.

Risk

Before makinng any decision for diversification through acquisition strategy, clearly we must assess the risk invloved. Consequently all the business decinsions involve risk. What are the targets and problems from diversification and how will fixing them affect the organization strategically and financially? Chen, Conover, and Kensiger expressed that “besides growth opportunities, other real options may enhance value by reducing risk or adding flexibility”

Compatibility

Fit between a parent and its businesses is a two-edged sword: a good fit can create value: a bad one can destroy it. Thus we need to ensure that the diversification strategy must be compatible in terms of mission, goals, and strategic plans of the organizations. Consequently we need to ensure in the highest degree that the acquisition is compatible with the long-term strategic plans.

Economies of Scope/Scale

Economies of scale are cost savings that accrue from increases in size number…Economies of scope are pretty much a phanemenon of related diversification, arising whenever it less costly to perform certain value chain activities for two or more bisinesses. Thus we need to ensure that we will achieve economies of scope/scale through the diversification strategy. Diversification can open up opportunities to achieve economies of scope, reduce costs, and build a low-cost advantage over less diversified rivals. Consequently we must be identified benefits in terms of shared assets, staff, organizational capabilities, and Information Systems among the strategic business units.

Purchase Consideration

Purchase consideration issue must be worthwhile for the organization. We need to determine before the acquisition what are the firm’s price, term, and cash required at closing. In order to address the above strategic issue we underly that Since 1980, managers have allocated over $20 billion to investment banking and other advisory fees to help formulate and ensure the success of their acquisition strategies. Moreover Jones and Catanach (2002) states that “when one corporation decides to acquire a business operated by another corporation, the acquirer must make legal and financial decisions.”  Consequently the above decision provide a further research implications because decisions hav tax implications that can dramatically affect the after-tax value of the transaction to both parties.

Acquisition Process

Before the implementation of any acquisition strategy we need to established a Management and Consultant Evaluation Team. The scope of the team is to prepare a due diligence and commercial diligence report for the target firm. The key members of this team will include a specialist who can quickly evaluates the market and a specialist Financial Consultant, who will evaluate the capital and cash sources, and furthermore the leverage which will derive from the acquisition. In summary we need to start building an entreprenuerial management team with diverse skills, as well as capital.

Acquisition Financing

“Investment decisions always have side effects on financing…” (Brealey, Myers, 2003). Thus we need to determine the way to finance an acquisition. Organizations are careful in acquiring and managing financing activities because of their potential to determine success or failure. For instance options include Equity, and Taxable Debt. Consequently before we move forward with financing, we need to conduct analyses to justify the acquisition. Such analyses must be includes a combined ratios at the acquisition time, between two year and five year projections for debt to adjusted capitalization, and cash as percentage of debt. Thus we need to use financing structure that is consistent with the value of the target firm.

In summary the above-recommended steps will increase the degree of success of acquisition strategy. These steps to success make objective assessments of the value added by an acquisition. Consequently the value added by an acquisition lead to growing of shareholders value.