Acquirers use several different types of metrics for measuring the ROI of an acquisition’s success. Planning and executing M&A deals are extremely challenging, with failure rates ranging from 70% to 90%. This phenomenon is evident across all industries, regardless of their products and services.
Dealmakers deploy various measurements to evaluate their investments and the profits they generate from them. Savvy investors assess the money they invest against the returns they expect. Next, they calculate the expected returns if they invest the funds in alternate channels.
Once acquirers complete executing and signing the transaction, they must set up benchmarks to measure its success. They must also work out a timeline for achieving that success. Many aspects define this timeline, like the company sizes, cultures, business models, skill sets, and more.
Buyers rely on both internal and external standards to measure success. Metrics are practical tools to arrive at statistics that you’ll share with stakeholders to convey that the acquisition has worked well.
External indicators include media perceptions, investor announcements, shareholder stock values, and competitor estimates. However, these indicators are not always reliable sources of information because companies tend to conceal their internal workings from publicity.
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Timelines for Evaluating Acquisition Success
If the acquired company is smaller in size and works in the same business vertical, integration and coordination are quick. For instance, a larger grocery chain purchasing a family-driven store in the same location. Since there aren’t many cultural differences, the smaller store quickly coalesces.
This process could take just a couple of months with the new acquisition functioning as before and catering to customers. If the two companies are much larger and more complex, integration could take up to three years to complete.
Though, you can expect to see operations starting to streamline within 90 days. In six months’ time, progress should be tangible, with synergies combining and new efficiencies emerging. By the end of two years, integration should be complete, with the surviving company ready to scale and profit.
With acquisitions becoming a global phenomenon and moving across borders and different continents, integrations become all the more complex. So will the metrics and calculations. Experts also accept that success is a lot more than financial performance and involves several other drivers.
A good starting point is identifying the objectives of the acquisition. Dealmakers enter into mergers and acquisitions to capture new markets and customer bases, purchase Intellectual Property, or target skill sets.
Accordingly, you’ll add up the sales generated from the acquired regions and look for other indicators for increased market visibility. If your goal is to gain IP and intangible assets, you’ll evaluate the new products developed in the company.
Customer satisfaction, accelerated growth and sales, and overall profits are other metrics for measuring the ROI of an acquisition’s success.
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Core Evaluation Technique for Measuring ROI – Internal Rate of Return (IRR)
Private equity firms and other acquirers prefer to use the Internal Rate of Return tool to measure an acquisition’s success. The IRR or percentage of return is the expected cash flow from the purchased company. This figure should be the same as or more than the investment cost.
Buyers typically have a targeted minimum return rate. If the IRR is higher than this estimate, they’ll move forward with the deal. Even if the acquisition’s objective is to achieve synergies, buyers follow the IRR rule before investing.
They could choose other options like purchasing a different company, scaling their own organization or investing in the open market. These strategies may provide better assurance of ROI or Return On Investment.
You’ll arrive at this number by dividing the company’s revenue by the acquirer’s purchase price. IRR is also called WACC or Weighted Average Cost of Capital.
Metrics for Measuring the ROI of an Acquisition’s Success
When you’re evaluating the acquisition’s success, you’ll start by gathering some core statistics. As the acquirer, expect maximum synergy during the initial stages of the deal closing. Both companies’ key stakeholders are ready for the anticipated changes and willing to make adjustments.
The board of directors, C-suite executives, employees, and shareholders support the deal and expect to see profitable synergies from the deal. Over time, the synergy can diminish, so you’ll evaluate success during this window of opportunity.
On the flip side, also note that acquisitions can be expensive. The planning and execution of an M&A deal typically require substantial resources. You’ll need consultants for due diligence, M&A advisors, and legal teams for regulatory compliance.
The post-merger integration practices may involve liquidating duplicated and redundant assets and reworking compensation structures for the core team. You may also have to take on pension dues for retired employees to stay compliant with the specific country’s labor laws.
Then again, paying off liens on Intellectual Property and Intangible Assets and settling pending suits and litigation are added expenses. These obligations and costs add to the final tab the acquisition costs the buyer. Calculating the ROI at this time may not be the right move.
Client Acquisition or Increase in the Number of Customers
In regional or cross-border acquisitions, your target is the customer base from the two geographical areas. You’ll work on maintaining the existing clientele by continuing to provide high-grade products and top-notch customer service. Also, divert resources to researching what customers are expecting.
The ideal way to evaluate this metric is by monitoring sales, revenues, and profits. And ensure that the surviving company is meeting its sales targets. Assign marketing teams to gather data by studying customer feedback to learn if they are being properly served.
Monitor reviews about product quality, customer complaints and issues they’re facing, service levels, and ideas for new product development (NPD). If your objective is to build a market presence in the new location, you’ll focus on cross-selling products. And grab market shares in the new markets.
At the same time, you’ll also keep watch on the Customer Acquisition Costs (CAC) and churn rates. If you’re successfully acquiring the clientele of the targeted company with the minimum of marketing costs, that’s a win. You’ll also want to lower churn rates or the number of customers moving on to competing brands.
While lower CAC is a positive sign, you’ll consider the quality of new clientele the acquisition brings in. Focus on factors like on-time payments and EMIs, open-box returns, and the value of post-sales refunds.
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Increasing Revenues and Cash Flows
Since the primary objective of acquisitions is profits, your focus should be on increasing sales. The best metric to measure sales is to monitor revenues, not just the acquired company. But of the entire organization, as a whole.
When navigating the challenges of integration, keeping an eye on the revenues helps maintain focus on the key objectives. Revenues per customer served is another metric to determine success. If the surviving company can attract high-profile clients with larger or bulk orders, that’s a positive indicator.
Adding up your revenues is a good metric, but experts also advise steady cash flows. If integration and synergy have been achieved successfully, the company should have steady cash flows. Tracking the synergy curve is another of the metrics for measuring the ROI of an acquisition’s success.
Acquirers must calculate their current revenues and expenses and estimate them against estimated future metrics. Plotting the statistics on the synergy curve will help you judge the ultimate success.
Intellectual Property-Driven Sales and Revenues
In today’s knowledge-driven business ecosystem, more M&A deals are driven by Intellectual Property. Accordingly, if IP-based product development and leveraging innovation are your core objectives, the company’s success metrics should center around higher revenues and sales. And, ultimately, profits.
If you can achieve collaboration in research and development and combined synergy in technical know-how, that’s a success parameter. Remember that this growth may not be as substantial as when building a market presence in new geographical locations.
But, if the surviving company releases new products in the market that are well-received by clients, that counts as success.
Achieving Better Cost Efficiency
Dealmakers may enter into acquisitions with the objective of lowering their operational costs in terms of reaching new markets. They may also focus on sharing distribution or procurement channels or retail outlets to cut back on last-mile expenses.
Combined marketing and advertising campaigns for complementary products and targeting the same customer demographic can also achieve cost efficiency. This is why lowered costs are another of the metrics for gauging acquisition success.
Workforce Productivity Metrics, Particularly in the Service Sector
Acquisitions in the service sector, for instance, consultancy firms, have similar success parameters. However, the focus is more on the human resources aspect of the surviving company. Employee attrition, lack of engagement, and dissatisfaction are common in M&A transactions.
Keeping these factors in mind, you’ll account for high workforce stress levels and lack of morale. Look for indicators like more sick days, high absenteeism, low productivity, multiple people taking vacation days, and resignations.
You’ll train HR to handle complaints about cultural disagreements and the increased workloads more efficiently to defuse tensions. Also, expect queries about potential layoffs, job security, compensation for overtime, and revised salary and benefits structures.
Employee attrition could lead to the loss of your core talent, which can affect customer service and profitability. Keeping open communication lines helps you assess the future issues you might have to face with employees leaving the company.
Measuring the Acquisition ROI Raises Success Rates
Measuring data-driven Return on Investment (ROI) and Key Performance Indicators (KPI) can ensure the success of the acquisition. That’s because owners can make the right decisions and allocate resources in the optimum areas to ensure streamlined integration
The owners and board of directors can identify the areas that need improvement or investment and work on speedy resolutions. Using KPIs and other metrics, you can also assess the performance of individual units and their functioning.
Especially in the case of cross-border mergers where the acquired company continues to function independently as the buyer’s subsidiary. Metrics also evaluate how the teams are performing and if they have achieved cultural integration effectively.
If the performance is less than satisfactory, owners can take the necessary steps to resolve issues.
What You Should Know About Evaluating Acquisition Success
Although there are several metrics for measuring the ROI of an acquisition’s success, acquirers must deploy suitable tools. These techniques will largely depend on the objectives of the M&A deal and the desired synergies.
Experts now also recommend that dealmakers evaluate the potential ROI or IRR before they execute and close the deal. Conducting due diligence to arrive at the numbers pre-merger is always advisable than post-merger.
You’ll have a better overview of the potential snags and reasons why acquisitions fail. That’s how you can plan for failure and walk away from the deal instead of going through with it. Delaying the deal until market conditions are more favorable or when it can provide better value is always advisable.
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