Put your best people on the deal team, says Telkom's Deon Fredericks
A thorough, smart and stealthy due diligence process is among the top ingredients for successful mergers and acquisitions. We spoke to finance executives and dealmakers about the homework a growth-hungry company needs to do. “Do two rounds of due diligence, put your very best finance team members on the deal and make sure you do your homework,” says Telkom Group CFO Deon Fredericks.
- The CFO is the connector in dealmaking, says Bowmans' Charles Douglas.
- When dealmaking, enter with a focused mind, says Standard Bank's Andrew Balnaves.
- The CFO should ensure due diligence is accurate and meticulously undertaken, says Sibanye's Charl Keyter.
- In dealmaking, understand what you buy, says Deloitte's Karin Hodson.
- If you want to see deal success, plan, says Ansarada's Arie Maree.
"In my opinion, a proper due diligence is the most important step in any acquisition," says Fredericks, whose long career at Telkom's finance department culminated in the role of Group CFO a few years ago. To ensure effectiveness of that process, several things need to be in place, he says. "The first is a committed dedicated team. Sometimes you let your advisors do most of the work and the challenge is that when the due diligence is finished, their role is finished, and they don't carry that responsibility going forward."
In the past few years, Deon has been instrumental in managing a number of successful deals. One of these was the company's acquisition of Business Connexion (BCX), a deal with a R2.7 billion price tag. Sharing some lessons learnt from the first 90 days' post-deal, Deon highlighted the importance of understanding what you are buying, also noting the need to be mindful of the culture of the company being acquired. "Try to keep that entity independent and entrepreneurial as far as possible," he says.
Deon opines that the CFO's role is an important one. "The CFO fits in upfront," he says. "He is involved from the strategy stage. It is his job to ensure the target you are focussing on is not only attractive but also the right fit for the company and that it will help you achieve your strategic objectives." The CFO gets involved in the critical decisions, he says, though he will not be part of the full process.
"The CFO will be involved in key matters, and again when decisions are made to conclude on the transaction, at which point he will indicate his support or raise his concerns. Where the CFO really plays an important role is in price discussions and deal negotiations - specifically where there are long-term incentives that form a part of the management structure."
For a deal to be successful, staff involved in the due diligence needs to understand the business and the industry and where both are going, know what to look for and what pitfalls to watch out for. "They must also build a good relationship with the company you are buying so that there's openness in the dealings." He offers words of caution in response to some common failings of the due diligence process: "Don't think that if you rush things you can buy your way out of trouble. If you have a challenging situation you first need to ensure that it stabilises before considering buying."
He further warns against buying businesses that you don't understand, or about which you don't have adequate knowledge, abilities or people to manage it. "Also, be mindful of buying companies that are built around people," he says. "If they don't stay this will seriously affect your business. You will need to ensure that innovative incentive schemes are in place that will keep the talent and protect the company, if this happens."
Deon highlights the importance of good culture fit: "When you put two companies together you are going to spend most of your time trying to align the cultures. Trying to change something that is entrenched can be difficult. Sometimes, if management is the problem, you could go as far as to say I'm buying the business but without management. Because that might be easier in terms of integration."
When it comes to post-deal integration, Deon says you should ensure you have the right resources available. Consider appointing an expert if not, he adds.It is also important to understand the impact and changes that integration requires, he says, and what this will cost, as it could be significant enough to wipe out all the synergies you have identified.
"In one of our cases we appointed an integration director to look after our interests and to get buy-in from the other company, because some management can see you want to take away their independence and there may be significant push back."
"Always ensure you get your best people on the project," says Deon. "We tend to think that, because we have a business to run, our best people need to focus on this and we put less than our best on the deal. But then you risk these people missing key things during the due diligence, which your best people would have picked up."
Deon advocates two rounds of due diligence, especially if a deal takes a very long time.The purpose of this is to validate for the last six months what the company has achieved - are they actually performing as they have said they are, he explains. If it turns out they aren't, you can reprice or walk away, he says.
"You need to ensure upfront before you agree to anything, that if it takes more than a certain time depending on the type of company and deal that you want to do a supplementary or complimentary due diligence, but you need to agree upfront to this."
On deal making, Deon offers some pertinent words of advice. "Don't just blindly accept what is presented to you. Ensure that you do your validation well and look at trends, what contracts are in place, the length of these, whether the revenue is dependent on people in the organisation and what would happen if those key people were to leave unexpectedly. Also, take your time, he says. "Sometimes the counter-party wants to disrupt the process. But wait until all the information is available before doing the due diligence. Ensure that all key information is available so that you can validate what management is presenting to you. And don't become too emotionally involved."
Deon's due diligence top 5
- Validate the revenue stream.
- Understand the costs.
- Understand the strength of the balance sheet within the organisation.
- Know the strength of the people involved.
- Consider the cultural fit of the organisation.