ERM Role in Implementing a Winning Acquisition Strategy

From Mike Cohen

Part 1 (of 2)

“Winning bids are made by winning bidders”
Author Unknown

“Is there such a dynamic as The Winners’ Curse?”
Richard H. Thaler

Is an acquisition strategy a positive endeavor for an insurance company? Is it a strategy necessary for the survival of some companies? In these difficult times, even for companies that have a track record of success in this arena, is an acquisition the answer? This report explores the various thought processes that companies go through when they consider an acquisition strategy, explores what activities need to take place in order for an acquisition to be seen as successful, and reflects on the role of enterprise risk management in improving the likelihood of success.

Success: According to Whom?

A property isn’t valued on the same terms by a buyer and a seller. Buyers and sellers are trying to accomplish different things relative to their particular situations:                                                                   – The buyer is trying to enhance his business (ideally strategically, not just financially … although improving one’s financial position at this point time looks very appealing!); on what criteria will the buyer’s acquisition be viewed a success?                                                                                                        – The seller is trying to either raise capital or increase focus; on what terms will the seller’s divestiture be viewed a success?

What can buyers and sellers do to increase their respective chances of success? What role can/should ERM play in these transactions?

Acquisitions as an Element of Corporate Strategy: Various Perspectives

What is the mind–set companies have as they consider acquisition activity?

“We see the opportunity to make suitable acquisitions at the right price as just another way of meeting our corporate objectives”

“We see acquisitions as crucial to achieving our objectives”

“We are an acquisition specialist”

“Our strategy is to make acquisitions and then integrate them effectively”

Which is of these approaches is right for you, if any … and, if so, under what circumstances? Given that acquisition activity in the aggregate has an uneven track record of success, how can acquirers improve their likelihood of success? Have the myriad of risks involved in such complicate endeavors not been understood and dealt with effectively, causing the majority of acquisitions to fall short of expectations?

Companies’ conversations with rating agencies have often revealed ‘curious’ expectations of acquisition activity:

“The deal is ‘fully priced,’ but we did not overpay”

“The deal will work because there is overlap”

“The deal will work because there is no overlap”

“Cultures are similar despite apparent differences”

“Although not accretive, it’s non-dilutive”

“Growth & profit objectives will be met through synergies”

Enhancing an Organization’s Business Model, in General and via Acquisition, to Better Meet Goals and Objectives

Can an Acquisition Be a Driver of Positive Change?

Existing business model   Clear business case for an acquisition  Enhanced business model

A well respected expert on business strategy and planning, Russell L. Ackoff, presented the concept of ‘idealized design” …  the best conceived business model a company can put into place. Does an acquisition help a company make its business model more effective? For this to happen, it must be supportive of the following:

– Mission, Vision: Is the acquisition consistent with the company’s strategic direction?
– Profitability: EPS, ROE, EVA; is the acquisition accretive to financial results, and if not when will it be? Are there dynamics/risks that could prevent attainment of the stated financial objectives?
– Competitive dynamics: Will additional market share provide the ability to dictate competitive terms? Given how fragmented the life insurance industry is, can the largest companies (as large as they are) alter competitive dynamics more in their favor? Does the acquisition enable the company to compete more strongly against powerful competitors?
– Market share: Are economics of scale gained? Is less desirable (unfavorably priced) business being acquired? As said, since most insurance business segments are so fragmented, even after decades of consolidation activity, does market share even matter?
– Is a company’s business profile materially enhanced?
– Is favorable diversification gained? Is focus lost?

Does an Acquisition Make a Company a More Successful Competitor?

– Expanding distribution
– Expanding geographic coverage
– Achieving business growth, scale
– Acquiring/enhancing functional capabilities
– Increasing profits and capital

To be continued …

Explore posts in the same categories: Action, Change Risk, Enterprise Risk Management, ERM, Execution Risk, People Risk


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