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Deal considerations

29 Mar 2012

Establishing appropriate processes to improve the likelihood of making better decisions

Last month’s article discussed the high valuations being placed on service providers to the mining and resources sector, including the significant premiums recently attracted by Brisbane-based mining services company Ludowici Limited (Ludowici) (ASX: LDW) by rival bidders The Weir Group Plc (Weir) and FLSmidth & Co A/S.

On 13 March Weir announced to the London Stock Exchange that it had withdrawn from bidding for Ludowici, noting that "whilst Ludowici represented an attractive opportunity to expand our [Weir's] market leading Australian business ' …. A materially higher offer would not have met the rigorous financial criteria which we [Weir] apply to all acquisitions'.

While any financial criteria are among the key considerations that an entity will apply in considering a potential deal, this is a relevant reminder of the need to maintain discipline when considering a potential deal in order to increase the likelihood of achieving the best outcome for your company and ultimately your shareholders. Establishing and implementing robust processes for considering any potential deal will assist in maintaining this discipline when potential deals arise and during negotiations.

Some useful processes may include

The type and nature of any processes that you adopt will depend upon, among other things, the nature and size of the deal being considered, as-well as the nature and size of your business. These processes may include the following.

  • Establishing clear deal criteria

One of the most effective ways of making better decisions when considering a potential deal is to ensure you are intimately familiar with the reasons that you are in the current position you are in. Ensuring that you have clear and cohesive criteria, and understanding why you have that criteria, is the only way that you will be able to effectively assess whether in fact your objectives in undertaking the transaction have been met.

These criteria may include anything from obtaining exposure to a particular market segment, obtaining additional capabilities, expanding into a new industry area or the nature of the particular consideration you are prepared to pay (i.e. scrip, services and/ or shares).

For entities that are not actively pursuing a potential deal, having a clear understanding of your current position and where you want it to be in five years' time, and your strategy for getting there, is equally important to ensure that you are in the best position to consider any opportunities as they arise.

  • Appointing an independent owner of the decision-making process.

Appointing someone who is responsible for the decision making process, who is not the person responsible for driving completion of the deal, will assist in ensuring that the process undertaken for considering and implementing the deal is robust.

Often those responsible for driving a deal may have an inherent bias or preference towards one or more outcomes. An independent party will be able to test any outcomes of the process and any key assumptions on which those outcomes are based, as-well as acting as an effective circuit-breaker for the inherent tension between the need to get a deal across the line and ensuring that it is in fact the right deal for the company.

An ideal person for this role is often the CFO or Head of Finance, who will have access to the necessary data on which to test the validity of the assumptions made by those directly involved in the deal and will also, ideally, have a role as an impartial adviser to the CEO or board.

This of course will not replace the need for robust Board discussion (where necessary).

  • Establishing a matrix of possible outcomes.

Establishing a matrix of the possible outcomes, including if the transaction does and does not proceed, including their likelihood and key contingencies, will help to highlight all of the key uncertainties involved in the transaction.

As it is common for people to think that a greater amount is within their control than is actually the case, this process will help you to consider the unavoidable uncertainties that cannot be managed or mitigated, as opposed to solely 'how the key risks are and how they will be mitigated'.

Recording at an early stage what these key uncertainties are, as-well as the key reasons why the deal should not proceed, and reassessing these near the end of the decision making process, will help to ensure that the final decision maker is aware of all of the issues that were considered during the course of the process, which may be otherwise overlooked or forgotten about at the time of the final decision.

While incorporating these items into your decision making process will assist in considering a potential merger or acquisition, they can also be incorporated into the process for considering many other key decisions, whether it be a new alliance, product or strategy, ultimately assisting you to make better decisions.