When asked "why are you making this particular acquisition", corporate management often cite strategic reasoning such as "the target company has a strong synergy with us", or "the geographical coverage provides expansion opportunities for my company".

However, the most prevalent reason cited by our clients was something relating to "making acquisitions in order to increase revenue through geographic or product expansion".

Another popular reason for making acquisitions is for the cost savings realized through consolidation. The competitive pressure for companies to build greater economies of scale, with more depth of skills and resources, is clearly evident throughout Asia in both the service and industrial sectors.

The consolidation patterns that have been witnessed over the past several years in Asia and other markets are also expected to become a key driver for making an acquisition in China in the next few years - particularly in some industrial sectors. The initial impetus for an acquisition can also be the outcome of some external factors such as general industry restructuring, financial trouble of a competitor or an approach by a third party that instigates the idea. However, without proper evaluation, these external clues can sometimes be misread and poor acquisition choices will be made.

So, what are the risks?

Clearly there are a multitude of risks in an acquisition and they should not be overlooked. The two fundamental risks involved in an acquisition are financial or operational. These are outlined as follows:

Financial

1. paying too much

2. taking on too much debt

3. synergies do not generate real cash flows

4. underestimate of the tax exposure or the exposure to contingent liabilities

Operational

1. management conflicts - personal and time

2. implementation of plan

3. sales/distribution channel conflicts

4. long-term commitments-rental, staffing, etc

Post-acquisition integration is often cited as the keystone of a successful merger or acquisition. It is therefore absolutely critical to spend time before the completion of the transaction outlining in detail how the integration of the two companies will take place and what the combined entity will look like. Those who wait until after the completion of the transaction are often frustrated by the additional costs, personnel conflicts and other issues that were not anticipated and discussed beforehand. Management should continually evaluate and document the success or failure of each component of the integration effort in order to establish a strong foundation for future acquisitions.

The timing of events leading up to, and following, an acquisition is also critical to its eventual success. For first-time acquirers, do not wait until you have finished negotiating a deal on your own before you bring in a lawyer to "document" the sale and the key terms. Due diligence is also an essential part of risk management during the process to mitigate potential risk exposure arising from an acquisition. Likewise, if you are going to bring professional advisors into the process, do so as early as possible in order to flag possible areas of concern and highlight opportunities that could not otherwise have been considered.

The author is an associate director of corporate finance at Grant Thornton, a member firm of Grant Thornton International Ltd which is one of the world's leading accounting and consulting firms.

(HK Edition 10/08/2010 page2)