Jim McColl warns firms are undervalued in M&As

Published on Saturday 13 March 2010 14:18

COMPANIES are putting their mergers and acquisitions at risk by undervaluing "intangibles" such as their brand or employees by as much as 40 per cent, according to a report.

Jim McColl, chairman and chief executive of engineering giant Clyde Blowers, said it was a "mistake" to "go by the numbers" when valuing a business. He said his team paid close attention to the value of intangibles during the $1 billion takeover of the fluid and power division of US industrial conglomerate Textron in 2008.

McColl said that many businesses were not comfortable with his approach to M&A and due diligence.

He said: "It would have been a mistake if we had just gone by the numbers. We had to look at the businesses being acquired and see how their processes and people were going to fit with our own organisation. One of the reasons not every business pays enough attention to the intangibles is that it's hard to quantify the benefits. You need to believe that it's going to add value without necessarily knowing in exact detail how much and when it will be realised."

Business leaders are currently valuing intangibles – such as brand value, leadership skills and staff morale – at no more than one third of a company's market capitalisation but the real value could be as high as 75 per cent, according to a report by management consultancy Hay Group.

According to Hay, devaluing the business threatens both the deal and potentially the viability of the business. "Without paying the right attention to intangibles, the full potential value of a deal cannot be achieved and could even damage the business," warned Deborah Allday, M&A director at Hay Group.

The report found the speed at which deals are often concluded and the lack of due diligence were blamed for the lack of attention paid to valuing intangibles. As part of the report, Hay Group questioned 560 business executives who had been involved in M&A deals worth at least $500 million in the past three years.

Recalling the Textron deal, McColl said that his team had identified a number of changes that would be required for the two organisations to come together with maximum efficiency once the intangible capital diligence was complete.

Cross-border and organisational differences were resolved by creating a 14-strong integration team, made up equally from Clyde Blowers and the acquired business, who worked together to amalgamate working practices and vision, he said. McColl added: "You have to look at the softer issues, otherwise you're not really completing due diligence properly."