Managing a Turkish Company after an acquisition - Why are post merger issues a critical success factor for Turkish acquisitions

There are numerous checklists prepared by advisors for steps to be taken or issues of importance during a post acquisition period especially in relevance to a transaction in the emerging markets. Such lists may include some of the following steps;

i. Restructuring the management team (including their targets & compensation)
ii. Tax issues considerations
iii. Local and global compliance
iv. Establishing a strategic plan

The steps above are all valid and extremely important for an acquisition to become a strategic and commercial success. However in landscapes such as Turkey we have learned the hard way that simpler essentials should be in place for a foreign acquirer to be successful with an acquired Turkish target.

Turkey until the early 2000's has attracted the attention of limited number of financial and strategic investors. The acquisitions made by foreign financial and strategic investors until the rebound from the 2001 banking crisis were only a handful and were all big transactions in which the target was in general a well established company. After the rebound from the domestic crisis by 2003, domestic consolidation that took place paved the way for a wider base of foreign investors to come in and examine the possibilities of acquiring Turkish targets. Since the second half of the 2000's regardless of the global financial crisis the number of foreign investors and acquirers in Turkey increased significantly. For the past 5 years we as advisors in Turkey are have come across mid to small cap strategic acquisitions made by foreign investors into Turkish SMEs. These investors are usually groups that are interested in tapping into the domestic consumption dynamics and spending of the country as well as the relatively cheaper and good quality production capabilities of the labor force.

As the aforementioned investment momentum started before the 2010's, today we still witness the problems that these investors are having even if they are already a couple of years into their investment. To analyze these problems we should understand the general characteristics of a Turkish SME.

What are the characteristics of a Turkish SME?

i. Generally family owned businesses (first or second generation)
ii. Management having a significant knowledge of the sector they operate in but a poor grip on financial reporting (ie. cost accounting) and control environment
iii. Never been through an independent audit of or internal audit
iv. Weak internal control environment exposed to fraud
v. Like in most emerging markets financial statements may not reflect a true and fair view in accordance with generally accepted accounting standards (such as IFRS or US GAAP)v. Like in most emerging markets financial statements may not reflect a true and fair view in accordance with generally accepted accounting standards (such as IFRS or US GAAP)

The characteristics mentioned above make a simple fact very significant for a foreign majority or minority shareholder in a Turkish SMEs which is the extraction of , accurate and timely data from the company in order to;

i. to be able to make remote strategic decisions,
ii. hold the management accountable for their performance and
iii. create a remote system for a new control environment not to mention the minimization of the cultural differences in corporate governance.

The Turkish SMEs due to a lack of resource and a lack of prioritization skills usually cannot quantify financial data in terms of product and business unit profitability. They also have a hard time providing comparable past performance figures for a foreign shareholder who prefers to cease certain accounting policies after the closing due the tax risks that are related with them.

Even if a foreign investor feels comfortable in keeping the existing shareholders as an important part of the management tied up with a minority stake in the company or if they appoint a new local management together with a financial controller in place, they have difficulty in obtaining the relevant data needed for correct strategic decisions that needs to made as well as a transparent controlling environment in which the management can be held accountable.

Such deficiencies are usually identified by the buyer during the pre-acquisition due diligence process. However, we tend to see that if the buyer interprets these non quantified issues with the required importance and spends the necessary financial and managerial resources to solve them after the closing, then they at least establish a strong foundation for the other post merger issues to be successfully dealt with.

Cerebra's corporate finance advisors and transaction service providers, emphasize this to our clients while carrying out the buy-side due diligence and work with them after the closing to create the optimum structure for a robust management reporting / group consolidation package and a well established internal control environment.