Merger and acquisition (M&A) transactions have reached a record high in recent years, currently worth $3.8 trillion worldwide. In the mining and metals sector in particular, M&A has been the strategy of choice for companies looking to expand to take advantage of increased demand from China and India. There are a number of pitfalls which need to be avoided, and an awareness of the factors influencing success, are crucial to any M&A activity, says Ron Spence, SKM’s Group Manager Strategy for Mining and Metals. Spence is responsible for management of selected major clients in the global mining business, as well as developing mergers and acquisitions and JV and alliance opportunities to enhance the SKM business.

Expectations need to be realistic, and careful planning is crucial to a successful outcome. It is important in planning an acquisition to clearly understand your objectives. There are often many expectations of an M&A strategy, including:

• Creating value for shareholders
• Enhancing skills by creating a network of talent which can be mobilised as needed
• Gaining in-country experience quickly by using existing staff, systems and networks
• Adding value to service provision
• Providing staff with opportunities for skill development which is a positive for staff retention and recruitment
• Decentralising workload
• Diversifying risk
• Gaining a strategic advantage against competitors
• Meeting earnings expectations.

However, transactions often fail for a number of reasons, including:

• Lacking a valid rationale, or relying on emotion rather than logic
• Having insufficient or incorrect information resulting from a poor understanding and knowledge of the industry or particular company
• Paying an unrealistic price due to a failure to perform a realistic valuation
• Poor implementation as a result of not preparing a post-acquisition plan in advance, failing to integrate rapidly, failing to embrace synergies and not recognising and valuing existing employees who may leave as a result.

“These pitfalls can be avoided by ensuring a clear understanding of your objectives and with careful planning for the post-acquisition implementation and integration requirements,” Spence says.

Ensuring the acquisition is a “strategic fit” with the company is the first step. Having the right strategy with clear objectives and criteria is essential.

Ensuring the correct information is available, such as an accurate valuation, an assessment of synergies and product and market dynamics, is vital. Offering the right price is crucial, including establishing a “walk away” price and assessing the alternative bidder’s strategies.

It is also important to be mindful that once the deal is done, the process doesn’t end, but in fact, increases in focus and intensity. Effective implementation is vital to success and key staff must be retained, cultures and systems must be integrated, targets and timetables should be set and continuous monitoring and incentives should be established.

As a key player in the mining and metals industry, SKM has used an M&A strategy over many years, most recently with the acquisition of Santiago-based engineering firm Minmetal in 2005 and Perth-based engineering firm HBH in 2006. The acquisition of HBH, which had a successful track record in the single and multi-disciplinary design, procurement and construction management of capital investments in the mining and metals industry, especially in mineral sands and alumina, boosted SKM’s capabilities in these areas.

With the Minmetal acquisition, SKM’s aim was to quickly and effectively expand its presence in South America and to acquire minerals processing and underground mining skills to use on projects not only in South America but elsewhere around the world. “In this way,” Spence explains, “we would be able to better service our major clients in the locations where they required our expertise. At the same time, the new South American office would benefit from SKM’s expertise, particularly in Project Management.

“It was hoped the acquisition would also enable us to decentralise our workload, overcoming labour constraints in Australia, while providing staff of both companies with international opportunities, which would enhance our Employer of Choice status. Ultimately, we hoped to create financial value for our 500 employee shareholders.

“At the time of the acquisition of Minmetal, the total staff of both companies was 520, with gross sales of $25 million. Two years later, SKM Minmetal has close to 900 staff and annual turnover has increased to $72 million. It has been an undoubtable success story, but M&A’s don’t always run as smoothly.

“Since the acquisition of Minmetal, SKM has invested heavily in IT, project management systems, consolidating the HR culture towards the SKM model, and moving our South American business from ‘local’ to ‘global’, which has been vital to our success.

“We have added value to both companies by establishing the Santiago office as a Global Centre of Expertise in Base Metals and Underground Mining and recently established a Water and Environment group to service our clients’ needs in this area. We are also looking to establish a Power and Industry business unit in the near future, to assist our clients in addressing power issues in the South American region.”

SKM Minmetal is now undertaking large EPCM projects such as the relocation of two in-pit crushers and conveyors and the expansion of a heap leach pad and stacking system at the Escondida copper mine in Chile, for BHPB Base Metals. It is also expanding into Peru, currently undertaking a prefeasibility study for an iron ore mine for Australian-based Strike Resources, and also to Brazil, having just completed a Value Engineering Study for Vale’s expansion of their Carajas mine to 130 Mt/y.

SKM has provided language training to at least 200 of its staff both in Australia and Chile in Spanish and English, and has also trained its Chilean staff in SKM Safety procedures, Performance Dialogues, the Managing People Program, Essentials of Leadership and the Future Leaders Program. Staff from the Australian office have moved to Santiago and SKM has provided opportunities for Chilean staff to come to Australia to gain experience in other areas of the business.

“The Santiago office has been integral to our winning and undertaking of work for the Olympic Dam expansion for BHPB Uranium and the undertaking of a parcel of work for the Mine and Port Developments Joint Venture with Fluor for BHPB Iron Ore in the Pilbara, Western Australia. The acquisition of Minmetal has fulfilled most, if not all, of our expectations and has certainly created value for our employees, clients and shareholders alike.”

“SKM is continuing with an M&A growth strategy, currently investigating opportunities in Canada, China, the UK and Africa. Such a strategy, with relevant experience, enhances and enables the delivery of major projects and creates enduring value for shareholders and staff.”