Expanding your business into a new market, especially an international one, is an exciting, yet tricky undertaking. There are many benefits to growing your business globally including reaching a new set of customers and a new geographic market. At the same time, success does not come easily. You must grapple with regulatory challenges, cultural differences, and country-specific dynamics. One wrong step and your time, energy and resources may all be wasted.
In his presentation, Matt explained that success begins by considering which customers you want to reach and what markets they will be in. Next, you select the right market for your business by looking at those that have a healthy, stable demand for your products and services now and in the future. A careful analysis of future demand is important to growth. You don’t want to spend lots of effort entering a market only to find that it is shrinking. Your new international market should support your company’s long-term growth goals.
Middle market M&A rose in October and dealmakers expect robust activity for the remainder of 2016, according to a survey by Mergers & Acquisitions. Survey participants expect more companies will be inclined to execute deals once the uncertainty of the U.S. presidential election has passed.
Overall M&A in 2016 has dropped significantly when compared to 2015 activity. US M&A value for the first nine months dropped from $1.53 trillion in 2015 to $1.07 trillion in 2016 (-30%) and the number of deals dropped from 9,028 to 8,103 (-10%), according to Thomson Reuters.
However, middle market M&A has remained relatively stable. For the first nine months of 2016 US middle market M&A value decreased just 3.5% from $155 billion to $145 billion and the number of deals decreased from 7,565 in 2015 to 6,935 in 2016 (-8.3%), according to Thomson Reuters.
As I previously discussed on this blog, now may be an ideal time for middle market companies to execute strategic mergers and acquisitions. While mega-deals are slowing down and large corporations shedding non-core business lines, there are many opportunities for middle market companies to take action. External growth, which includes joint venture, minority interest, majority interest and 100% acquisition may help your company grow for years to come.
Are you ready for M&A? Take the Acquisition Readiness Assessment now for free.
Fill out the form below to access take the assessment online.
For many firms, acquisitions are the only way to obtain a new technology or product and remain a competitive player in the marketplace.
Technology firms are notorious for acquiring startups or smaller firms to gain the latest talent and cutting-edge products. For example, Facebook acquired new technology when it bought potential rivals Instagram and WhatsApp. At the same time it bolstered its position against Google.
Another sector that’s facing great disruption is the financial industry. Most think of traditional brick and mortar banks, suits and ties, credit cards, debit cards, etc. The reality is FinTech (financial technology) is reshaping the industry. PayPal, Venmo and Apple Pay are growing in popularity and traditional banks need to keep up or risk losing consumers. Traditional big banks are acquiring, rather than building, FinTech capabilities. JPMorgan Chase has formed a joint venture with On Deck, an online lending platform for small businesses.
The advantage of acquisitions, especially in a swiftly changing environment, is the ability to gain a new technology or product rapidly and in some cases immediately. A well-executed acquisition brings you a “ready-made” solution where once the deal closes you have access to new technology, new technology that your customers need. On the other hand, building your own solution can take more time, but in today’s fast-paced environment, by the time you develop your own solution, the market may have moved on. In addition, you’ll likely face some teething problems or setbacks as you begin to develop a solution.
If there’s a technology or product that your company needs to stay relevant today or in the next five to ten years, I recommend you consider acquisition as an option. A carefully planned, strategic acquisition can help you stay up-to-date and relevant in your industry.
Private equity firms are increasingly acquiring minority interests in public companies in order to grow, according to the Wall Street Journal. The landscape for PE is changing. Firms are facing tough competition from strategic acquirers who have cash on their balance sheets and are typically willing to spend more on an acquisition. At the same time, fewer banks are lending to private equity firms because of regulations that restrict the amount of debt allowed in acquisitions, making funding leveraged buyouts difficult.
In this challenging environment, minority interest may prove to be a path to growth. For PE firms, acquiring small stakes in public companies can pave the way to a 100% acquisition.
There are a number of advantages to minority interest for financial and strategic buyers.
1. Save Money
You have the opportunity to pursue external growth with a company that may be too expensive or too big for you to acquire in its entirety. For PE firms that are struggling to find financing, acquiring minority stakes allows them to pursue acquisitions despite limited funding.
2. Spread Risk
If you, like most business leaders, have limited financial resources to invest in acquisition, you can acquire several minority interest to spread your risk, while remaining within your budget.
3. Retain Key Management
It’s unlikely that the entire management team will leave when you acquire a minority stake. These experienced team members may stay on and continue adding value to the company for years to come.
4. Open Doors
Minority interest allows you to pursue opportunities that may not be open to 100% acquisition. It would be much more difficult for a PE firm to outright acquire a publicly traded company than it is slowly acquire minority stakes. For strategic acquirers, there may be not-for-sale owners who are not interested in giving up their entire company, but may be open to selling a piece of it.
5. Execute Your Strategy
Minority investment can be used to eventually acquire a majority stake on even the entire company. It’s common to build in options for the buyer to acquire additional stakes as time passes. For example, Disney acquired a 33% stake in video streaming company BAMTech and has the option to acquire a majority stake in the future.
While it’s an important milestone, a signed letter of intent does not guarantee a successful acquisition. Just ask Pfizer who withdrew its $150 billion bid to acquire Allergan after signing a LOI. Pfizer ended up paying a breakup fee of $150 million.
After the LOI is signed, you still have a few major steps to take before the acquisition closes including due diligence, final valuation drafting the purchase agreement, and integration planning. In this final stage of the M&A process, consulting with external advisors such as lawyers and valuation experts is important, however you must remain actively involved in the process and continue leading the acquisition. At the end of the day you, not the lawyers – will own the company and have to live with the decision.
It is important to take a thorough look at these technical issues and consult experts while maintaining your leadership and guiding the acquisition. Don’t let some mistakes you make during this final phase derail the months or even years of hard work you’ve put into the deal. Gain confidence in your decisions in our webinar “M&A: From LOI to Close” on November 10 and learn how to navigate these steps move the deal to the finish line. This webinar will provide insight any professional involved in M&A will want to know.
After completing this webinar, you will be able to:
Explain the structure of an LOI and how to make it beneficial to your situation
Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
Utilize strategies to negotiate an agreement that is beneficial to both sides
Identify how valuation is affected during the Due Diligence and Closing processes
Recognize what is expected at Closing
Begin to execute your Integration game plan
M&A: From LOI to Close
Date: November 10 Time: 1:00 PM ET – 2:15 PM ET
CPE credit available
Trust is everything. As leaders, we can forget this during the excitement of a deal. We can get caught up in reviewing financials, bogged down in the details of due diligence, or absorbed in mountains of research and completely forget about the humans involved in the transaction. When you take a moment to think, it’s obvious that no deal can take place without some level of trust between the two parties.
I was reminded of this a few weeks ago when I had the opportunity to participate in an event, From DoG Street to Wall Street, at the College of William & Mary. The event connects current students interested in finance and investment banking with alumni, and I was happy return to my alma mater to answer questions and discuss my experience.
Participating in the investment banking roundtable discussion at From DoG Stree to Wall Street.
During the event I shared with students was the importance of trust and relationships in mergers and acquisitions. When I speak about relationships I don’t mean relying on your friends and network to make deals. I simply mean establishing a connection with another person. Especially in the world of not-for-sale acquisitions, paying attention to the human aspect of M&A is critical. Our philosophy is built on relationships and we work hand-in-hand with our clients from initial strategy development through deal execution in order to ensure they are in the best position for long-term, strategic growth. Some of our clients have stayed with us since we were first founded in 1995.
We not only take this approach with our clients, but also with the owners of acquisition prospects. In the world of privately held not-for-sale acquisitions trust is critical. Unlike in for-sale auctions, most owners of not-for-sale companies are not looking to sell their business to anyone, let alone a stranger, and many are initially distrustful of any potential buyers. Focusing on the mechanics of the transaction and financials at the onset is a sure way to kill any potential deal. The path to a successful acquisition begins with winning the owner’s trust, sharing your strategic vision, and developing a relationship that leads to mutually beneficial acquisition.
After signing a letter of intent, you expect the deal to close, but there are a number of reasons acquisitions fail ranging from regulatory hurdles to unexpected challenges that arise during due diligence to cultural clashes. In my last post, I discussed reasons deals fall apart even after both parties sign a LOI. Here are three ways to make sure your deal stays intact and reaches the finish line.
1. Strategy First!
Using strategy as your guiding principal is helpful in all steps of the M&A process. As you finalize your deal, continue communicating your shared vision for the newly merged company with the owner. It will be easier to reach an agreement and smooth over negotiations if both parties agree on the direction of the acquisition. Make sure both you and the seller keep the big picture in mind and are aligned on strategy.
2. Understand the Seller’s Perspective
Many owners have a strong emotional attachment to their company; it’s their baby. They’ve spent their lives building the business and they are not going to sell to just anyone. Prior to signing the LOI, you had to convince the owner that you were the right home for their company. Even after signing the LOI, it’s important to continue reaffirming the seller that you are the right buyer. Remember to keep the seller’s perspective in mind rather than just barreling forward and pushing your own agenda. Remember – a LOI is not the same as an agreement and the seller can still back out.
3. Negotiate in Parallel, Not Series
During negotiations, rather than arguing each little point, gather all the points of contention and settle them together. This way, you can determine what’s really important to you and to the seller. Bringing all the issues to the table at once will reduce frustration and prevent you from getting stuck on unimportant issues that can prevent your deal from moving forward.
Have a Plan B
Even if you follow the strategies listed above, your deal may still fall apart. It’s part of the nature of acquisitions – high risk, high reward. The best way to mitigate risk and make sure you haven’t wasted all your time and effort is to have a backup plan. Have a robust pipeline of companies to consider for acquisition. This way if one deal falls apart, you can still move forward with your other options.
Remember that just because a deal is announced, it doesn’t mean it will go through. A record number of M&A transactions announced in 2015 have been cancelled bringing the total deal value down from $4.374 trillion to $78 billion. Unfortunately cancelled deals mean a lot of time, resources and effort were wasted putting together these transactions.
Why Do Deal Fall Apart?
Typically when you first read about a deal in the news, especially with large publicly traded transactions, the transaction has not been completed and the two companies have only agreed to a letter of intent (LOI). After signing the LOI, the two companies can iron out all the details of the final agreement and wait for regulatory approval if necessary. During this period between LOI and close, the deal may break up for a number of reasons.
1. Regulatory Hurdles
Anti-trust issues and regulatory hurdles create delays for many large, publicly traded transactions. Regulatory scrutiny doesn’t necessarily mean a transaction will be called off, but it can be a contributing factor. Pfizer planned to acquire Allergan for $160 billion and relocate its headquarters to Ireland in order to lower its tax bill. However, due to new U.S. Treasury rules aimed at curbing these types of transactions, called tax inversions, Pfizer and Allergan called off the deal earlier this year.
2. Disagreement over Deal Terms
Other acquisitions fall apart because the two companies can’t agree on deal terms. The massive $35 billion “merger of equals” between Publicis Groupe and Omnicom Group faced a number of challenges: personality clashes, cultural differences, and disagreement on deal structure and senior positions. The deal was expected to close in six months when it was first announced, but nine months later the two companies mutually agreed to disagree and went their separate ways.
3. Cold Feet
In the world of privately-held not-for-sale acquisitions, it’s not uncommon for an owner to be anxious about selling their business. Typically by the time you’ve signed an LOI, you have overcome many of these fears by ensuring that the acquisition is the right strategic fit and gaining an understanding the owner’s perspective and motivations. However, the owner could still change their mind and decide not to sell.
On the other hand, circumstances could change that make you back out of the deal. Something uncovered during due diligence or a surprising turn of events may prevent you from going through with the deal. We once had to walk away from a deal because we didn’t share the same ethical values as the prospect company; the owner had two sets of books.
In my next post I’ll go over strategies for moving your deal forward after signing the LOI.
Some might say the best time to pursue an acquisition is when the right opportunity comes along, but they’re wrong. The best time to pursue M&A is whenever you are ready. The best opportunities are those that you seek out proactively. If you wait around for opportunity to come to you, you may be missing out.
To many it’s a novel approach, but we advocate pursuing not-for-sale acquisitions: that is, companies that have not advertised themselves as potential acquisition prospects, and may have not even have considered the option. The truth is, every company is for sale…for the right equation. Especially in the privately-held world, when a company is “not-for-sale” it simply means the owner is not currently considering selling, but they may be open to it if a sufficiently attractive vision is presented. It’s possible that up till now, they haven’t found the right buyer, or simply have never really thought about M&A as an option. If you only look at companies that are for sale, you drastically limit your choices.
By being proactive you can search for a company that meets your ideal profile and fits in with your growth strategy rather than accepting whatever happens to be on the market. If you were planning to buy a car, you wouldn’t wait for s salesman to knock at your door and hope you like what he offers. You’d decide on exactly the features and look that you want, and go in search of the closest match you can find.
Pursuing acquisition on your own terms starts with a carefully developed M&A strategy. This should complement your company’s overall growth strategy. The most successful acquisitions aren’t about cost-savings or financial engineering; they are about setting your company up for long-term growth. Acquisitions can be one of the fastest ways to grow your business and help you reach new markets and customers.
It usually takes at least one year to develop your M&A strategy, create a step-by-step plan, identify the right companies and execute and close the deal. Keep this timeline in mind when you start thinking about a transaction. So if you’re anticipating any challenges to your current growth, the time to start on your acquisition plan is not some future date when you run into an eager seller — it’s today!
Culture is an important part of an organization, but it can be difficult to define. Unlike other areas, such as finance and operations, which have concrete metrics like revenue, EBITDA, and number of employees, quantitatively measuring culture can be challenging. Leaders often rely on their “gut” to understand another company’s culture, but this leaves an incomplete picture.
When pursuing mergers and acquisitions, fully understanding the seller’s organization, including its culture is critical to your success. Rather than relying on subjective impressions, we use the Cultural Assessment Tool to measure a company’s culture.
We look at about two dozen key areas and scrutinize how the company goes about doing business in each area. For example decision-making: Is it centralized or decentralized? It is fast or is slow? Is the company consensus-building or dictatorial? We use this tool in the first place to look within, and then to analyze a prospective acquisition. For implementation, we use an online questionnaire tool, such as SurveyMonkey, which is easy to deploy and delivers quick results.
The Cultural Assessment Tool
How we apply the Cultural Assessment Tool depends on the size of the organization. We typically approach the process on four levels: shareholders, executives, managers, and employees in the organization. What we’re looking for is the perspective on the company’s culture at each level, so we can create a crosspollination of views across the organization. What often causes surprise is how differently people at various levels may view the same company culture.
For example, we worked with a company where the shareholders felt the culture was open and transparent, with flexible, nimble decision-making that nurtured innovation. The rank-and-file staff held a diametrically opposite view. They didn’t feel that the mission and operational plan were at all well communicated. In fact, they saw the culture as closed, dictatorial, and averse to consensus-building. It was almost as though we were talking about two different companies.
Using the Cultural Assessment Tool is one way to objectively measure and evaluate your own culture and the seller’s culture during due diligence.
When contacting an owner about acquisitions, don’t be surprised to hear “no.” Most owners, when asked about selling their “not-for-sale” business will automatically refuse simply because it’s unexpected. Remember, for an owner focused on running the day-to-day operations of his business, this offer is coming out of the blue. There are, of course, a number of other reasons why owners don’t want to sell including history, age, family, and community. Don’t be afraid of rejection or give up after the first try. If you are persistent, you may find the owner is open to at least talking to you or meeting with you to hear you out.
However, in some cases, despite your determination, you may find that the owner still is not interested in selling or any type of partnership. So what do you do? Do you keep calling him or do you give up?
When contacting an owner about selling his “not-for-sale” business you must be persistent, but not obnoxious. It’s important to strike the right balance. If you’re at an impasse with an owner who is not budging on his “not-for-sale” position, there are a few strategies you can employ.
Write the Owner a Letter
If the owner is still refusing to meet with you after multiple phone calls, try taking the conversation from verbal to written. In a letter, you don’t seem as pushy and the owner has more time to think through his response rather than react in the moment.
Stay in Touch
If the owner still seems uninterested after a letter, put him on a keep in contact list. We have a list of prospects that we call every quarter to check in and see if anything has changed since we last spoke to them. A big part of acquisitions is timing and an owner who is not ready to sell today, may be ready six months down the road. When something changes in his business and the switch flips, he may pick up the phone and call you. While there’s no guarantee that the owner will sell, at least if you made the initial approach, when he is are ready, you will be at the top of the list as a potential buyer.
If you’ve tried both of the strategies listed above and still have not had any success, it may be time to move onto another prospect. You shouldn’t keep beating a dead horse and some owners are really not going to sell their business no matter what.
If you have a robust pipeline of acquisition prospects that you are pursuing in parallel, this won’t be a major setback to your acquisition program. With many options you increase your chances of a successful acquisition.
With every acquisition you have a choice of how you will integrate the two entities. Often buyers assume a “winner-takes-all” approach where they impose their systems and culture on the acquired company. This is not always the best way to successful integration. In fact, it may be best to integrate some of the seller’s practices into your own organization.
In our new M&A Express Videocast, I advocate a strategic approach that leverages the best from both entities. I will also introduce the power of the 100-day plan in achieving a successful integration.
How Far to Integrate
April 5, 1:00 pm – 1:20 PM ET
About M&A Express
M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies. M&A Express is free! M&A Express is free! Visit our website for more information.
How can you tell a good company from a bad company?
A lot of CEOs say that they trust their gut when it comes to acquisition targets, but unfortunately instincts and opinions aren’t enough. We need facts and metrics. We need real tools to generate quantifiable data about the companies we’re considering. M&A is a massive undertaking and relying on instinct alone to guide you is a mistake.
The Prospect Criteria Matrix
One tool we use to help objectively evaluate potential companies for acquisition is the Prospect Criteria Matrix. It starts by defining the key characteristics of a good acquisition for your strategic objectives. In each case, you want to determine a way to quantify the criterion on some kind of scoring system.
For example, “good financials” may be one criteria and your metrics may be a revenue between $25 and $35 million, and a strong balance sheet. Other criteria could include customers or geographic location.
Typically we recommend clients limit to no more than six criteria. With more than six criteria, it’s easy to lose focus on meaningful strategic aspects of the company. Each individual criterion should have multiple, measurable metrics.
But simply scoring the criteria is not sufficient. The information you gather needs to be weighted because not all criteria are created equal. Some factors will be more critical than others. You need to sit down with your team and identify the things that are most and least important to your organization. For example, financials might be a very high priority for your acquisition strategy, so you might weight that one at 30 percent. If location might be less important, and you’d give that 20 percent. You juggle your criteria to add up to 100 percent.
So how do you use this tool? Let’s say you have 20 companies you’re evaluating. Get everyone on your acquisition team together and ask them to rate each company based on the criteria you’ve chosen. It usually works best to use a scale of one to ten. One company might get an eight in a particular category while another gets a three. Once you’ve established the average for each category for each company, you multiply by the weighting percentages to find the weighted average.
The Prospect Criteria Matrix helps you objectively evaluate potential acquisition candidates.
What’s even more important than the areas where everyone agrees are those where there is dissent. If you give a company an 8 on financials and someone else gives it a 2, then that should be the start of a conversation. And because you’ve chosen measurable criteria, you can compare the data rather argue about whose “gut feeling” is right.
The tool allows you to easily prioritize companies, and it also helps to confront some of the warning signs we’ve looked at above. For instance, if your CEO is pushing a “Brother-In-Law” company, instead of having an awkward conversation about why you think he’s wrong to be so enthusiastic, you can show him the data and insights generated by the Prospect Criteria Matrix.
Finding the right partner is a crucial component of successful mergers and acquisitions and pursuing a deal with the wrong company can be a costly mistake. We’ve all seen the headlines of major mergers and acquisitions that have fallen apart at some point along the deal – whether it’s before the transaction closes or during integration. On the other hand, if done right, with the correct partner, strategic M&A allows a business to grow rapidly and effectively and gain a competitive advantage.
When searching for companies to acquire, it is important to keep three things in mind: Strategy, demand, and options.
Any successful M&A process must begin with a solid, strategic rationale. Why do you want to make an acquisition? What will the acquisition accomplish? How is M&A aligned with your overall growth strategy?
It makes no sense to pursue M&A simply for the sake of it with no real plan in mind. That is like starting out on a trip without a map (or GPS or smartphone) and hoping you will arrive at the correct destination. Make sure you have a plan and strategy.
Once you have developed your strategy, you should determine the right market to focus before you being looking at individual companies. This “markets-first” approach allows you select markets that have a healthy, stable demand for your acquisition partner’s products or services. Without taking future demand into consideration, you risk acquiring a company in a shrinking market where demand for its products and services are in decline. Avoid pursuing these unqualified acquisition prospects by selecting the best markets for growth before researching acquisition prospects.
Have Many Options
While you may only be acquiring one company, it’s not enough to only pursue one acquisition prospect at a time. You do not want to spend all your time and effort pursuing one company only to risk having the deal fall apart in the end. Deals fall apart for a number of reasons – the owner get cold feet, you can’t agree on the deal terms, a competitor comes along, etc. If you have only looked at one company you will find yourself back at square one with nothing to show for all your time and effort spent chasing the deal.
In fact, it takes up to 75 to 100 candidates to identify the right deal. It’s not enough to have a plan B, you need a plan C, D, E, F, and so on. We encourage you to broaden your search for prospects to include not-for-sale companies. Not-for-sale simply means the owner is not actively considering sell – not that they will never sell the company. By including not-for-sale companies in your search you significantly expand your universe of potential acquisition prospects.
Think of your prospect pipeline as a funnel. Gradually, as you move forward in the M&A process, you will eliminate candidates that are not an ideal fit with you strategic rationale for acquisition. With the “funnel” approach you can move prospects along simultaneously, in a systematic and efficient manner.
After all that hard work putting together an acquisition —not to mention the costs in both time and money—it might seem unthinkable to give up on a deal. But you should be on the lookout for these 10 warning signs during the transaction process. They may just be telling you to walk away.
The prospect does not meet your criteria. Always keep your strategic objective in sight, and if the target doesn’t serve your goal, walk away.
Only your CEO believes in the deal. Your CEO’s enthusiasm for a deal is not sufficient grounds to proceed, if no one else is convinced.
There is strong dissent on the acquisition team. When the acquisition team is conflicted, the transaction is likely to fail.
There are glaring cultural differences between the two companies. Some cultural difference can be valuable, but a complete clash of values and business philosophies will lead to trouble.
The buyer and/or seller are inexperienced, or they lack good advisors. Beware of a transaction conducted by rookies!
The buyer and seller can’t close an unrealistic valuation gap. Differences of valuation are inevitable, but if there’s no hope of finding middle ground, walk away.
The valuation doesn’t change…even if facts do. Due diligence may uncover facts that should change the valuation — if it doesn’t change in the light of new data, that’s a bad sign.
A poorly run auction of a for-sale company. Badly run auctions are a huge hazard and a strong reason to back off from a deal.
Buying a company only so your competitor doesn’t get it first. If your goal is only defensive, rethink the transaction: there’s far more value in pursuing long-term strategic growth
An overemphasis on sunk costs. Remember there are few things more expensive than buying the wrong company — so be prepared to cut your losses rather than press ahead regardless.
If you are finding many of these warning signs appear in your deal, you may want to reconsider going through with the acquisition. Take some time to think about it – Is this really the best deal for your company? You never want to execute an acquisition simply for the sake of it; rather M&A should always be carefully planned and strategic in nature in order to maximize your success.
Learn more! Watch the M&A Express Videocast “When to Walk Away” for free
Acquisition can be a powerful tool for accelerating your company’s growth. 2016 may be the year you build on your capabilities, add new services or products, gain new customers or enter new markets. However, it’s important not to get swept away in the excitement of a deal and to remain strategic. A carefully planned, strategic approach greatly increases your chances of successful M&A and long-term business growth. As you consider growing your business in the new year, here are some tips for remaining strategic in 2016.
1. Begin with strategy.
Your overall growth strategy should be the primary driver and guide for your acquisition. While this is a simple principle, it can sometimes be forgotten in the excitement of the deal. Do not acquire a company simply for the sake of acquiring a company. While acquisition can be a powerful and rapid tool for growth, buying the wrong company can be an expensive mistake!
2. Use a demand-driven approach.
In our typical M&A process, we have clients pursue markets before researching individual companies. The reason is that selecting the right market is critical to successful growth. The market should have healthy, stable demand for your products or services and be aligned with your overall growth strategy. We strongly recommend selecting a market prior to identifying acquisition targets or potential partners. Without understanding market dynamics, you may be tempted to pursue what looks like a promising opportunity, only to find that the market is in a serious decline. In addition, market research will help you enormously when it comes to evaluating and identifying potential companies to acquire.
3. Develop measurable criteria.
Again, the criteria should be aligned with your overall strategy. Criteria can include growth rate, size, geography, customers, or key players. It’s best to pick six criteria – too few and you won’t cover all necessary aspects, and too many will cause you to lose focus. Begin your research at a high level and then progressively zero in on individual market segments you find attractive as you gather more information. As your research progresses, you’ll have a better understanding of the markets. Make sure to use your criteria to remain objective.
4. Expand beyond the “usual suspects.”
It’s important not to fall back on the “usual suspects” or businesses that are already known to you. There’s nothing wrong with pursuing “usual suspects,” but they should not be your only source of candidates. Turning to these companies alone may mean you are ignoring a whole host of companies that could be strategically valuable acquisitions. Conducting market research will likely help you identify fresh companies that you didn’t even know about.
5. Remember the human factor.
Acquisitions involve much more than just financial figures. It’s extremely important to develop relationship with owners, especially in privately-held, not-for-sale acquisitions. Many times owners view their company as their baby and convincing them to sell to you involves much more than just a fat paycheck. Consider the owner’s drivers and motivations. What does he or she really care about? Developing a strong relationship with an owner early on in the M&A process will greatly benefit you when it comes to due diligence and negotiations.
Best of luck in pursuing strategic acquisitions in 2016. For more tips on strategic M&A, be sure to subscribe to the Successful Acquisitions blog.
In light of recent FTC rulings against market domination, Sysco has changed its M&A strategy to focus on smaller, strategic deals rather than large transformative deals. Although Sysco’s change is motivated by regulatory obstacles to larger acquisitions, using strategic, smaller deals is an excellent approach from a strategic perspective. We have long recommended that our clients pursue a series of small transactions to achieve their long-term growth goals. We call this strategy taking “frequent small bites of the apple” because it’s much easier to eat an apple one bite at a time than to cram the whole fruit into your mouth!
Among the advantages of pursuing a series of smaller deals:
1. Focus on One Reason
You may have many needs to meet before you reach your long-term growth goals, for instance improving talent and technological capabilities and expanding geographically. If your vision is growing into a worldwide paint manufacturer and distributor, but you only have manufacturing operations on the East Coast, you will need to expand geographically, build your distribution networks, and perhaps improve on your manufacturing capabilities. Doing all this with only one company may dilute your efforts, or you might acquire a company that really doesn’t fulfill any of your strategic needs. A better approach: first focus on acquiring a company with an excellent distribution network in the U.S and then another company with quality manufacturing capabilities that match your acquisition criteria. Once you’ve adjusted to this change, you might look at acquisitions outside the U.S.
2. Stay Below the Radar
Large transactions draw attention, especially the mega-deals valued at over $5 billion that have boosted M&A value to record levels. But many transactions are much smaller than these multi-billion dollar deals; in the U.S. from November 1, 2014 to October 31, 2015 there were 12,663 M&A transactions, according to Factset data. 95% of these deals were under $500 million or undisclosed. (Undisclosed deals are typically privately held, smaller transactions that are too small for financial reporting). Smaller strategic transactions allow you to make moves below the radar, out of sight of your competition.
3. Adjust to Integration Challenges More Easily
Even the most carefully planned acquisition encounters integration challenges as people and systems adjust to the newly merged company. By acquiring a smaller company, you dramatically limit your integration challenges. Once you’ve had time to work out any kinks and make sure your new company is operating smoothly, you can begin pursuing the next acquisition.
4. Minimize Risk of Acquisition Failure
Although acquisitions are inherently a risky undertaking, smaller strategic transactions are much less risky than large transformative deals. Because integration challenges are minimized, you can remain focused on your strategic objectives, increasing your chances of realizing synergies from the deal. There’s also less financial risk associated with smaller acquisitions; you can minimize capital outlays while rapidly growing your company to reach your long-term goals.
Executing a series of strategic acquisitions is a proven way for middle market companies to grow.
A small deal is also ideal for first-time acquirers who have never pursued growth through mergers and acquisitions. All in all, smaller acquisitions allow you to remain focused, move covertly in the market, and increase your chances of success while still rapidly moving you closer to your vision for the future.
Instead of investing in growth, companies this year have been holding more than $1.4 trillion in cash – close to a record $1.65 trillion in 2014. Oracle’s $56 billion cash stockpile is 1.5 times its sales and Cisco’s $60 billion in cash is 1.2 times its sales. Eleven companies have cash reserves double their annual revenue.
Companies that stockpile cash don’t invest in stock buybacks and dividends, research and development, other organic growth initiatives or mergers and acquisitions. A strong balance sheet is important, but the levels of cash held by nonfinancial S&P 500 companies is astounding! They may be worried about the economy or the upcoming elections. But there’s another possibility: all that money on the sidelines portends robust M&A activity in 2016.
Publicly traded companies also are stashing profits offshore to avoid paying taxes on them. The U.S. corporate tax rate is one of the highest in the world and tax inversions in particular are being driven by the pursuit of tax savings rather than for strategic reasons. .
The latest example is Pfizer and Allergan’s proposed merger which would relocate the company to Ireland and away from the U.S. corporate tax rate. Other companies that have done this include Chiquita, Perrigo, Medtronic, Endo, and Actavis despite calls for stronger restrictions on tax inversions by Congress and President Obama. Pfizer already has found ways to save on taxes even without the acquisition. The company has designated $74 billion as “indefinitely’ invested abroad.
Invest in Growth Now
As other companies hold onto cash, you have a unique opportunity now to invest in your future. Do this by developing a long-term strategic plan, investing in new products, services or equipment, or growing organically. Or pursue the faster, more powerful vehicle of strategic mergers and acquisitions. Middle market companies can seek privately held, not-for-sale deals that focus on long-term growth rather than on cost savings or short-term quarterly updates with shareholders. This increases the likelihood of a successful transaction and sustainable growth.
Middle market companies cannot afford to dwell on cost savings and sit idle. Make sure you are thinking about long-term growth and how your company will not only survive, but thrive.
Is your company hoarding too much cash? Or are you investing in future growth?
Signing the letter of intent (LOI) launches the final phase of the M&A process, where you delve into the details of due diligence, deal structure, closing the transaction and integration. In this third phase of the Roadmap to Acquisitions, Build the Deal, maintaining momentum remains critical. Even as the finish line is in sight, there is still much to be done in order to seal the deal and it is important to remain actively involved rather than defaulting to lawyers and accountants. In this final phase you have the opportunity to strengthen your relationship with the prospect and enrich synergies that will result from the newly formed business.
If you’ve followed the Roadmap to Acquisitions, all the work you’ve done previously in developing a strong strategic plan and building a relationship with the prospect will pay off as you navigate this final phase.
In our upcoming webinar, “M&A: From LOI to Close,” I will guide you through the final steps in the acquisition process and show you how to close the transaction.
After completing this webinar, you will be able to:
Explain the structure of an LOI and how to make it beneficial to your situation
Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
Utilize strategies to negotiate an agreement that is beneficial to both sides
Identify how valuation is affected during the Due Diligence and Closing processes
Cultural due diligence is a critical task in the acquisition process. It exposes hidden problems and risks, but also may identify opportunities. However, if you do uncover red flags, you may need to reevaluate the deal. Sometimes you must simply call it off. We have walked away from a transaction when due diligence revealed a problem.
Huge Ethical Difference
The most obvious reason to back out is when there is a huge difference in ethics or values. At one meeting with an owner, we asked to see the company’s books and were asked: “Well, which set of books do you want to see?” Of course we wanted to see the accurate ones. More investigation revealed a culture of cutting corners. People weren’t hesitant about stepping over the line in ways that to us were clearly out of bounds. Changing this culture – holding the staff to our ethical standards – was too great a challenge. We had to walk away from the deal.
Incompatibility in the Workforce
An incompatibility in the workforce may raise a different red flag. We found that the employees at another company were not very technologically advanced or trained in automation. Given our client’s highly sophisticated, automated and computer-led environment, upgrading the workforce would have required too drastic a change.
While these examples may help, there’s no clear rule about when to back away. Every strategic acquisition is slightly different and your reasons for saying “no” may vary from ours.