Acquisition Strategy

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.

Strategy First

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.

Be Demand-driven

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.

Learn more about Building a Robust Pipeline of Acquisition Prospects in our webinar on March 17.

Date: Thursday, March 17
Time: 1:00 PM ET
CPE credit available.

Photo Credit: Barn Images

Do you know when to walk away from a transaction?

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.

  1. 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.
  2. 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.
  3. There is strong dissent on the acquisition team. When the acquisition team is conflicted, the transaction is likely to fail.
  4. 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.
  5. The buyer and/or seller are inexperienced, or they lack good advisors. Beware of a transaction conducted by rookies!
  6. 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.
  7. 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.
  8. 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.
  9. 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
  10. 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

Photo credit: Barn Images

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.

 

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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.

4 reasons why smaller acquisitions are better

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.

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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.

And it’s not just Fortune 500 companies. According to the Middle Market Center, more middle market firms plan to hold onto cash in 2016. Fewer of them are willing to invest extra money or plan to expand in 2016.

Have U.S. Companies Stopped Investing In Growth?

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.

Tax Savings

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?

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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
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

Date: Thursday, December 17, 2015

CPE credit available.

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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.

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Effective leadership plays a critical role in integrating companies following an acquisition. Challenges abound, for instance when disagreements arise between the executive team and the rest of the staff. How do you bridge the gap? Communicate painful decisions? Maintain calm during a period of change?

As the leader of an integration process, you should:

  • Be aware of the key challenges and opportunities
  • Recognize that different management styles can bring new value to the combined organization.
  • Be good listeners. Those who aren’t decision-makers need to be heard and to hear from their leaders in response.

Leaders who bulldoze their way through integration breed resistance within the acquired company and are likely to be frustrated by a lack of progress. This can be avoided by adopting a collaborative approach.

That isn’t to suggest that as a leader you should simply acquiesce, but rather that you balance the input of executives and employees and make decisions that best serve the interests of the organization.

Leaders choose which issues may be negotiated, and which are beyond discussion. They must clearly communicate how decisions will be made and how information will be disseminated.

Consider the challenges of integrating Kraft and Heinz following completion of their merger last July.  The Wall Street Journal reports Kraft Heinz is closing seven facilities, including Kraft’s former headquarters near Chicago, and cutting 2,600 jobs. In situations like that, leaders must make tough choices, combining two companies with strong cultures and entrenched staff. Cost cutting, innovation and automation may be essential to the success of the integration, but so is the way in which these dramatic changes are implemented.

The quality of leadership can make or break an integration program.

It goes without saying that the introductory meeting is a crucial step of the acquisition process. If it goes well, your partnership could result in a successful deal. If it goes badly, you may be throwing away a great opportunity and have wasted hours of time and resources chasing the deal.

Your goal for the first meeting is to impress the owner or management team of the acquisition prospect and keep them interested in learning more. In not-for-sale, strategic acquisitions, it’s especially important to convey your strategic rationale and vision for the future. The owner is not looking for a reason to sell, so it’s up to you to convince them to even consider it — and why you would be the best buyer of their company.

I’ve found that, without proper guidance, buyers tend to make the same mistakes in first meeting with owners. Here are 5 common errors:

1. Using a Generic Presentation

Failing to customize your presentation for each target company is a huge mistake; a generic presentation is the best way to get ignored or even kill a deal. No one wants to receive a boilerplate presentation that is irrelevant to their business and current situation. Take the time to tailor the presentation to the acquisition prospect. Think about what you have learned about the company during research and your introductory call. What are the owner’s hot buttons? And what might motivate them to consider selling? Even simple touches like adding the prospect’s logo to the footer of the presentation really make a difference and demonstrate that you are serious about the deal.

2. Bringing In Lawyers Too Soon

Lawyers and advisors are necessary and important figures in M&A, but lawyers aren’t needed at a first meeting. That only elevates tensions and can close off communication with a seller who may be less experienced than you in M&A. Even if the seller decides to bring their lawyers, leave yours at home. We once had an anxious owner who scheduled our first meeting at his lawyer’s office. We agreed, but said we wouldn’t be bringing any lawyers. Upon hearing this, he changed his mind and we ended up meeting at his company and even getting a tour of his plant. Not having lawyers completely changed the atmosphere of the meeting and our conversations. Our client was able to connect on a deeper level with the owner that ultimately led to a successful acquisition.

3. Not Selling Your Vision

Even though you are the buyer, you are effectively trying to sell your vision of a successful acquisition to the owner. How would the transaction benefit both companies? Why do you want to acquire this specific company? Why are you the best buyer for their business? These questions should already be answered and your goals should be clearly defined before you even approach an owner about acquiring their company. Then, once the owner expresses interest, you’ll be able to share your vision and strategic rationale in a clear and convincing manner rather than scrambling to put together an explanation.

4. Taking Charge

Demanding the first meeting be on your terms, or on your turf, puts sellers on the defensive. Let them pick the location and allow them to be your hosts. Making them comfortable may mean they are more willing to talk openly about the possibility of an acquisition.

5. Talking too Much

One huge mistake buyers make is saying too much too soon. The introductory meeting is like a first date. Don’t spill all your secrets right away or expect the owner to tell all. It’s important to keep some information back until a later time. A great way to make sure that you don’t put your foot in your mouth is to limit the time spent during your first visit. Typically we will have a dinner the night before and a three-hour meeting the next morning. Specifically, avoid having breakfast with the owner, and do not stay for lunch. The simple rationale: If you stay too long you may be tempted to fill dead air and venture in too deep too soon. Remember, if all goes well there will be more meetings and more opportunities to share information.

 

What is the best way to position your company to be sold? I’ve often heard this question from owners and executives who aren’t quite ready to exit their business but who may be thinking about its future over the next five to 10 years. If you’re in this position, you’re wise to begin thinking about the process early on – planning is essential in preparing a business for sale. Spending time on preparation will increase your likelihood of selling to the right buyer.

In my experience working on the buy-side, I would say the most important thing buyers are looking for is profitable growth. They will want to know that they can take what you have built and continue to grow it; otherwise the only other synergy would be cost savings.  Therefore they want a business that does something unique that other companies, start-ups or technology can’t easily displace.

Every business is different, but here are some areas that buyers tend to focus on when looking at an acquisition:

  1. Customers — Ideally, you have lots of them because customer concentration creates vulnerabilities.  You also need a system in place to bring on new business that doesn’t require your hands-on engagement, preferably with multi-year contracts.
  2. Audited or Reviewed Financials —  Potential buyers will have a lot more confidence in your business and the numbers if you have 3 years of audited or reviewed financial statements.  It goes without saying that a high-margin business is always desirable.  Tax returns will be asked for so make sure to file them — truthfully!
  3. People – Who is instrumental in the success of your company? What is your balance of employees and 1099 contractors?  These are increasingly important factors for a buyer. You’ll need a robust HR system for recruiting, hiring, training and retaining? Buyers also look at the quality of management. Do you have a team in place to run the business for the new owner, without you? A company that’s over-dependent on one individual has lower value as an acquisition, so make sure there are others ready to take over the operation when you leave.

SABMiller has agreed to Anheuser-Busch InBev’s $106 billion offer to acquire it. Together, they will form a global beer conglomerate with $64 billion in annual revenues that is estimated to make up 29% of global beer sales. The new company would be three times bigger than its next competitor, Heineken. Given that this is such a large acquisition, the merger will of course, be subject to regulatory approval and the two companies will likely need to sell off some assets in order to gain approval.

Strategic Rationale

With this acquisition Anheuser-Busch will gain access to fast growing markets like Latin American and Africa as sales in traditional markets like the U.S. and Europe have slowed down. This trend is widespread across the beer and even the liquor industry and is forcing large companies to take action. Earlier I wrote about liquor giant Diageo’s strategy to woo African drinkers with its own brand of spirits and beer. It seems like Anheuser-Busch is pursuing a similar path to growth by following future demand. Originally founded in Johannesburg, South Africa, SABMiller is the largest brewer in Africa, with a 34% market share. An acquisition may be the fastest and safest route for Anheuser-Busch to enter into a new market and attract new customers.

Negotiations

The agreement comes just days after SABMiller rejected Anheuser-Busch’s offer. As with many publicly traded companies, there were multiple shareholders to convince which took many talks over the course of several weeks. The investment bank 3G Capital which helped put together Anheuser-Busch, negotiated with two of SABMiller’s biggest shareholders: the Santo Domingo family and tobacco company Altria.

In any acquisition, understanding the motivations of the seller is critical to the success of an acquisition. In the case of Anheuser-Busch, without the approval of the two largest shareholders, SABMiller would not have agreed to its offer. Although privately held, middle market companies typically do not need to negotiate with multiple, large shareholders, especially not publicly, you may need to negotiate with two owners or even a family. These owners may want different things out of an acquisition. As a buyer, it’s up to you to figure out what the owner or owners really want and what will motivate them to sell. In this case, SABMiller, wanted something in addition to a high premium, it wanted assurances that the deal would pass regulatory approval and a $3 billion breakup fee.

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In my over 20 years of pursing strategic, not-for-sale acquisitions for clients, the most important piece of advice I have is: be prepared. It may sound simple, but I cannot stress enough how critical preparation is to M&A success. This applies to every stage of the Roadmap to Acquisitions, our M&A process, from initial strategy to research, to due diligence and integration.

Capstone Roadmap to Acquisitions

The Roadmap to Acquisitions in a strategic, proven process for pursuing M&A, based on over 20 years’ experience.

Develop a Plan

In the early stages of the M&A process, you must develop a carefully planned strategy to guide your search for the right acquisition. This means that before running off to pursue companies to buy, you take the time to really examine your business and your vision for the future. Think about your overall strategy, how M&A can help you achieve it and what steps you will be taking to execute. The point of pursuing acquisitions is not for the sake of buying another company – rather, executing an acquisition should be a tool for reaching your strategic goals.

This foundational step will determine the success or failure or your program. Acquisitions are inherently risky and those who come to the table armed with a plan increase their chances of success.

Do Your Homework

As you move along the acquisition process into conducting market and company research, preparation remains important, especially when it comes to primary research. When calling key contacts in the marketplace or owners of companies, it’s important to be knowledgeable about the industry so that the caller takes you seriously. We call this “doing your homework.” This means, that before you even pick up the phone to conduct primary market research, you have already conducted secondary research by accessing articles, websites, reports, and databases. And before making contact with an owner, you have already analyzed the market, researched the owner and studied the company.

Without preparing for these conversations, it’s difficult to maximize the value of your discussion and ask the right questions. You may miss out on an opportunity to gain new insights, the caller may refuse to speak with you or you may even damage a relationship with a potential acquisition prospect.

On the other hand, if you have prepared well, you may gain new insights about the market or the industry, and begin to develop a relationship with an owner that may turn into an acquisition.

Move Swiftly

When it finally comes to executing the deal, a lot of your hard work and preparation pays off. Ideally you have identified the best candidates for acquisition in the most effective way by following your strategic acquisition program and by thoroughly researching markets and companies.

It’s also helpful to have all your documents and financing ready in order to maintain momentum. Nothing kills a deal like stalling and you do not want to be scrambling at the last minute to put together a financing package or paperwork for the deal.

Being prepared is important even after the deal closes. Integration issues remain a top reason for acquisition failure. Slow integration can interfere with the effectiveness of a deal, and in some cases it can even lead to acquisition failure. After the deal closes, you only have about 100 days to implement changes, or employees become resistant. And there are a number of mission critical items that must be addressed on Day 1. One way to mitigate, or even avoid integration issues, is by developing an integration plan long before the deal even closes. This way, you’ve had the time to anticipate integration challenges and develop solutions and your integration plan is ready to be deployed on Day 1.

No Short Cut, Just Hard Work

There is no short cut to preparation. It takes good old-fashioned work, strategic thinking and attention to detail. While it does take time and effort, it’s the most effective way to increase your chances of acquisition success.

By now, many of you will have heard of Berkshire Hathaway’s $37.2 billion acquisition of Precision Castparts Corp. (PCC), an aerospace parts manufacturer. The acquisition is Berkshire Hathaway’s largest to-date which goes to show with each strategic acquisition, Berkshire Hathaway must make bigger and bigger deals to “move the needle.”

Strategic and to the Point

The straightforward nature of the deal’s press release is particularly refreshing and reflective of Warren Buffett’s overall attitude toward strategic acquisitions.

“I’ve admired PCC’s operations for a long time. For good reasons, it is the suppler of choice for the world’s aerospace industry, one of the largest sources of American exports,” said Warren Buffet.

Mark Donegan, PCC’s chairman and chief executive officer stated: “We see a unique alignment between Warren’s management and investment philosophy and how we manage PCC for the long-term.”

You can read the full press release here.

You’ll notice there are no flowery words or long-winded paragraphs in the press release, unlike the now infamous AOL-Time Warner deal. As I’ve stated before on this blog and in my book, at Capstone, we are big proponents of having only ONE reason for acquisition. Having a simple, clear, strategic path forward leads to success. On the other hand, pursuing many reasons makes the deal unnecessarily complicated and unfocused.

Finding Growth through M&A

Warren Buffett’s latest acquisition reflects the overall trend in the market – M&A is the pathway to growth. Dealogic data reports $2.63 trillion in deals as of August 3, perhaps the most robust year yet. The Wall Street Journal notes, robust M&A “…has been driven largely by companies buying others to drive growth at a time when earnings increases aren’t easy to achieve.”

Organic growth options are anemic or stagnant at best, forcing companies to seriously consider M&A to drive growth. In today’s market, businesses cannot be content to sit on the side lines and go about business as usual. They should take a careful look at all of their growth options – including acquisitions – and determine the best path forward based on a strategic, proactive approach. Those who fail to move now and consider their strategy for growth will be unfortunately be left behind.

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Most companies are seeking growth outside of their core business through organic means or mergers and acquisitions, according to a new survey by McKinsey.

What’s interesting is that although many companies want to expand beyond their mainstay business, most do not have the capabilities to do so. Here are three best practice steps noted for successfully growing in new categories:

  1. Scanning for expansion opportunities
  2. Evaluating expansion opportunities
  3. Integrating new activities into core business

By following these best practices, companies are two times as likely to be successful; however, McKinsey reports that only between 27% and 33% of those that they surveyed did so.

When it comes to exploring new opportunities, business leaders are often too caught up in day-to-day activities to think about the bigger picture. Many are overly concerned with their competitors or simply are at a loss when it comes to generating new ideas for growth. This also means that once an opportunity is identified, it’s often the only one considered – so of course, the company has trouble properly evaluating the single opportunity and determining whether it is a good fit. And if an opportunity is not the right fit, there will be difficulties in integrating it into the core business.

If you find yourself in a similar situation, or simply wish to improve your capabilities, here’s some advice to help with your growth efforts.

  • Start with strategy – It should go without saying, but strategy is key to success. The survey emphasized the importance of having a clear, long-term strategy: “When executives say their companies have a clear strategy for expanding into new activities, for example, they are four times more likely than those whose companies have no such strategy to report significant value creation.”
  • Consider all your growth options – Did you know there are FIVE options for growth? They are: organic, external, minimize costs, exit, and do nothing. While you may be leaning toward one of these pathways, it’s best to consider it in the context of the others. This gives you a chance to seriously evaluate all of possibilities and provides a more complete picture. By considering all five options, you will either gain confidence about the decision you’ve already made or uncover a new path for growth.
  • Use tools to generate ideas – We use tools like the Adjacency Map and the Opportunity Matrix to generate, organize and evaluate new opportunities. We find that a brainstorming session using these tools gets the ideas flowing. No idea should be off the table, no matter how remote or crazy it may seem.
  • Evaluate opportunities with criteria – Develop criteria that match your ideal opportunity. Which aspects are most important to you? Market size, demographics, technological capabilities or something else? For example, if your overall strategy is to expand into Latin America, location is clearly important. Those opportunities that allow you to expand south of the border will be evaluated more favorably that those that don’t. Once your criteria are established, compare all options against the same criteria. This will help you remain objective and strategic.
  • Develop an action plan – You need a clear plan for executing and integrating the newly acquired business (or new product or capability) with the rest of your current business. For M&A, especially, integration is the number one reason for failure – so start planning early. Your plan should, of course, be guided by your long-term growth strategy.

If you’d like to continue exploring your options for growth, download your free copy of “Finding Opportunities for Growth: The Opportunity Matrix.”

 

Packaged food company ConAgra Foods plans to divest its private label branch Ralcorp after acquiring it in 2012 for $5 billion.

Why is ConAgra spinning off this private label business so quickly after acquisition?

The many reasons include pressure from activist investors, poor performance, increased competition, and tighter margins. Ralcorp’s revenues dropped by 6 percent over the past few years.

One key reason lies in ConAgra’s original acquisition strategy. When it acquired Ralcorp after chasing the company for over a year, ConAgra focused mainly on cost savings. At the time ConAgra stated the acquisition would “provide significant annual cost synergies.”

“ConAgra Foods intends to use its strong infrastructure and productivity capabilities to drive significant cost synergies from this transaction, primarily in the areas of supply chain and procurement efficiencies. It expects to achieve approximately $225 million of cost synergies on an annual basis by the fourth full fiscal year after closing.”

Unfortunately for ConAgra, focusing on the cost synergies of the deal has been unsuccessful. ConAgra has struggled to expand its private label business despite a growing private label sector. It has been unable to respond to increasing competition and shrinking margins. Cost-cutting has a place, but it can’t grow revenues or help your business stand out from the competition. This is why I recommend against focusing on cost savings in M&A. You can only reap the benefits of cost synergies once and then you need a new plan for growing your business.

Rather than focus on cost cutting, successful acquirers target adding long-term growth to business.

There are many reasons for acquisition other than cost-cutting, including:

  • Adding a new technology or capability
  • Entering a new market or sector
  • Adding talent
  • Enhancing your brand and reputation with customers
  • Blocking a competitor

Acquisition is a costly undertaking, both in terms of finances and time. ConAgra spent about a year and a half chasing Ralcorp only to divest it less than three years later. Don’t let your acquisition efforts go to waste. Make sure you have a compelling strategic rationale for the deal — one that is focused primarily on growth.

Photo Credit: Neubie via Flickr cc

I decided to answer a very basic, but important question about M&A, given that we often talk about strategic acquisitions.

Q: What’s the difference between a financial and a strategic buyer?

A: A financial buyer brings little inherent value to the transaction. Typically they bring capital and capital allocation knowledge, but usually no specific knowledge about the technology, application, or customers of the seller.

On the other hand, strategic buyers do have specialized knowledge about a particular market or product that will add value to the transaction, or what we call “synergies.” Synergies typically come in two forms – cost reduction or increasing revenues. Acquisitions that bring real value are focused on the revenue growth side rather than on cost-cutting. You can only cut costs once, but done right you can continue to grow revenue for years to come.

For example, although a strategic acquirer may be able to cut costs by consolidating overhead and admin expenses, that hopefully is not the only reason for the acquisition! It might be that the seller’s technology is complementary to the buyer’s and can be used to grow market share through cross-selling. In a recent example, Verizon just closed on its acquisition of AOL for its mobile advertising technology. Verizon is a huge mobile carrier and has expertise with mobile phones and an understanding of the technology and business. Adding mobile advertising is another way it can increase revenues with its current customer mix, especially as more and more people acquire smartphones.

For strategic acquirers, the focus of the acquisition should be on long-term growth for the entire business. Most strategic acquirers will buy a company and keep it rather than sell it after a few years to make a profit, as private equity groups tend to do.

Robust mergers and acquisitions activity is often an indicator of economic growth, but the recent flurry of deals do not reflect a confidence in the economy, Andrew Ross Sorkin writes in Dealbook.

Revenue growth of US companies has declined from 11.2% in 2010 to 5% to 2020, a Citigroup report indicates.  “Strategic actions such as M&A…have become a key priority to generate growth in the current environment. The lack of an organic impetus to growth is apparent in the outlook for capital expenditures.”

For many companies, acquisition is a powerful tool for growth when organic growth stalls. In today’s market, strategic acquirers are pursuing acquisitions in order to grow their business in the future.

If you’re facing a similar situation, proactively considering strategic acquisitions is a wise move. You may be growing this year, but what do your growth prospects look like down the road in five or ten years? Being proactive, rather than reactive, will put you a position that allows you to choose what you want. You will have more flexibility in considering the best acquisition prospects that meet your criteria and have more time to develop and execute your plan. Waiting until the last minute typically makes the process more difficult and limits your options.

Another trend to watch out for is cost cutting, which remains one of the main reason for executing deals in today’s market. While cost savings can be a legitimate reason for acquisition, I will raise a cautionary flag. Cost cutting is rarely a long-term growth strategy. You can only reap the benefits from cost saving synergies one time. Once you’ve trimmed the excess – closed a plant, realized tax savings, consolidated general overhead expenses – you have to ask yourself, “What’s next?” Strategic acquirers should remember to consider acquisitions in context of their overall growth strategy.

Many people begin pursuing M&A by listing possible companies to buy. But there’s a far better approach when you’re planning an acquisition.

While a prospect company may look exciting today, a closer inspection can reveal it is operating in a a shrinking market. If you’ve invested all your resources pursuing one company only to find its future growth prospects are dim, you’ve unfortunately wasted lots of time and effort. You have to return to the beginning of the process and start all over again. This situation is all to common in my experience, which is why I recommend looking at markets before looking at companies.

The main benefit of a “markets-first” approach is that it allows you to identify and follow future demand. What your customers or potential customers will want in five or even ten years is key to any company’s success.

Learn more about the “markets-first” approach in our upcoming webinar,”How to Pick Top-Notch Markets,” on June 18.

View our full webinar calendar.

“I always take control, but I did not buy 51 percent. Control doesn’t have to be 51 percent. I think people get confused by that.” Marcus Lemonis comments about minority investment on Squawkbox are spot-on.

When asked to elaborate, he explained, “I just document everything: full financial control, full operational control. I can have 10 percent [invested in a company]…and I’m still going to [run it]…”

When I speak with executives or owners about minority investment as an option, I usually hear the same pushback: We don’t want to do minority investment because we want to control the business. Well, as Lemonis’ comments demonstrate, control and minority investment are not mutually exclusive. You do not need a majority stake or 100 percent acquisition in order to have control.

Perhaps you do not have sufficient funding to acquire 100 percent of a company, or you would like to diversify your investments. You may still be able to use minority investment to achieve your strategic goals. Find out what parts of the business are important to your growth strategy and write them into your purchase agreement. Perhaps you need full control over one specific product line of the business. Make sure to document your desired level of control in the agreement.

Another idea is to build an option for purchasing further shares or a complete buyout into the agreement. You can even make this option contingent on specific performance conditions.

Minority investment is one of those pathways to growth that’s often overlooked. Don’t let this opportunity pass you by because you have misconceptions about “control.”

Check out Lemonis’ full interview on Squawkbox.

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“How often do you get involved in a situation where a company is pursuing a ‘usual suspect’? And how do you handle it?”

This question was asked after Capstone’s presentation on “How to Pick Top-Notch Markets” by Project Manager Matt Craft and Managing Director John Dearing at the Virginia Economic Development Partnership’s VALET spring meeting.

This is an excellent question because the situation is extremely common. A “usual suspect” is a company that easily comes to mind because you already have an existing relationship. It may be a supplier, competitor or industry partner or it may be a company owned by your CFO’s sister. Naturally, because “usual suspects” are the easiest prospects to find, many companies begin their M&A search with them.

There’s nothing wrong with looking at them, but because of your pre-existing relationship it may be difficult to remain objective. In addition, we find that many times clients are only considering one familiar company and no other options.

When studying a usual suspect, we recommend taking a step back to remain strategic and objective throughout the M&A process. Use strategic criteria to objectively assess the company. How does the company align with your strategy? Is it really a good fit? Or have you been blinded by love?

We also recommend considering at least two other companies so you have three options for the sake of comparison. Without a comparison, by default the usual suspect will be the best and only prospect. If it’s truly the best prospect, it will withstand the scrutiny of criteria and comparison to other companies. You may even find that one of the other options is actually a better fit for your company

We know it’s difficult to say “no” to the usual suspect, especially if you have your heart set on it, but remember, acquisition is a huge undertaking. You cannot afford to make a decision based on emotion or incomplete information. Consider multiple options and use strategic criteria to make the best decision about your acquisition prospects.

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Learn more by attending our webinar “How to Pick Top-Notch Markets.”  Click here to register.