Mergers and Acquisitions

It seems like 2017 will be a strong year for acquisitions. A new report highlights a number of factors that could drive activity this year including the record levels of cash held by private equity firms and a favorable lending environment for borrowers.

Potential changes to U.S. tax policy under the new administration could reduce the corporate tax rate and encourage companies to repatriate offshore cash to invest in acquisitions.

2016 was a year full of uncertainty, from Brexit to the U.S. presidential elections, but as the economic and political landscape stabilizes, business leaders are regaining their confidence. 80% of executives surveyed predict M&A activity will increase in 2017. These market conditions may be the right recipe for increased acquisitions, especially for companies facing poor organic growth prospects.

In the first quarter alone, a number of significant transactions have been announced including the owner of Burger King and Tim Horton’s acquiring Popeyes, Mars acquiring pet hospital company VCA, and Intel pushing into the self-driving car space by purchasing Mobileye. These deals will likely spur additional acquisitions as key players react to changing industry dynamics and competition.

While we don’t know if M&A in 2017 will match 2015’s record level, we can certainly expect an uptick in activity for the remainder of the year.

Photo credit: Igor Trepeshchenok / Barn Images 

3M, the maker of Post-it, will acquire Scott Safety from Johnson Controls for $2 billion to build up its safety division. This is the second largest acquisition for 3M after its purchase of Capital Safety, a maker of fall protection equipment such as harnesses, lanyards, and self-retracting lifelines, from KKR & Co. for $2.5 billion in 2015.

Scott Safety’s products include respiratory-protection products, thermal-imaging devices, and other products for firefighters and industrial workers. The company will become a part of 3M’s safety division, which accounts for 18% of the company’s sales in 2016 and is the second largest division.

3M is using acquisitions to boost slow growth in the US and to combat industry challenges in the consumer and electronic sector. In 2016, 3M executed a number of acquisitions and divestments as part of its realignment strategy. The company sold its temporary protective films business, safety prescription eyewear business, and pressurized polyurethane foam adhesives business. 3M also purchased Semfinder, a medical coding technology company.

Here are two lessons for leaders who are thinking about company growth.

1. Acquisitions can jumpstart growth.

When organic growth options such as, opening a new store or adding new products, fail to grow revenue significantly, it may be time to look at external growth. Strategic leaders evaluate shifting industry dynamics to anticipate future demand and then use acquisitions to reposition their companies to capture a share of the high-growth market. When completed, the acquisition of Scott Safety will add 1,500 employees, $570 million in revenue, and a slew of products immediately to 3M’s safety division.

2. Acquisition isn’t just about getting bigger.

Acquisition is truly about recalibrating your business and focusing on strategy. Although 3M is acquiring Scott Safety, the company also divested of a number of businesses in 2016 and is paring down from 40 business units to 25.

On the other hand, the seller, Johnson Control is also realigning their business with this divestment. “Consistent with our priority to focus the portfolio on our two core platforms of Buildings and Energy, we continue to execute on our strategic plan.” said Johnson Controls Chairman and CEO Alex Molinaroli.

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You do not need an M&A advisor to pursue acquisitions. You might think I’m crazy for saying this, after all, we are M&A advisors, but the truth is you can pursue acquisitions on your own. In fact, for those of you who are so inclined to take the do-it-yourself approach, I lay out a step-by-step process, the Roadmap to Acquisitions, in my book Successful Acquisitions and regularly provide tips and tricks for free on this blog and through my firm’s educational resource M&A U™.

That being said, there are many benefits to bringing on an experienced M&A advisor. Think of it this way: Technically, you do not need a CPA to do your taxes. Depending on your situation, you may be able to go through the paperwork, file your taxes on your own and hope you don’t get audited. Or, you could consult an experienced professional and rest easy, knowing the job will be done right.

The advantage of an M&A advisor is having an expert by your side for every step in the process. Unfortunately, especially if your company has never done an acquisition, it’s difficult to tell if you are missing any important steps until it’s too late. An experienced advisor will help you navigate the process and avoid making mistakes.

Here are five advantages of using a third party:

  1. Objective outsider to help evaluate decisions – Acquisitions can be emotional and as a third party, an M&A advisor can help facilitate discussions and resolve conflicting perspectives.
  2. Experienced market and company research team – In addition to accessing to multiple databases of industry information, a third party can speak directly to key industry players without giving away your interest in making an acquisition.
  3. Discreet approach to owners – One of the advantages of privately-held acquisitions is the ability to execute your strategy under the radar. An M&A advisor can approach companies – even competitors – on your behalf without exposing your plans to marketplace.
  4. Maintain negotiation momentum and overcome roadblocks – Negotiating during acquisitions is not about “winning,” it’s about understanding the motivators that will prompt an owner to sell. It takes experience to discover these underlying desires that will help move the deal forward.
  5. Ensure early preparation for success integration – When it comes to integration, experience has taught us that preparation begins very early in the process, well before the deal is consummated. With the help of an advisor, you can address integration issues early so that you successfully weather the challenging first 100 days of integration post-closing.

Does this sound familiar? You want to grow through acquisitions, but there are no good companies to acquire. While it may seem like there are absolutely zero acquisition prospects, usually that is not the case.

Many companies struggle to find acquisition prospects because they are focusing on only on industry partners, suppliers, or competitors they already have a relationship with. We call these companies the “usual suspects.” There’s nothing wrong with looking at the “usual suspects” for acquisition opportunities, but if you find you are hearing the same company names over and over again without getting any results, it may be time to try a new approach.

Here are four more ways to find quality acquisition prospects in addition the “usual suspects”:

  1. Market Research – In researching the market you will naturally uncover a few potential acquisition prospects. You will also have the advantage of gaining a deeper understanding of the market which will help you select the best companies to acquire, evaluate potential acquisition candidates, and negotiate with owners.
  2. Trade Shows / Associations – Both are an excellent source for finding many companies in your desired industry in a short amount of time. Walk the floor of a trade show and you’ll see dozens of companies all in one location and many trade associations also member companies listed on their website.
  3. Internal Input – Use the resources you already have. Your sales team is filled with folks who have their ear to the ground and are up-to-date on key players and new developments in the industry.
  4. For-sale Companies – Looking at for-sale companies is never a bad place to start your search. Just make sure you don’t limit yourself by only considering these opportunities. Including not-for-sale companies in your search will increase your chances for a successful acquisition. Remember, every company is for sale, for the right equation.

For more tips on finding companies to acquire join our webinar Building a Robust Pipeline of Acquisition Prospects on March 23.

After this webinar you will be able to:

  • Approach the search for the right acquisition prospect systematically
  • Understand effective research methods for identifying prospects
  • Develop criteria for your ideal acquisition prospect
  • Use tools for objective decision-making during the acquisition process

Building a Robust Pipeline of Acquisition Prospects

Date: Thursday, March 23, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available.

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The media industry is going through a wave of consolidation as traditional players try to adjust to changing consumer habits. Demand for traditional media like print newspapers, cable TV, magazines, and landline phones, has decreased as streaming, mobile and digital media becomes more popular. As this trend continues, businesses will continue acquiring to capture consumers, build economies of scale and monetize content in order to stay profitable and grow. Here are three interesting transactions in the telecommunications, media and entertainment sector.

AT&T to Acquire Time Warner

AT&T plans to acquire Time Warner for $85 billion in one of the biggest media acquisitions in history. The telecommunications provider is eager to get its hands on Time Warner’s popular channels, such as HBO and CNN, in order to compete with rival Verizon, which recently acquired AOL and is in the process of acquiring Yahoo!. Time Warner plans to sell Atlanta broadcast stations to Meredith Corp in order avoid an antitrust review.

Sprint Acquires a 33% Stake in Tidal

Sprint acquired a 33% stake in Tidal, an online music streaming service owned by rapper Jay Z. By pairing Sprint’s pipeline of mobile phone customers with Tidal’s music and video content, the companies can be more powerful and reach more consumers.

In some ways this deal is a realization of the infamous Time Warner – AOL deal where they tried to leverage AOL’s infrastructure to distribute Time Warner’s content. While that deal is largely considered a failure, times have changed and Sprint and Tidal have a chance to get the integration right. While Time Warner and AOL tried a “merger of equals,” Sprint has acquired a minority investment in Tidal for $200 million.

Hollywood Reporter – Billboard Media Purchases Music Brands from SpinMedia

The Hollywood Reporter-Billboard Media Group will acquire four brands, Spin, Vibe, Steroegum, and Death and Taxes, from SpinMedia in order to establish the largest music brand by digital traffic, social reach and audience share. The Hollywood Reporter – Billboard Media Group’s strategic rationale is to reach millennials and aggressively enter into the video market.

I was recently interviewed about this deal in The Street:

“One of the challenges in today’s media environment is how do you remain relevant, so by combining these business brands and in particular by focusing on the music space, I think strategically the deal makes sense.”

As technology advances and consumer behavior continues to evolve, media companies will continue acquiring in order to stay relevant and most importantly, profitable.

Not finding the right company to acquire is the top challenge for middle market companies seeking to grow through mergers and acquisitions. According to Capstone’s survey of middle market executives, 28% noted lack of suitable companies as the strongest reason for not considering acquisitions as a tool for growth.

Finding the right company to acquire is critical to the success of a deal, especially for strategic acquirers who plan to hold onto the newly acquired business long-term.

The lack of targets may be because most leaders are only focusing on for-sale companies. Many wrongly assume that if an owner is not actively seeking a buyer, a there is no chance for a deal. This is simply not the case. Once you begin to consider not-for-sale acquisitions, the universe of options expands.

Pursuing not for-sale acquisitions allows you to take charge of your acquisition strategy and seek out the best companies to acquire rather than accepting whatever opportunity happens to come your way.

For many I realize the idea of pursuing not-for-sale deals can be intimidating, and many assume that if an owner is not actively selling their company that there is no chance for acquisition. This is simply not true. While searching for and approaching companies that aren’t seeking buyers requires a different approach, and more effort, than reacting to whatever happens to be for sale, there are some tricks to approaching these owners.

Finding an Owner’s “Hot Buttons”

One of these best practices is to find the owner’s “hot buttons” to determine what the right equation will be for them to consider selling. A “hot button” is any issue an owner would insist on addressing if they were to sell the company. Price might be one such “hot button” but it’s unlikely to be the only one. The owner may love his or her work, in which holding a position after the acquisition would be a priority. There may be a succession issue if the owner has family members in the company they want to take care of. The owner could have longstanding ties to the community—or may even be the biggest employer in town—and would want to ensure the business stays in the area.

Being informed about these “hot button” issues, and handling them sensitively, opens up the whole field of so-called “not-for-sale” companies.  Now, as you develop your acquisition strategy, you have far more choices, and much better chance of finding the company that truly matches your over-riding strategic goal.

Because approaching “not-for-sale” owners takes great skill, it often it makes sense to hire a third party expert who has experience in this work and is not perceived as any kind of competitive threat by the owner.  Your acquisition advisor can also help you tease out the precise equation that would prompt the owner to sell.

For more insights on middle market M&A, download our report State of Middle Market M&A 2017.

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Capstone Strategic’s survey of middle market executives shows most see the same (43%) or growing (31%) M&A activity in their industry. 47% are pursuing M&A in order to access new markets.

Capstone Strategic, the leading M&A advisory firm for the middle market, surveyed middle market executives from multiple industries on their growth and M&A experience in 2016 and their outlook for 2017. The survey was conducted in December 2016 and followed previous annual surveys of the middle market.

M&A activity across the board is mostly seen as the same (43%) or growing (31%).

Looking forward, our respondents are evenly split on whether or not they will pursue M&A in 2017. 35% are less than 50% likely to execute acquisitions and 35% are more than 50% likely. The top driver for pursuing M&A this year is access to new markets (47%).

As for obstacles to M&A, time and attention demanded by the process is the top barrier to pursuing acquisitions in 2017 (25%) while the most common reason for not considering M&A as a tool for growth is lack of appropriate target companies (28%).

The overall growth picture is improving. Those reporting modest growth rose from 58% in 2015 to 67% in 2016 and those reporting high growth grew from 11% in 2015 to 13% in 2016. Those reporting contraction shrunk from 9% in 2015 to 5% in 2016.

The business environment is seen by most in a positive light, with the majority reporting the same (50%) or an improved (35%) environment for growth. Compared to 2015, fewer executives saw a worsening environment for growth (8% compared to 13%).

Capstone’s CEO David Braun said: “The survey confirmed that 2016 remained an active year for middle market mergers and acquisitions and looking ahead, we believe we’ll see begin to see a renewed interest in M&A activity due to pent up demand and supply in the marketplace. 2017 presents a unique opportunity for companies that decide to execute strategic acquisitions.”

The full survey, State of Middle Market M&A 2017, can be viewed by clicking here.

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Burgers, coffee and fried chicken will soon be under one roof. Restaurant Brands International Inc., the parent company of Burger King and Tim Hortons is acquiring Popeyes for $1.8 billion. The deal is expected to close in April.

Restaurant Brands hopes to use its global reach to expand Popeyes restaurants internationally. Currently, Popeyes, which primarily sells fried chicken, has over 2,000 restaurants worldwide with 1,600 located in the U.S. Popeyes revenue in 2015 was $259 million.

3G Capital, a Brazilian private equity firm, owns a 43% stake in Restaurant Brands, and has orchestrated multiple acquisitions of U.S. consumer companies, including Burger King’s acquisition of Tim Hortons in 2014 which formed Restaurant Brands, and the Kraft – Heinz merger in 2015. Earlier this week Kraft – Heinz attempted to acquire Unilever for $143 billion but was rejected. 3G Capital tends to “squeeze” profits out of its acquisitions through cost cutting and leveraging economies of scale. The real question this time will be if 3G can grow Popeyes into an international brand to rival the most dominant chicken fast food restaurants, which include Chick-fil-A, which is privately owned, and KFC, which is owned by Yum! Brands Inc.

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We usually think acquirers are big, multinational companies that gobble up their smaller competitors. However, that’s not always the case. Hudson’s Bay, which has a market value of $1.5 billion, is interested in acquiring Macy’s, which has a market value of $9.4 billion.

This transaction challenges common perceptions about acquirers and sellers and demonstrates that for the right strategic reasons, acquisition can be used as a growth tool by any company. While a smaller company acquiring a larger one is not the norm, it does happen. And, in this case, Hudson’s Bay could use Macy’s to expand its retail presence in the U.S. with another well-known department store. It would be difficult, if not impossible, for Hudson’s Bay to build up the reputation and name brand of Macy’s organically.

Hudson’s Bay, headquartered in Toronto, is an active acquirer and has a history of success in growing struggling retailers and optimizing value from its real estate. It acquired its affiliate Lord & Taylor in 2012 and Saks’s Fifth Avenue in for $2.4 billion in 2013. One year later, the Manhattan Saks Fifth Avenue store was valued at $3.7 billion. Hudson’s Bay has also made other acquisitions including German retailer Galeria Kaufhof for $2.8 billion in 2015 and Gilt Groupe for $250 million in 2016.

It will be interested to see how the transaction is structured and how Hudson’s Bay plans to tackle the challenges Macy’s is facing. Macy’s, like many traditional retailers, is struggling to keep up with market changes. The store is currently in the process of shutting down 100 stores and is planning to cut 10,000 jobs after facing disappointing fourth quarter sales. Perhaps an acquisition will save Macy’s? Only time will tell.

If you are thinking about growing your business, I encourage you to consider strategic acquisitions. Despite what you may think, there are many more options than just a large company acquiring 100% of a smaller company. I hope the example of Hudson’s Bay and Macy’s helps you gain a better understanding of what options might be available for you.

Learn more! Download the whitepaper Nine Pathways of External Growth.

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Sears, which was once a thriving department store, is dying a slow death and the company is grasping for cash in order to stay afloat. Last year, Sears borrowed $200 million from CEO Eddie Lampert’s hedge fund and most recently Sears agreed to sell Craftsman to Stanley Black & Decker. Under the terms of the acquisition Sears will get a cash payment of $525 million followed by a payment of $250 million after three years. It will also receive royalties from the sales for Craftsman for the next 15 years. Stanley Black & Decker is focused on strengthening its position in the tool market. In October 2016 the company announced it would acquire the tool business of Newell Brands, which includes Irwin, Lenox and Hilmor, for $1.95 billion.

From Success to Struggle

So how did Sears go from successful department store to its current situation? Of course many retailers have been hit hard – not just Sears. Faced with competition from online stores, traditional retailers are struggling to keep up. Macy’s is in the process of closing 100 stores in order to cut costs and Walmart is now offering free two-day shipping when shoppers spend at least $35 in order to compete with Amazon.

But, we can’t blame everything on competition. Competition is the very nature of business and there will always be changes to in the industry, which are beyond your control. It’s up to leaders to anticipate these changes and proactively develop a strategy in order to survive and even thrive when times are tough. Instead, Sears did nothing. Sears is not the only company to fall into this “strategy.” When things are going well, or at least satisfactorily, it’s easy to get comfortable and keep doing the same thing.

However, the result of doing nothing can be disastrous for your business. Think about Montgomery Ward, which was the Amazon of the 1800s, accepting and delivering orders by mail. But now the company doesn’t even exist. If Sears wants to avoid the same fate, it will need to be more innovative to fix its long term growth problems. Getting cash now is a temporary solution and it will be interesting to see what steps the company takes once they get the cash.

Are You Doing Nothing?

For business leaders today, I urge you to take a serious look at your business and marketplace. Don’t let yourself get too comfortable or get too caught up in the day-to-day tasks that you neglect the bigger picture. Any company that doesn’t remain on its toes can succumb to doing nothing.

No matter your current situation, you should always think about what could happen next and question your assumptions. Just because your plan works now, doesn’t mean it will work in the future. Where might the market be headed to tomorrow? In five years? Set aside time to look at your business strategy to make sure you answer these questions.

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Many company owners and executives know that M&A could hugely accelerate their growth. But they hold back for several common reasons. Let’s take a look.

1. “There Are No Suitable Companies to Buy”

You’re probably right—almost. There are no suitable companies for sale. That does NOT mean there are no great companies to buy. You just have to look beyond those that are marked “for sale”. Generally, it’s much better to pursue not-for-sale companies, for a host of reasons. The company is less likely to have problems; you won’t be competing with other buyers; and no one need know about the transaction until it’s complete.

2. “If a Company Is Not for Sale, I Can’t Buy It”

Every company is for sale… for the right equation. Note the word here is “equation” not “price”. Many owners would be glad to sell if they could find a buyer with the right vision, and who understands their unique (sometimes very personal) needs — for example to look after family members employed by the firm, or keep the company brand unchanged, or provide certain special benefits with the deal. Click to continue reading on The M&A Growth Bulletin.

This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.

Mars, the maker of M&Ms and Snickers, will acquire VCA, a veterinary company, for $7.7 billion. VCA owns about 800 animal hospitals a lab business and dog day care franchises and has about $ 2 billion in revenue.

Although it may seem strange for a candy company to acquire a pet company, Mars already owns 39 petcare brands including IAMS, Pedigree and Whiskas and the acquisition will make the petcare division the company’s largest. The deal also makes sense for Mars’ long-term growth. The company, like many packaged good companies, is facing declining sales as many consumers today prefer healthy, fresh foods over packaged goods. While the CPG market may be in decline, fortunately, the petcare market is growing. In 2015, $35 billion were spent on vet care in the U.S.

Identify the Right Market for Growth

The transaction illustrates how finding the right market for growth can set you up for long-term success. For Mars, the acquisition of VCA is an opportunity to capitalize on a booming sector.

Many companies, when pursuing mergers and acquisitions think about a list of companies to buy and don’t spend much time analyzing the market. Unfortunately, this may mean acquiring a company that despite being a winner in today, is in a declining market.

Take the time to conduct a market analysis to explore the best opportunities for your company.  When faced with stagnation or contraction in your current market, you can use strategic acquisitions to pivot into a new high-growth market to ensure your long-term success.

What Business Are You Really In?

Another lesson from this transaction is the importance of really understanding your business. It’s easy to go with the most obvious choice when defining our business. If Mars simply stopped short and said “we are a candy company,” this deal would never have been executed. What’s worse, Mars could be facing serious challenges since demand for packaged goods is declining.

It’s important to take a step back and look at the big picture when you think about growing your business. What is your business really about? Don’t understate the power of this simple question. Your answer will impact the trajectory of growth you choose.

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Thanks to advances in science and healthcare, people are living longer than ever. As they age, demand for healthcare products and services increases. One of the most significant demographic trends impacting healthcare is the aging baby boomer generation. As about 75 million American baby boomers grow older, demand for healthcare continue to will increase rapidly.

Today, companies are taking note of these market changes and using acquisitions to quickly capitalize on this opportunity for growth.

Just this week eyeglass giants Luxottica and Essilor announced a merger in order to take advantage of ideal market conditions. The acquisition will allow the company to benefit from strong demand in the eyeglass market that is only expected to grow.

In the heart disease sector, medical device companies are also acquiring in order to meet the growing needs of patients. Medtronic acquired HeartWare International for $1.1 billion, Teleflex acquired Vascular Solutions for $1 billion and Edwards Lifesciences acquired Valtech Cardio for $690 million. In this sector there is “huge unmet needs” according to Edwards Lifesciences CEO Michael Mussallem.

The primary driver of these acquisitions is swiftly meeting demand. Rather than waiting to build their own solutions, with acquisitions companies can rapidly take advantage of market conditions today and position themselves for future growth.

The ability to meet future demand is key to the success of any company. Take a look at your own industry and market. Where is demand going?

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Global M&A reached $3.7 trillion in 2016, dropping 16%, and the number of deals increased slightly by 1% when compared to last year. While 2016 did not match 2015’s record-levels, activity was still robust. Compared to 2014, activity increased by 5%.

Activity in the fourth quarter reached $1.2 trillion with 13,504 deals announced, a 50% increase in deal value and 18% increase in the number of deals when compared to 3Q 2016. This year, there were a number of interesting deals to note, including the AT&T’s acquisition of Time Warner transactionVerizon’s deal with Yahoo, and GE Oil and Gas combining with Baker Hughes.

Click on the infographic for a closer look at M&A in 2016.

M&A Update Year End 2016 - Capstone Infographic

The Street interviewed Capstone CEO David Braun for the article “Hollywood Reporter-Billboard Media Likes Sound of SpinMedia’s Music Brands.”

In the article David Braun analyzes the deal’s strategic rationale and discusses how traditional media businesses can continue to grow amidst a changing environment. As print media declines and digital media consumption rises, traditional publishing and communication companies must find new ways to stay relevant, capture market share and most importantly revenue.

Read the full article on The Street here: Hollywood Reporter-Billboard Media Likes Sound of SpinMedia’s Music Brands.”

When you think growing your business in 2017, you probably picture hiring more sales people, opening a new branch, developing additional products or acquiring state-of-the-art technology. Today I want to introduce a new concept for consideration: growing by exiting a business. Before you immediately dismiss the idea, take a moment to challenge your assumptions about company growth and allow yourself to be open to a new perspective. The reality is in some cases exiting may be the best path for growing your company.

Here are three ways exiting can help you grow.

  1. Get Focused – By exiting non-core business lines you can be focus on what you’re really good at. Take P&G for example. Over the last few years the company has adopted a strategic focus and shed over 105 brands in order to focus on 10 fast-growing categories. Shedding these non-core business lines will help P&G become more profitable. You may have some business lines you want to divest so that you can refocus your strategy and resources on what you truly excel at.
  2. Avoid Losses – If a part of your business is no longer profitable, you should evaluate whether or not you should keep going. Maintaining a business simply because you’ve always done so is not a good reason. The world changes and it may be that your customers no longer have a need for this product. For example, it would be crazy to continue manufacturing VCRs in today’s world.
  3. Grow Your Bottom Line – While overall sales or number of customers may shrink if you exit a market, your overall profit may grow. We once worked with an American manufacturer who made millions of die-casting products for various industrial customers. Unfortunately, many of their customers were purchasing cheaper products from China. Faced with this competition, our client decided to reinvent themselves into a maker of specialty components for the aerospace industry. They sold their old equipment and purchased the latest technology. As a result, their customer base shrunk tremendously, but profit rose.

When we hear the word “growth,” we automatically think about “more,” “bigger,” “expanding” not “less,” “smaller” or “shrinking.” While many would never consider exiting a business in order to grow, I encourage you to consider it as you develop your strategic growth plan.

Learn more about growing your business in our webinar 5 Options for Growth.

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2016 continued be a strategic, rather than a financial buyer’s market and strategic buyers deployed large cash reserves to pursue growth through M&A. Unlike financial buyers, which typically look for a three to five years return on investment, strategic buyers can afford to pay more due to their long-term focus.

The middle market has been eager to use M&A as a viable tool for growth. Despite a challenging economic environment, activity in the middle market remained stable in 2016, dropping only 3.5% in 3Q 2016.

As we close out 2016 and look forward to 2017, here is a roundup of the most popular posts of the year from the Successful Acquisitions blog.

  1. The Most Important Thing about M&A According to Warren Buffett
  2. 10 Signs You Should Walk Away from a Deal
  3. M&A Activity after the U.S. Election: Analysis and Outlook
  4. 7 Strategic Questions to Ask Before Pursuing Mergers & Acquisitions – New Webinar
  5. How to Avoid Irrational Decision-Making in M&A
  6. 5 Tips for Taking a Strategic Approach to M&A in 2016
  7. Is Middle Market M&A on the Rebound?
  8. Growth Through Acquisition – Exit Readiness Podcast Interview
  9. How to Break Bad News without Sinking Your Acquisition
  10. What Is Happening with Valuation Multiples Today?

Thank you for reading and we will see you all in 2017.

Photo Credit: Barn Images

2016 has been a year of surprises with the U.K. voting to leave the European Union, fears over China’s economic slowdown, oil price slumps, and Donald Trump winning the U.S. presidential election. Despite these shocks to the market, 2016 will likely be the third best year for global mergers and acquisitions in the past 10 years and dealmakers predict that 2017 will be even stronger.

2017 Outlook

There are many factors that may contribute to robust M&A activity next year. Capital remains available and cheap and in the latest Livingston Survey from the Federal Reserve Bank of Philadelphia, economic forecasters have strengthened their outlook for the U.S. economic environment and their predictions for stock prices. The possibility of tax reform under the new presidential administration may also boost M&A activity. Most importantly, CEOs remain confident and willing to execute deals to grow their businesses.

Geopolitical upsets like Brexit and the outcome of the U.S. presidential elections may dampen activity as some may wait to see how these situations will affect their business and the marketplace. Changes in the interest rates may also reduce activity in some sectors, but create new opportunities in others such as financial services.

Top Sectors for 2017

Strong activity is expected in the following sectors:

  • Consumer product
  • Telecommunications, Media and Technology (TMT)
  • Industrials
  • Healthcare
  • Financial services
  • Oil and gas

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The demand for “healthy” or “better for you” food and beverages continues as consumers become more health conscious. Following this trend, Dr. Pepper Snapple (DPS) has agreed to acquire Bai brands, the maker of antioxidant and other “all natural” drinks for $1.7 billion. Founded in 2009, Bai has about $300 million in revenue and 373 employees. The acquisition is one of the biggest for DPS and the first major one since it spun off Cadbury Schweppes in 2008.

Demand for Soda Shrinking

Soda companies are faced with shrinking demand for their traditional products and increased competition from new healthy products both from large food manufacturers and startup brands.

Many recognize the need to expand their portfolios in order to continue to grow. Recently Coca-Cola acquired Unilever’s Soy drink business and PepsiCo agreed to acquire KeVita, a probiotic drink maker. Both companies also own a number of “healthy” brands. Coca-Cola owns Dasani water, Honest Tea, PowerAde and Vitamin Water and Pepsi owns Gatorade, Tropicana, Lipton Teas, and Aquafina.

While the multiple for this transaction is on the higher end, DPS is acquiring the potential growth opportunities Bai presents.

Thinking strategically, this acquisition will add breadth to DPS’s product line. DPS hopes to grow the business by filling its existing pipeline and distribution expertise with Bai’s products. By going healthy, DPS may be able to grow despite the declining popularity of soda.

From Strategic Alliance to Acquisition

Sometimes business leaders and owners shy away from acquisition because they are overwhelmed by buying an entire company. It is important to remember that there are many options and tools available to you when it comes to external growth, from strategic alliance to joint ventures to minority interest to a majority stake to 100% acquisition. All of these options should be considered to determine which path is right for your business.

The DPS – Bai transaction did not begin at 100% acquisition. Instead, DPS began with a strategic partnership, then later acquired a minority stake for $15 million in 2014. With minority interest DPS could gain some of the upsides of Bai’s growth, while also mitigating the risks associated with a new relatively and unknown product. Once Bai continued to grow and proved its profitability, DPS decided to acquire the entire business.

Minority investment is often used as a foothold to get your toes wet with an option to acquire the entire company later, depending on what makes the most sense for your business.

As expected, Verso is consolidating locations and moving its headquarters from Tennessee to Ohio. Verso purchased NewPage Holdings for $1.4 billion in January 2014, but later filed for Chapter 11 bankruptcy. While Verso has emerged from bankruptcy, the company is not out of the woods yet.

“You’ve got a wounded company cutting staff, and that hurts morale,” says Capstone CEO David Braun in The Memphis Business Journal. David says Verso will have to do more than simply cut costs in order to be successful in the long-run. Read the full article here: Even after move, Verso will have more cuts to make