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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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.
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?
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%.
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.
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.
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:
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.
One month after the U.S. presidential election, there is still a great deal of speculation about what will happen in the M&A market over the next year. Looking back at M&A activity so far this year, compared to 2015 activity, fewer and smaller deals were announced. During the first 9 months of 2016, M&A value dropped by 30% to $1.07 trillion and average deal size dropped by 22% to $132 million. This year we have seen fewer huge, double-digit billion dollar transactions which dominated the marketplace in 2015.
Part of the reason is that historically, leading up to a presidential election where there will be a change of administration, there’s been hesitation in the marketplace. Business people don’t like uncertainty and as a result are less likely to take action.
The outcome of the election caught a number of people off guard, and we have already seen some impact in terms of some deals that are getting re-priced, accelerated or delayed in response. For example, in the healthcare space there’s uncertainty about how the Affordable Care Act will be impacted and we’re seeing a pullback in deals that touch upon it.
Despite this, over the next 24 months we expect an uptick in M&A. We’re already seeing a strong pipeline of deal activity as a result of the election being behind us. The business climate is still somewhat unsettled, but there’s a sense of relief the election is over.
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.
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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.
Seeking growth amid a shifting telecommunications industry, AT&T has bet on media content. The company plans to acquire Time Warner for $85 billion in one of the biggest media acquisitions in history. The transaction will likely take over a year to receive regulatory approval, but both AT&T and Time Warner executives are optimistic. AT&T CEO Randall Stephenson has compared the deal to Comcast’s acquisition of NBC Universal in 2013, which was approved after a long period of regulatory scrutiny. This vertical merger will bring together Time Warner’s media content and AT&T’s distribution network in one company.
Telecommunications and media companies are starting to take notice of these trends. Just last year AT&T’s biggest rival, Verizon, acquired AOL in a push to reach more mobile users. And earlier this year, it announced it would acquire Yahoo to boost its mobile unit.
AT&T may also plan to create original, exclusive content leveraging Time Warner’s expertise in media. Online streaming services such as Netflix and Amazon have successfully produced their own original content.
In the long term, AT&T wants to build up a robust, next-generation infrastructure in order to compete with cable providers. “I will be sorely disappointed if we are not going head-to-head” with cable providers by 2021, said Stephenson.
Growing in a Declining Market
As demand for traditional telecommunication services shrinks, AT&T and other providers must look outside their current market for new growth opportunities. In a declining marketing, consolidating, or simply gaining more market share will not help you grow in the long term. If AT&T managed to capture the entire market for landline phones, their revenues would still shrink as consumers abandon landlines.
By acquiring Time Warner, AT&T will own content including popular networks such as HBO and CNN. Organically growing its own content business would take time and be difficult given the large size of other media content producers like Disney and CBS. As an established business, Time Warner gives AT&T a foothold in the media market and immediate access to new users.
If like A&T you are stuck in a declining marketing, identifying markets with future demand for your company’s products or services is the key to growth. You can explore future demand by using our tool, the Opportunity Matrix, to understand where you want to position your company strategically looking forward.