M & A News

Just this Sunday, I received an email about the Ritz-Carlton Rewards and Marriott Rewards combining with Starwood Preferred Guest. According to the email and Marriott’s website, the three loyalty programs will be linked, but operate as independent programs. Marriott does not expect to merge the programs any time before 2018.

Marriott Rewards Email

Screenshot of the email announcement on combining the Ritz-Carlton Rewards and Marriott Rewards with Starwood Preferred Guest.

Marriott International first announced it would buy Starwood Hotels and Resorts Worldwide for $12.2 billion on November 11, 2015. The acquisition, which just received anti-trust approval from Chinese regulators, creates the largest hotel company with more than 5,500 owned or franchised hotels and more than 1.1 million rooms. In recent years, the hotel industry has faced competition from alternate lodging like Airbnb, making consolidations more attractive in order to save off competition and leverage economies of scale. Together Marriott and Starwood will generate $2.7 billion in fee revenue and are estimated to save $200 million in the second year post-closing.

Integration Planning Begins at the Start

Even prior to the deal closing, it’s important to begin integration planning. The Marriott and Starwood acquisition closed on September 23 and on day one, they rolled out their loyalty program integration. You can bet they already had this plan in their hip pocket.

The ability to successfully integrate largely depends on planning for and considering integration issues way back at the start of the entire acquisition process. Waiting until the day after the acquisition closes to begin thinking about integration. By then, you should already be executed your plan; it’s too late to begin planning.

The loyalty programs are just one small component of a larger plan to combine Marriott and Starwood. Even in this small piece of the plan, we see Marriott taking a phased approach by linking, but not combining Rewards with SPG. Marriott and Starwood both own a number of high-profile brand name hotels. Marriott faces the challenge of keeping Starwood’s loyal customers, many of who were upset about the merger, so keeping SPG running independently, rather than folding into Marriott Rewards, makes sense.

Determining how much to integrate depends on your strategic reason for acquisition. You may choose to have the seller integrate all of your processes, but other times you may choose to leave the seller alone. In other cases, you may even adopt best practices from the seller. You may also choose to adopt various levels of integration in different parts of your business. While Marriott has chosen to operate the loyalty programs independently, it’s likely it will combine departments like accounting and finance.

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Yahoo says the private information of at least 500 million has been compromised due to a cyber-attack in 2014. In the biggest security breach to date, hackers gained access to sensitive information including names, emails addresses, telephone numbers, birth dates, passwords, and security questions.

The security breach has ramifications not just for Yahoo and its users, but also for Verizon, which is currently in the process of acquiring Yahoo for $4.8 billion. Even though the cyberattack occurred in 2014, Verizon only found out about it last week. As a result of the hack, Verizon could possibly walk away from the deal or renegotiate the price.

The hack on Yahoo highlights the need for functional due diligence in order to identify all critical information that could potentially impact a deal. Leaders tend to focus on financial and legal data during due diligence, however failing to fully research other areas of the business, including cybersecurity, can be detrimental to your acquisition. You don’t want to find a “surprise” after the acquisition closes.

Functional Leaders Critical to Comprehensive Due Diligence

Functional due diligence is one of the best ways to ensure you are making decisions with the most complete data. This means incorporating leaders from each of the functional areas of your business – IT, sales, marketing, operations, accounting, finance – early on in the due diligence process. These leaders are involved in the day-to-day tasks of running the company and have a high-level of familiarity with their functional area. They are specialized experts who can spot problems, identify solutions, and ask appropriate questions that other executives may overlook.

It’s best to have each functional leader develop their own list of questions based on their experience working in the functional area of your business and the overall acquisition strategy. Next, have the functional leaders from your company meet with their respective leaders on the seller’s side to gather the necessary information. Once each functional leader has met with their counterpart, you can compile the individual lists into one comprehensive data set that covers all aspects of your business in thorough detail.

An addition to identifying risks and critical pieces of information, functional leaders can help develop and implement your integration plan. They will be able to anticipate specific integration challenges you may have and help develop solutions to avoid these pitfalls. Involving functional leaders in due diligence increases your chances of a successful acquisition.

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Ford announced it would acquire Chariot, a shuttle-van startup based in San Francisco, in order to expand beyond auto manufacturing and become a mobility company. This is the first acquisition by Ford Smart Mobility, which was established in March of 2016 in order to focus on “emerging mobility services.” Ford reportedly paid $65 million for Chariot.

Chariot uses 100 Ford Transit vans to offer rides to commuters along 28 routes in the San Francisco Bay Area. After the acquisition, Chariot will leverage Ford’s expertise in logistics and vehicle operations as well as use data algorithms to schedule trips in real time. Together Chariot and Ford plan to expand to at least five more markets. Ford already has shuttle programs in Kansas City, Missouri, and Dearborn Michigan. Ford intends to focus on other forms of transportation including bikes, dynamic shuttles and more, according to Jim Hackett, the chairman of Ford Smart Mobility.

Ford will also partner with Motivate to expand a bike sharing program in the Bay Area. Through the partnership, the program will grow to from 700 to 7,000 bikes and be renamed Ford GoBike.

Auto Manufacturing in Decline

To put it nicely, the outlook for auto manufacturing is pretty bleak. Competitors like Zipcar, Uber and Lyft and new technologies have disrupted the traditional automotive industry. Consumers today are buying fewer cars and option for public transportation or car sharing instead. The trend is not limited to millennials, in fact, according to a study published by University of Michigan’s Transportation Research Institute, fewer middle-aged adults in their 30s and 40s had driver’s licenses in 2014 than did in 1983. Ford is by no means the only car manufacturer to see that its market is shrinking. Earlier this year GM invested $500 million in Lyft to invest in self-driving car partnership.

How to Grow in a Shrinking Market

What’s your market outlook? While your business may be profitable today, if you’re in a shrinking market, future growth will be challenging. Faced with a declining market, now is the time to consider your options and next steps to ensure long term growth. You made focus on building your own solution organically or you may decide to partner with another company to rapidly gain access to a new market. In the case of Ford, the acquisition will allow the company to rapidly gain a foothold in the growing market of ride-sharing and alternate means of transportation.

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The credit union industry is evolving. While many credit unions are consolidating through credit union mergers, others are seizing creative opportunities such as adopting cloud technology to improve efficiencies, focusing on underserved markets, and using partnerships and strategic mergers and acquisitions to grow and bring value to members.

One interesting trend to note is credit unions acquiring banks. Since 2011, 11 transactions have been announced. Most recently Family Security Credit Union of Decatur, Alabama announced its plan to acquire Bank of Pine Hill of Pine Hill, Alabama. Earlier this year Royal Credit Union announced the acquisition of Capital Bank in St. Paul, Minnesota, and Advia Credit Union announced the acquisition of Mid America Bank in Parchment, Michigan.

Since 2011, 11 credit union - bank acquisitions have been announced.

Since 2011, 11 credit union – bank acquisitions have been announced.

Credit unions are taking action for a number of reasons including to increase their market footprint, scale with vendors and partners, grow non-interest income, and enhance technology. For many credit unions, strategic mergers and acquisitions can be a way to rapidly achieve growth.

Acquiring community banks is a new type of opportunity for credit unions that adds to their share and geographic reach. For the banks, credit unions are a trusted local partner that can continue to serve the financial needs of their customers. More credit union – bank transactions are expected to be announced before the end of 2016.

While acquiring a bank may or may not be the right strategy for your organization, being proactive and developing new strategies for growth is incredibly important in today’s environment. Credit unions are faced with new challenges every day from the rising cost of compliance to the increasing threat of hackers and cyber security issues to generating member-friendly non-interest income. It is abundantly clear that remaining stagnant and going about business as usual is no longer an option. Credit unions that address these challenges head-on and adapt new strategies will continue to grow and serve the needs of their current members and new members.

I am excited to announce the launch of our new quarterly newsletter, The M&A Growth Bulletin. This newsletter will deliver essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market.

In the first issue of The M&A Growth Bulletin, we will address five common objections leaders have to M&A and how you can use acquisitions to accelerate your growth. The newsletter will also include tips for strategic growth and highlight interesting deals in the news. These valuable articles will be published exclusively for the M&A Growth Bulletin and accessible by subscribers for free.

The first issue will be published at the beginning of September. Subscribe now if you’d like to have The M&A Growth Bulletin delivered straight to your inbox each quarter.

Photo Credit: Barn Images, Modification: “M&A Growth Bulletin” text and M&A U™ logo added by Capstone Strategic, Inc

Walmart will acquire web retailer Jet.com for $3.3 billion in order to boost its online business. The deal is the largest ever purchase of U.S. e-commerce startup. While Walmart has plenty of bricks and mortar stores, the company has struggled to grow its online business. Walmart knows it needs to be competitive with Amazon who has branched out into selling groceries and other consumer goods traditionally bought at stores. It’s no secret that e-commerce is on the rise. We now have a whole generation of shoppers who grew up with the internet and are very comfortable with and may even prefer buying ordinary staples online instead of going to a physical store.

There are a couple of interesting points to note about this transaction from an integration standpoint.

1. Keeping Key Employees

It’s important to assess key employees at the seller’s organization and put plans in place to keep them post-closing. Keep in mind, the best person for the job might be in the seller’s organization. Jet founder Marc Lore will take a senior leadership position in Walmart’s e-commerce division while Walmart’s top online executive Neil Ashe will leave. Part of the reason for acquisition is the expertise of a star player who will help Walmart be more effective at e-commerce.

2. Adapting to the Seller

The amount of equity you acquire in a company does not indicate what you should do from an integration standpoint. Just because you acquire 100% of a company does not mean you should force the seller to comply with all of your practices.

It would not make much sense if, after the acquisition, Walmart expected Jet to comply with the Walmart way of doing things. Why did Walmart acquire Jet in the first place? They wanted the knowledge and expertise. Walmart plans to keep Jet.com and Walmart.com operating as separate websites. It also plans to integrate Jet’s software into its own website.

A critical component to being successful at integration is understanding what level of integration you need. You must be disciplined and understand why you are buying the company whether is for their expertise, culture, members, etc. Whatever the case may be, keep in mind you may need to integrate your organization to the seller’s.  This sets the tone for the way you will be thinking about integration. Don’t assume that everything the seller does needs to change.

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Unilever purchased Dollar Shave Club, a startup that sells razors and grooming products to men, for $1 billion. That price may seem absurd for a company that is not yet profitable, however Dollar Shave club is growing quickly.

The company’s revenue is expected to jump from $152 million in 2015 to $200 million in 2016. Dollar Shave Club was founded 2012 by Michael Dubin and delivers razors and other grooming products to subscribers each month by mail. The acquisition also gives Unilever a foothold in the U.S. men’s razor market and allows it to compete with its rival Procter & Gamble, who owns Gillette, the top player.

In contrast, Gillette’s market share has shrunk from 71% of the U.S. market in 2010 to 59% in 2015. Gillette was caught off guard by the success of Dollar Shave Club and tried to halt its growth by filing a lawsuit against Dollar Shave Club claiming patent infringement.

Understanding Future Customer Demand

The acquisition of Dollar Shave Club highlights the importance of understanding and capturing future customer demand. The ability to fulfill the demands of your current customers and of your customers in the future remains key to the success of any company. After all, customers are what keeps you in business!

This demand-driven approach is incredibly important in pursuing strategic mergers and acquisitions that help you grow long-term. Not only does Dollar Shave Club allow Unilever to compete in the U.S., it allows Unilever to capitalize on the rise of ecommerce and a popular brand name. More and more consumers are buying products online rather than in stores and subscription-based businesses are increasingly popular. Amazon even has a button that literally allows consumers to order everyday goods like soaps, laundry detergents, dryer sheets, and even some groceries, at the push of a button. Purchasing Dollar Shave Club is not just about growing today; it’s about growing in the future.

Clearly the market is different than it was even five or ten years ago and it will continue evolving over the next five, ten or 15 years. As a business leader you have two choices – maintain business as usual and react when faced with a new competitor and industry disruptor, or proactively develop a plan to leverage changes to your advantage. The choice is yours.

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Another blockbuster tech deal was announced yesterday. Verizon will acquire Yahoo’s core business for $4.83 billion to boost its digital advertising capabilities. The deal includes Yahoo’s search, mail content and ad-tech business, but does not include Yahoo’s shares in Alibaba and Yahoo Japan. The combined company will reach over one billion users. Verizon plans to merge Yahoo with AOL, which was acquired last year for $4.4 billion, to create a larger advertising subsidiary.

Verizon’s Strategic Rationale

Verizon is building is digital advertising capabilities to compete with the top two players, Google and Facebook. With the deal, Verizon will double its digital advertising business to become the third largest US internet advertiser with 4.5% of the market share.

Lowell McAdam, Verizon Chairman and CEO, said in a press release“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.” 

In building on its AOL deal, Verizon is doing what we call taking “frequent bites of the apple,” or using a series of deals to achieve its overall growth strategy. Using a multiple deals rather than a single transformational deal can have many benefits including focusing on a single reason for acquisition, adjusting to integration challenges more easily and minimizing the risk of acquisition failure. Fortunately, Verizon has already had some time to digest and integrate the AOL acquisition because integrating Yahoo’s massive workforce of 8,800 employees and 700 contractors will be no easy task.

Integrating Yahoo will be critical to growing Verizon’s digital ad business. In today’s marketplace, content is king and Verizon will need to produce and monetize exciting content in order to compete with Google and Facebook, who have users creating unique videos for free on YouTube and Facebook. Even with Yahoo, Verizon will still be far behind Google and Facebook who make up 36% and 17% of the market, respectively.

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After hitting record-high levels in 2015, global M&A activity dropped significantly in the first half of 2016. It was the slowest first six month period for global mergers and acquisitions in the past two years. The value of deals decreased from $2.03 trillion to $1.65 trillion (19%) while the number of deals decreased from 22,153 to 21,087 (5%). While overall activity declined, deals announced in the second quarter of 2016 increased by 24% when compared to the first quarter. The downturn in value has been attributed to fewer mega deals (deals over $5 billion).

Global middle market M&A (deals under $500 million) remained relatively stable compared to overall activity. Deal value and volume fell by just 6% and 2%, respectively.

Looking to the future, uncertainty hampers M&A activity. Dealmakers cited concerns about “Brexit,” the U.K.’s vote to leave the European Union and the upcoming U.S. presidential election in November.

Deals in the News

M&A update 1H 2016 Infographic

On June 23 the United Kingdom voted to leave the European Union (E.U.). Many were shocked at the outcome of “Brexit” and the markets reacted badly. The day following the vote, the pound dropped down to the lowest level against the dollar since 1985, stocks in the U.K. and U.S. fell, and on June 27 the Standards & Poor’s rating agency downgraded the U.K.’s rating from AAA to AA. E.U. leaders continue to hold meetings to discuss the fall-out of Brexit.

In the middle market, Brexit has added to concerns for dealmakers who are already worried about the upcoming U.S. presidential elections. There are many questions about what will happen in terms of economics, regulations, taxes and business agreements. While most middle market companies are focused on the U.S. market, Brexit has the potential to bring about change for those who don’t trade directly with Europe.

Challenge or Opportunity?

While concerns about trade and the markets are valid, Brexit, like other tumultuous events, is also an opportunity for bold leaders who aren’t afraid to take action and be proactive. While your competitors are panicking about the future, you can use the current climate to your advantage.

For example, with the stock market plunging two common reactions are to panic about the future or take a risk and buy stock. If you follow the common sense maxim of “buy low, sell high,” your course of action seems self-evident. The day following Brexit, Barclays and the Royal Bank of Scotland’s stocks dropped sharply and trading was suspended briefly on June 27. But did the stock really lose 17% in one day, or was the market overreacting? One week later, the markets seemed to be stabilizing.

Consumers Favor Independence over Bureaucracy

Whether or not you support Brexit, the vote seems to indicate that people are tired of bureaucracy.  The same could be true from a business standpoint; people (your potential customers) now favor flexible startups over large, established corporations. They expect their voices to be heard and for businesses to listen to their feedback and address their concerns.

Think about the rise of Uber over taxis. Uber is nimble, fresh and technologically advanced – you can order your ride via mobile app, track your driver, and leave reviews. Pricing is typically cheaper than taxis and changes in real-time according to supply and demand. On the other hand, taxis are seen as slow and ineffective. “Uberization” is occurring across countless industries even traditional ones such as healthcare and financial institutions.

Take Action

Regardless of whether or not you agree with Brexit, there’s no point in panicking or digging in your heels wishing for the circumstances to be different. In business, it’s impossible to control market changes or shifts in consumer demand. In order to be successful, you must adapt and use these conditions to your advantage. Take action and put together a plan that will allow you not only to survive, but to thrive in a changing climate.

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* The opinions expressed in this blog post are not meant to be used as legal or financial advice.

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Consumer demand for healthy snacks is on the rise. In 2015, sales of conventional products were mostly flat (1.6%) while sales for specialty products grew by 6% and sales for natural products grew by 12.6%. U.S. natural and organic food and beverages sales also grew by 10.7% last year.

Not only are consumers more health conscious, they are also snacking more often; one in five adults eats on the run. Millennials also snack significantly more than any other demographic and tend to eat snacks in place of meals.

Given the current industry, it’s no surprise that food and beverage companies are offering a host of healthy snacking options. There are a brands, such as KIND, that specialize in offering niche, innovate snacks. Large, traditional companies also want to tap into this fast-growing market and are using acquisition to stay on top of consumer trends, compete with rivals, and capture a piece of the growing (healthy) pie.

A recent example is Kashi acquiring Pure Organic, a maker of organic nutrition bars and fruit snacks. Interestingly, Kashi was acquired by Kellogg in 2000, years before demand for natural foods boomed. Unfortunately, the Kashi brand has struggled under Kellogg in recent years and has been a “source of weakness.”  This was in part due to Kellogg’s mismanagement of the brand, differences in corporate cultures, and increased competition from rivals.

With the acquisition of Pure Organic, Kashi is able to swiftly react to consumer demand and realign its strategy. While Kashi may also develop new products in-house to reach new customers, the advantage of buying rather than building is that Kashi has immediate access to Pure Organic’s product mix and existing customers.

The deal is just one example of the importance of understanding future demand in order to successful grow your business. Below are some questions to help you think through your current situation and your company’s strategy.

  • What is your growth plan for the next 3-5 years?
  • What are some trends in your industry?
  • How will you respond to changes in customer demand?
  • What tactics will you use to achieve this growth? Will you develop a solution in-house, partner with another firm, or acquire?
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Monsanto has rejected Bayer’s all-cash $62 billion bid, but says it is open to negotiations. A combination of Bayer and Monsanto would create the largest seed and pesticide business globally with $67 billion in sales. While you may not be creating an agricultural behemoth with your acquisition, there are a few lessons we can learn from this transaction, regardless of size.

M&A Will Affect You…How You Respond Is Your Choice

One of the reasons Bayer wants to acquire Monsanto is because of consolidation in the agriculture industry. Last year chemical giants Dow Chemical and DuPont agreed to a deal that will combine their agriculture businesses. Earlier this year Syngenta, a Swiss pesticide maker, agreed to be sold for $43 billion to China National Chemical Corporation.

When acquisitions occur in your industry, they affect you whether or not you decide to pursue M&A. A major acquisition by a key player may change the market environment and industry dynamics and you’ll need to find ways to adapt to these changes. This may mean changing your approach to customers, developing a new product, or pursuing strategic acquisitions yourself. Whatever you decide to do, remaining static and maintaining “business as usual” is not the best path to success.

Price Isn’t Everything

The Bayer – Monsanto deal is a publicly traded transaction and so it must be reported in the news and to investors. With all the media surrounding the deal, all the information is available to not just the public, but Bayer’s competitors. It’s interesting that Monsanto has rejected Bayer’s offer as “incomplete and financially inadequate,” but is open to further discussions. In other words, Monsanto believes the offer is too low and would like a higher price.

In contrast to large publicly traded companies, privately held firms execute acquisitions a bit differently. First, there is no need to announce each acquisition to the public. This allows you to fly under the radar and keep your strategic plans hidden from competitors. It also may help you to avoid price wars and auctions where you are competing against other bidders.

Of course, price is an important aspect of any deal, but it is not the only important factor. Especially in the world of privately held, not-for-sale acquisitions, there are many non-financial factors that can (and will) convince an owner to sell. Finding out what motivates an owner and communicating the strategic alignment of the deal are critical.

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Middle market deal activity reached its lowest level since 2009, according to Mergers & Acquisitions. This may be a result of concerns about the upcoming U.S. presidential election and because banks are shying away from lending to private equity-backed deals.

While middle market M&A activity is down, when compared to 2015 levels, the middle market as a whole is actually leading the U.S. economy in revenue and job creation. According to the Middle Market Indicator, the middle market grew at a rate of 6.3% over the past twelve month while the S&P 500 growth rate was -3.4%. The projected twelve month growth rate is 4.6% for the middle market.

So how should an owner or executive see this paradox? In a word: opportunity. With continued strength in the middle market, but a decline in deals, you have the chance to move more freely than when M&A is hot.

If other companies are paralyzed by uncertainty, you should be emboldened. Seize the opening to pursue transactions while competition is reduced.

M&A can be the best way to own the future, by claiming new market share, adding new technologies, enriching your brand, or expanding your human resources.

But where to begin?

Your first step is to review your current market and identify predictors for future demand. What are your customers buying today? What will they need tomorrow? You probably have an approximate idea but now is the time to conduct thorough research, so you can spot the gaps that your company could fill.

The next step is to consider how strategic acquisition could position you to meet future needs faster than organic growth.

Especially if you have a strong balance sheet, right now is an exceptionally opportune time to accelerate your growth through mergers and acquisitions. So make a plan, and then act.

Recent analysis shows that deal activity reached $435 billion in the first quarter of 2016 in North America and Europe. This is the second highest total on record and 84% of the deals were executed by strategic buyers.

Companies with lots of cash on their balance sheets and are now willing to deploy some of it to pursue larger deals that move the needle on revenue. Traditionally, companies can use their money to invest in organic growth, dividends for shareholders, or in acquisitions. In today’s environment, M&A makes the most sense for firms who have the cash and need to quickly spur growth.

In addition, strategics are not constrained by the same investment criteria as financial buyers like private equity firms. They can afford to pay more up front since they plan to hold onto the newly acquired company for long-term growth. On the other hand, private equity buyers are typically looking for return on their investment in three to five years.

Over the past week we’ve seen a number of interesting acquisitions by strategic acquirers, including Berkshire Hathaway’s $1 billion investment in Apple. And Pfizer’s purchase of Anacor Pharmaceuticals for $5.2 billion after its $152 billion merger with Allergan fell apart last month.

 

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Last week, thousands of investors gathered at Berkshire Hathaway’s annual shareholder meeting in Omaha. Warren Buffett, perhaps one of the greatest strategic acquirers, shared his insights for successful acquisitions. There are two pearls of Buffett wisdom, reported direct from the meeting by Dealbook that I’d like to highlight in this post.

Looking at the Big Picture

Buffett insists that the most important thing isn’t negotiating every fine point of a deal, but being right on the broader prospects of the potential takeover target.

I can confirm this from my own experience as an M&A advisor. Far too often I see company leaders getting caught up in the minutiae of a deal. While details do matter, the success of your acquisition doesn’t lie in the technicalities. You can get every detail exactly right, but if you acquire the wrong company, your acquisition is doomed to failure.

Think about buying a car that’s the exact shade of blue you want, but the transmission has been trashed! Or imagine purchasing your “dream home” that’s located in the wrong state. No matter what color the car, or how beautiful the house, neither is a good purchase when you take in the whole picture. If you’re getting bogged down in the weeds, take a step back and look at your strategic objectives.

Evaluating Future Demand

According to Buffett, “The mistakes [in mergers and acquisitions] are always about making an improper assessment of the economic future.”

When talking about is erroneous analysis of future demand for the product line of the business you’re about to acquire.

Understanding future demand is critical, because without demand for its products and services, any business risks becoming obsolete. So when you think about acquiring a company, consider what the market will look like in 5 or 10 years. Who will the customers be? What will be the demand for these kinds of products or services? Is this sector shrinking or growing? Without taking the market dynamics into consideration, you risk acquiring a dud.

These two points from Buffett may seem simple, but it can be easy to get caught up in the excitement of a deal or to over-focus on the details. Remember to take a step back and assess the entire situation, taking into account your own strategic goals and future demand. Evaluating an opportunity with this broader perspective will help increase your chances of a successful deal.

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News in from Coca-Cola reminds us that growth is more about recalibration than it is about adding size. According to the Wall Street Journal, Coke plans to sell off all of its US manufacturing plants by 2017.

Why would they do that?

Coke has struggled with its asset heavy distribution over the past couple of years and is now reversing a decision it made in 2006 to acquire its largest bottler for $12.3 billion. Divestment enables the soft drinks behemoth to focus on its more profitable concentrate business, and on being a brand manager and IP manager rather than a bottling manufacturer. After this divestiture, Coke’s operating margins will increase from 23% to 34%

Business is inherently cyclical. An asset-heavy strategy may be needed in certain market conditions. Other times may demand a lighter approach. In this case, for Coca-Cola today, the sum of the whole is worth less than the individual pieces. Its assets hold higher value when they’re separated. And Coke knows it has to take action to avoid becoming an acquisition target. There have been rumors that Anheuser-Busch InBev could try to buy the company.

What lessons can middle market companies learn from Coke’s dramatic pivot? Perhaps the most important point is that M&A is not about simply getting bigger. It’s about strategic recalibration and seizing opportunities to refocus your business to best leverage the market and future demand. Practically speaking, progress for your business may not always mean expansion. Pruning can also be a stimulus to long-term growth.

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Pfizer and Allergan have announced that they are abandoning their $160 billion merger.

This resulted from a political storm around tax inversions, a technique whereby US companies relocate abroad to avoid the high US corporate tax rates. The Treasury department took action to insert new rules that effectively killed the financial benefits of the deal.

According to their agreement with Allergan, Pfizer will pay a breakup fee of $150 million.

Politics aside, this is just a small reminder of why acquisitions that are not carefully planned can prove to be costly errors. Could Pfizer have anticipated the government’s intervention? That’s hard to know, but in principle buyers need to be looking ahead at potential roadblocks that could jeopardize a deal.

Transactions unfold in stages, and each stage can present its own challenged. In particular, a signed letter of agreement (LOI), although an important milestone, does not ensure that the deal is done. There’s a lot of that can happen between LOI signing and the final acquisition agreement. It’s essential to make your plans with that in mind.

Assuming yours is a middle market company, you may not experience the same type of regulatory scrutiny that publicly traded companies do. However, there’s no shortage of other issues that may show up, such as owner hesitancy, problems uncovered by due diligence, cultural collisions and many more.

And the story doesn’t end when you finally ink the acquisition contract. You may “successfully” acquire a company only to see things fall apart during integration.

With every M&A transaction, there are many moving parts. It’s the task of your acquisition team, including both your own staff and your outside advisors, to consider them all. To name a few, you must consider regulations, taxes, legal challenges, due diligence, valuation, cultural integration and—never to be forgotten—your overall strategic purpose.

With any business initiative worth taking, it’s impossible to eliminate risk—but you can and should minimize it. In M&A, the best way to do this is to follow a system that’s been proven in prior acquisitions. I call this the “Roadmap to Acquisitions” and I consider it the single most decisive factor in M&A success. Take a holistic view of the acquisition process from the start to finish, and be both proactive and strategic. In other words, know your end result as best you can, and anticipate all the hurdles you may have to overcome to reach it.

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In 2015, record valuations drove a boom in mergers and acquisitions activity, leaving many to wonder when the deal bubble would burst.

In 2015, US buyout firms paid an average of 10.3 times EBITDA compared with the previous record of an average 9.7 times multiple in 2007. Despite hitting a peak, valuations are still expected to remain high for some time.

So what is happening in the market today? Why are valuations so high, and how does this affect you?

High Valuations

One factor driving valuations higher and higher are sellers’ unrealistic expectations about valuation multiples.

According to consultant Joseph Feldman, many sellers, especially those who have never conducted a transaction before, tend to look at news articles with high-valued deals as a guide. Unfortunately, they don’t realize that those headliners are not representative of the market as a whole.

Private Equity vs. Strategic Buyers

There is lively competition between private equity and strategic buyers, but with such high valuation multiples, M&A today is still a strategic acquirers’ market, and financing remains relatively inexpensive.

Strategic acquirers have an advantage because they may be more willing to pay for higher valuations, on account of their more long-term focus. Private Equity firms tend to have have specific, short-term targets for return on investment, so they may be less willing to pay a premium.

Says Andrew Hulsh, Partner at Pepper Hamilton:  “These strategic corporate buyers, unlike private equity sponsors, may not need to be quite as concerned about the short-term impact of paying a higher price for these companies and assets, and can sometimes offset the premiums paid for these companies in part through business synergies and related cost savings.”

What Should You Do?

As a buyer focused on long-term growth, you have an advantage in today’s market. You may be willing to pay a bit more for a deal that makes strategic sense and will help you realize your goals. Price is always an important concern, of course. But it shouldn’t be the overriding factor. Long-term, it’s far cheaper to pay a bit more for the right company than to underpay for the wrong company. Acquiring the wrong company can prove a very costly mistake that is not easily fixed.

I’m not saying you should pay a multiple that doesn’t make sense. As always, you should remain strategic when pursuing M&A. Does the company fit in with your strategic rationale for acquisition? Also keep in mind there may be other non-financial aspects of the deal that this the right fit for you, and make you the preferred buyer for the target. Especially in the world of not-for-sale, privately held businesses, money isn’t everything.

Photo Credit: Mark Ittleman via Flickr cc

Capstone’s survey of middle market executives shows 53% likely to pursue mergers and acquisitions in 2016 compared to 41% when last surveyed.

Capstone surveyed middle market executives from multiple industries on their growth and M&A experience in 2015 and their outlook for 2016. The survey was conducted in December 2015, and followed a previous survey in 2014.

Respondents gave a mixed picture of growth for their industries in 2015. More respondents saw extremes in their industries. Those reporting high growth grew from 4% in 2014 to 11% in 2015, while those reporting contraction grew from 2% in 2014 to 9% in 2015. Between these two poles, most respondents were seeing modest growth in their industries during 2015 (58%).

How likely is it that your company will pursue some form of M&A or external growth in 2016?

How likely is it that your company will pursue some form of M&A or external growth in 2016?

The environment for growth in 2015 was seen by most in a positive light, with the majority reporting the same (46%) or an improved (36%) environment.
M&A activity across the board in 2015 was mostly seen as the same (36%) or growing (33%) when compared to 2014.

Looking forward to the coming year, companies showed a stronger inclination to engage in M&A, compared to predictions when we last asked this question in 2014 (53% certain or likely, compared to 41%).

When asked about their growth goals, respondents were evenly split between “selling current products in new markets” (40%), “creating and selling new products in current markets” (36%), and “increasing sale of current products in current markets” (38%). (Some respondents were pursuing more than one goal).

As for barriers to engaging in M&A, these were largely internal, with respondents citing “lack of resources” (33%) as a primary reason not to pursue transactions.

Capstone’s CEO David Braun said: “This survey confirms what we ourselves observed, that 2015 was an active year for middle market M&A and 2016 is likely to prove an even stronger year. We see a growing polarization between growth-focused companies and those that are sitting on the sidelines. While many companies are still holding cash, more players are emboldened to expand through external growth. This includes acquisitions but also minority ownership deals, joint ventures and strategic alliances. When growth stagnates, M&A can often provide the fastest path forward. When growth is high, companies should seize the opportunity to plan for further expansion.”

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

Reflecting the growth of ecommerce, shoe retailer DSW will acquire Ebuys, Inc., the company announced on February 17.  At $62 million, the acquisition may seem tiny compared to such newsmakers as Sysco’s $3.1 billion deal to acquire Brakes Group or IBM’s $2.6 billion deal to acquire Truven Health Analytics. But there are opportunities to learn from this transaction.

DSW, which stands for Discount Show Warehouse, has 469 stores in the U.S and Puerto Rico and is known for low pricing on brand-name shoes and accessories. Ebuys also sells shoes and accessories to North America, Europe Australia and Asia through the retail sites ShoeMetro and ApparelSave. DSW will use the acquisition to increase its online presence and expand abroad.

Although bigger deals draw greater attention, companies often use smaller, more targeted acquisitions to grow strategically. Especially in the middle market, the value of many deals isn’t disclosed and the deals may not even announced. Businesses often like to move stealthily and keep their strategic plans hidden from the competition.

Strategic Rationale

An analysis of this deal with our opportunity matrix shows that it is built upon distribution – selling the same products to new markets. With Ebuys, DSW will continue to sell shoes, footwear and accessories but find new customers internationally and online outside of their traditional retail space. Looking at trends in the retail space – and quite frankly in any space – the rise of technology is here to stay. Customers, especially millennials, use the internet increasingly to research and purchase products. Rather than risk becoming obsolete like brick-and-mortar bookstores driven out of business by Amazon, retailers such as DSW must adapt to changes in market demand and increase their ecommerce capabilities.

Opportunity for More

There is more to this deal, in that Ebuys has the opportunity to earn future payments. Also known as earnouts, these are commonly used in acquisitions as a means of bridging the valuation gap between buyers and sellers. Sellers naturally have high expectations for their businesses, often called hockey stick projections, that buyers might disagree with. With earnouts, the seller will receive a future payment once they hit certain milestones. In addition to the $62.5 billion DSW will pay today for its acquisition, if Ebuys achieves the financial goals set forth in the acquisition agreement, it will have the opportunity to earn more.

With future payments, buyers are in essence saying to sellers “We love your business and want to see you achieve your projections, so prove it to us. If you do, we’ll pay you more.” This way, if the seller’s positive projections turn out to be true, the seller will be rewarded, but the buyer doesn’t risk losing money on growth that never materializes.

Photo Credit: Mike Mozart via Flickr cc