M & A News

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?
Photo Credit: Elliott P. via Flickr cc

 

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.

Photo Credit: Mike Mozart via Flickr cc

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.

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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

It’s no surprise that credit union consolidation continues; it is estimated that there were 65% more mergers in 2015 than in 2000. Overall, there were about 15% fewer credit unions in 2015 than in 2011. While there are fewer players today than in previous years, the credit union market is not shrinking or in decline. The number of credit unions with over $500 million in assets grew by 21% from 2011 to 2015, which means there are fewer, larger players. Consolidation is not limited to credit unions alone. We are also seeing consolidation of service organizations that provider products, services and technology to the credit union space as well.

Given the current environment, what’s the best course of action for CUSOs? One the one hand, for credit union service organizations (CUSOs) serving credit unions exclusively it means there are fewer credit unions to sell to, but on the other hand, since each player is bigger there are potentially more opportunities for CUSOs.

There are CUSOs right now proactively trying to find value and expand in today’s market. For example, CUSO currently only servicing the east coast may use strategic M&A to quickly gain a footprint in a new geographic market in order to service the growing member base of the credit unions they service.

External factors are also affecting the credit union and CUSO industry. When we look at U.S. M&A activity as a whole, 2015 was a massive year. We are in an environment where deal flow, the number of transactions, size of transactions and valuation multiples are at a peak. And peaks are followed by troughs so 2016 could be an interesting year.

There are a ton of deals going on and a lot of money chasing those deals. This means there are new competitors that CUSOs need to consider when investing in organizations. More and more people from outside the credit union space see the opportunity and are trying to figure out how to enter the industry. For example, private equity are doubling down and looking to expand in technology and financial services especially. While there is more competition from outsiders looking to invest in the same opportunities, CUSOs also provide unique access and benefits to non-exclusive credit union organizations looking to enter into the credit union world.

* This post was contributed by John Dearing, Managing Director at Capstone

Capstone CEO David Braun’s Analysis in the Memphis Business Journal

Verso Paper, after acquiring NewPage Holdings for $1.4 billion in January 2014, has filed for Chapter 11 bankruptcy. Verso, which manufactures coated paper used in products like magazines, is struggling in a declining market. With its new acquisition, the company failed to realize desired economies of scale needed to compete in a world of rising digital media.

What happened? David Braun analyzes what went wrong and what Verso might do to survive in his interview in the Memphis Business Journal. Read the full article here: “Analysis: What might Verso look like after Chapter 11?

The Letter of Intent (LOI) is far more than a legal document. It’s a key milestone in the M&A process and can be a powerful tool for getting the deal done. The LOI provides an opportunity to solidify your relationship with the seller and brings about a new level of commitment and resolve to getting the deal done.

Please join me for a 20-minute M&A Express Videocast this Thursday, January 28 at 1:00 PM ET. In this new videocast you will see how the LOI can help you position the deal in the eyes of sellers and their influencers. You will also learn how to use the LOI to test your assumptions, and set the seller’s expectations about deal structure, price and the acquisition process.

The Letter of Intent: A Key Milestone

January 28, 1:00 pm – 1:20 PM ET

About M&A Express

M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies. M&A Express is free! M&A Express is free! Visit our website for more information.

Watch previous Videocasts on-demand:

  • Why You Need a Roadmap
  • Where to Start Your Search
  • When to Walk Away
  • The Hidden Power of Minority Ownership
  • Cultural Due Diligence

 

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Despite record levels of activity, the current M&A market is still quite a bumpy ride for many. In 2015, deal value reached $2.3 trillion and 9,962 deals were announced in the U.S. Compared to 2014 numbers, we saw a very significant increase in deal value, while the number of deals was relatively flat (-1.6 percent). This is because the average deal size grew 67 percent in 2015 — from $141 million to $235 million.

US M&A Activity M&A 2015 v 2014 Values

Big Brand Name Acquisitions

One of the reasons for this enormous increase in deal value was that transactions by big brand names came back in vogue. Think about Marriott buying Starwood Hotels for $12.2 billion, creating the largest hotel company in the world. The number of megadeals — deals valued at more than $10 billion — increased by nearly 130 percent while deals over $5 billion and $10 billion increased by 24 percent. A few very large deals were enough in themselves to drive up the total value of M&A activity.

Great Risk, Great Reward

Another factor that contributed to these record-level M&A numbers was an increase in valuations. Buyers were simply willing to pay more for companies. We had a certain amount of “chasing yield” where companies with cash sitting on their balance sheets were looking for ways to deploy it. Rather than getting a third of a percentage point with financial institutions, they were willing to take some risk and get a five percent return on an investment. When you get a five percent return you are willing to pay a 20 X multiple. That’s how we saw some of those deal values go up, especially in the real estate industry (with some REITs) and also in the pharmaceutical space.

Private Equity Activity Still Modest

Taking a look at private equity, the activity is still modest. The market remains one where strategic buyers have an advantage over financial buyers. Part of the reason is that strategic buyers are more motivated and tend to have more cash. Many are faced with stagnant organic growth prospects, which drives them to execute acquisitions to spur growth. In addition, since strategic buyers typically hold on to their acquisitions long-term, they tend to expect higher returns from a deal and can therefore bring a better value proposition to the table than private equity. However, we expect private equity will be back soon, even if they were not quite as vigorous in 2015.

US PE Activity 2015

Concern over Interest Rates

Historically the fourth quarter is very busy for private equity because they want to book investments before year-end. In 2015 we saw a flurry of activity in the third quarter that is usually reserved for the fourth quarter, as people accelerated to close deals earlier. A driver for this was concern over what would happen with the Fed raising interest rates.

Photo Credit: Barn Images

2015 was the “strongest year for deal making on record,” according to Thomson Reuters.  Global deal value reached $4.7 trillion, a 42% increase from 2014, and U.S. deal value reached $2.3 billion, a 64% increase. Despite this record-breaking activity, the number of deals announced globally remained relatively flat and in the U.S., the number of deals actually decreased by 1.65% from 10,129 in 2014 to 9,962 in 2015. This is mainly due to the large number of mega deals (deals over $5 billion) announced in 2015.

As we look forward to what will most likely be another year of exciting M&A activity, let’s take a look back at the posts from the Successful Acquisitions blog that you, our readers, found most interesting.

  1. Why You Don’t Need a 51% Stake to Control a Business
  2. CVS and Target Pharmacy Acquisition, Divestiture and Co-branding
  3. Strategic vs. Financial Acquisitions – What’s the Difference?
  4. How You Can Manage the M&A Process: Tools for Success
  5. Strategic Acquirers at an Advantage in Today’s Market
  6. Why ConAgra Plans to Sell Ralcorp Less than 3 Years Later
  7. New Webinar – “Leadership Essentials for Successful M&A”
  8. When Organic Growth Stalls, Consider M&A
  9. Pharmaceutical M&A: The Rush to Acquire
  10. 2014 Record Breaking Year for M&A
Photo Credit: Barn Images

In light of recent FTC rulings against market domination, Sysco has changed its M&A strategy to focus on smaller, strategic deals rather than large transformative deals. Although Sysco’s change is motivated by regulatory obstacles to larger acquisitions, using strategic, smaller deals is an excellent approach from a strategic perspective. We have long recommended that our clients pursue a series of small transactions to achieve their long-term growth goals. We call this strategy taking “frequent small bites of the apple” because it’s much easier to eat an apple one bite at a time than to cram the whole fruit into your mouth!

Among the advantages of pursuing a series of smaller deals:

1. Focus on One Reason

You may have many needs to meet before you reach your long-term growth goals, for instance improving talent and technological capabilities and expanding geographically. If your vision is growing into a worldwide paint manufacturer and distributor, but you only have manufacturing operations on the East Coast, you will need to expand geographically, build your distribution networks, and perhaps improve on your manufacturing capabilities. Doing all this with only one company may dilute your efforts, or you might acquire a company that really doesn’t fulfill any of your strategic needs.  A better approach: first focus on acquiring a company with an excellent distribution network in the U.S and then another company with quality manufacturing capabilities that match your acquisition criteria. Once you’ve adjusted to this change, you might look at acquisitions outside the U.S.

2. Stay Below the Radar

Large transactions draw attention, especially the mega-deals valued at over $5 billion that have boosted M&A value to record levels. But many transactions are much smaller than these multi-billion dollar deals; in the U.S. from November 1, 2014 to October 31, 2015 there were 12,663 M&A transactions, according to Factset data. 95% of these deals were under $500 million or undisclosed. (Undisclosed deals are typically privately held, smaller transactions that are too small for financial reporting). Smaller strategic transactions allow you to make moves below the radar, out of sight of your competition.

4 reasons why smaller acquisitions are better

3. Adjust to Integration Challenges More Easily

Even the most carefully planned acquisition encounters integration challenges as people and systems adjust to the newly merged company. By acquiring a smaller company, you dramatically limit your integration challenges. Once you’ve had time to work out any kinks and make sure your new company is operating smoothly, you can begin pursuing the next acquisition.

4. Minimize Risk of Acquisition Failure

Although acquisitions are inherently a risky undertaking, smaller strategic transactions are much less risky than large transformative deals. Because integration challenges are minimized, you can remain focused on your strategic objectives, increasing your chances of realizing synergies from the deal. There’s also less financial risk associated with smaller acquisitions; you can minimize capital outlays while rapidly growing your company to reach your long-term goals.

Executing a series of strategic acquisitions is a proven way for middle market companies to grow.

A small deal is also ideal for first-time acquirers who have never pursued growth through mergers and acquisitions. All in all, smaller acquisitions allow you to remain focused, move covertly in the market, and increase your chances of success while still rapidly moving you closer to your vision for the future.

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Credit unions’ traditional use of consolidation as one way to grow is a trend likely to rise over the next five years, according to industry experts. While the percentage of these deals climbs, there actually are fewer mergers because there are fewer credit unions. There were 4% fewer credit unions in September 2015 than one year earlier, according to CU Data.

Credit Union mergers and consolidation.

Credit union consolidation continues.

Given their decreasing numbers, credit unions pursuing growth will need to consider alternatives ways to grow such as strategic mergers and acquisitions, a common strategy used in the for-profit world. Strategic M&A for credit unions may be motivated by distribution — offering existing products and services to new markets, members or geographies —or breadth — adding new products or services for their existing members. This important tool can generate noninterest income and allow credit unions to create unique value for their members.

At the CUES Directors Conference, Capstone CEO David Braun presented a workshop on Strategic Mergers & Acquisitions for Credit Unions, where he challenged credit union leaders to think creatively to generate new ideas for growth. At this standing-room only session, credit union leaders discussed the increasing importance of strategic mergers and acquisitions for their organizations and for the credit union industry as a whole.

CUES David Braun Strategic Mergers and Acquisitions 2015

David Braun presented a workshop “Grow or Die: Strategic Mergers and Acquisitions for Credit Unions” at the CUES Directors Conference in Orlando Florida on December 8, 2015

Feature photo credit: Opensource.com via Flickr cc

Instead of investing in growth, companies this year have been holding more than $1.4 trillion in cash – close to a record $1.65 trillion in 2014. Oracle’s $56 billion cash stockpile is 1.5 times its sales and Cisco’s $60 billion in cash is 1.2 times its sales. Eleven companies have cash reserves double their annual revenue.

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

Have U.S. Companies Stopped Investing In Growth?

Companies that stockpile cash don’t invest in stock buybacks and dividends, research and development, other organic growth initiatives or mergers and acquisitions.  A strong balance sheet is important, but the levels of cash held by nonfinancial S&P 500 companies is astounding!  They may be worried about the economy or the upcoming elections. But there’s another possibility: all that money on the sidelines portends robust M&A activity in 2016.

Tax Savings

Publicly traded companies also are stashing profits offshore to avoid paying taxes on them. The U.S. corporate tax rate is one of the highest in the world and tax inversions in particular are being driven by the pursuit of tax savings rather than for strategic reasons. .

The latest example is Pfizer and Allergan’s proposed merger which would relocate the company to Ireland and away from the U.S. corporate tax rate. Other companies that have done this include Chiquita, Perrigo, Medtronic, Endo, and Actavis despite calls for stronger restrictions on tax inversions by Congress and President Obama. Pfizer already has found ways to save on taxes even without the acquisition. The company has designated $74 billion as “indefinitely’ invested abroad.

Invest in Growth Now

As other companies hold onto cash, you have a unique opportunity now to invest in your future. Do this by developing a long-term strategic plan, investing in new products, services or equipment, or growing organically. Or pursue the faster, more powerful vehicle of strategic mergers and acquisitions. Middle market companies can seek privately held, not-for-sale deals that focus on long-term growth rather than on cost savings or short-term quarterly updates with shareholders. This increases the likelihood of a successful transaction and sustainable growth.

Middle market companies cannot afford to dwell on cost savings and sit idle. Make sure you are thinking about long-term growth and how your company will not only survive, but thrive.

Is your company hoarding too much cash? Or are you investing in future growth?

Photo Credit: Pictures of Money via Flickr cc

As we near the end of the fourth quarter, everyone is wondering what will happen in 2016. Will the frenzied M&A activity of 2015 continue into the new year?

There seem to be mixed reviews on what activity will look like next year. The Intralinks deal flow predictor indicates a 7% increase in global M&A in Q1 2016, but Mergers & Acquisitions Magazine has been citing a downward trend in the middle market for the past few months.

On the other hand, on a recent Deal Webcast “2016 Middle Market Outlook,” dealmakers were a bit more hopeful, expecting to see activity continue due to the high levels of dry powder and capital on the sidelines, while they did admit there may be a slight downturn.

The lending environment will be similar in 2016 to what it was in 2015 and in the middle market private equity will continue to be highly competitive, according to Michael Fanelli of RSM.

Healthcare and Technology Will Dominate

The Affordable Care Act brought about widespread changes to the healthcare industry, spurring a wave of mega-mergers by massive pharmaceutical companies. Despite this wave of mega-deals, for the most part much of the uncertainty surrounding ACA seems to have worked its way out of the middle-market companies. Tim Alexander of Harris Williams says that by and large, healthcare has become less of a due diligence item for dealmakers, especially those in the upper middle market.

On the other hand, in the lower middle market, the ACA may still raise some red flags, especially for businesses with part-time employees or ones that don’t have healthcare plans at all. While some sellers may have thought about the impacts of ACA, many are waiting to begin talks with a buyer before engaging professionals to deal with these issues, according to Fanelli.

The focus on healthcare is not only due to changes brought about from the Affordable Care Act, but is also indicative of a larger health and wellness trend we’re seeing in the U.S. Expect shakeups in the consumer and food and beverage spaces as people focus on healthier, organic specialty products.

As for technology, there’s plenty of disruption that will continue over the next one to two years, with a constant flow of innovative startups. This continuing trend will have its own impact on the middle market.

The U.S. Middle Market Remains Strong

For the most part, all three dealmakers agreed that middle market M&A is much stronger in the U.S. than it is cross-border or internationally. Most investors see the U.S. as the locale where they can expect their highest returns. This regional focus is not unique to the middle market: In the first 9 months of 2015, the U.S. accounted for 47% of global M&A transactions ($1.5 trillion).

Engaging with Sellers Remains Critical

When it comes to deal-making, building a connection with the owner and sharing your strategic vision remain the critical starting points. There are numerous reasons why an owner may decide to go with a financial buyer over a strategic buyer, even though technically strategic buyers should have an advantage from a cash perspective. In our experience, the same has been true (less money for strategic acquisition vs. financial). What it comes down to is really understanding the owner’s priorities and what he or she wants out of an acquisition. Hint: It’s not always more money.

As Marc Utay of Clarion Capital Partners said, echoing one of our key principles: “Price is important, but not the most important thing. It [the company] is like a child to them.”

 

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

As the leader of an integration process, you should:

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

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

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

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

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

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