“I’m not interested in selling my business right now.”
“We already have a strategic plan in place.”
“We are already talking to another buyer.”
“Why should I listen to you? I get asked to sell all the time.”
“I may sell in a few years when my company has a higher value.”
“Who are you????”
These are the typical responses owners give when contacted for the first time about selling their business. While it can be discouraging to hear “no,” it would be more surprising to hear an owner say, “Yes, I am ready and willing to sell you my business over the phone right now!” Experienced acquirers know that an owner’s initial “no,” is simply a knee-jerk reaction resulting from surprise more than anything else.
The majority of owners of privately-held businesses, especially those that are healthy and run well, are not operating their business with the intent of selling. They are focused on growth and delivering products and services to their customers. Just because someone is not currently thinking about selling does not mean that their company is not for sale. Click to continue reading on The M&A Growth Bulletin.
This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.
“We did an acquisition about 15 years ago. It did not go well…I guess you could say we are still ‘recovering,’ the CEO of a family-owned business recently shared with me during a meeting.
She went on to explain there were a number of integration issues and other challenges that cropped up post-closing that the company was not prepared to handle. From payroll issues to disgruntled employees to operational challenges – the experience was “traumatic,” for the organization according to the CEO.
Fortunately, the company is in a better place today and is ready to explore new ways to grow. While leadership recognizes the potential of a strategic acquisition, because of their previous experience, they are, understandably, hesitant.
It’s not uncommon to have this reaction. But just because an acquisition didn’t work in the past, it doesn’t mean you have to abandon M&A as a tool for growth. You can learn from what went wrong last time and be successful when executing future deals.
There are many reasons deals fail from culture clashes, hidden liabilities, poor planning, or simply inadequate of expertise, but these issues point to one overarching reason for acquisition failure – lack of strategy. Alarmingly, many companies take on a reactive approach to acquisitions, buying whatever company comes their way without first developing a strategic plan. Not having a plan is a surefire way to fail.
In the case of our family-owned business, they decided to take on a strategic approach to M&A this time around. Unlike last time, where they adopted a “plan as you” approach to M&A, they dedicated serious resources to establishing a strategic plan for acquisition prior to even looking at companies. This included identifying potential integration challenges and developing a 100-day post-closing plan long before the deal closed to avoid the same issues as last time. With a firm foundation the company was able to identify the right opportunities for growth and execute a successful transaction.
If you are still suffering from the results of a failed acquisition, I encourage you to adopt a strategic approach right now. Gather your team together to review your growth options in light of your overall strategic vision. Then, you can determine your next steps whether its organic growth, external growth, minimizing costs, exiting a business, or doing nothing. With a strategy in place, you will avoid many pitfalls and maximize your chances for success.
You do not need an M&A advisor to pursue acquisitions. You might think I’m crazy for saying this, after all, we are M&A advisors, but the truth is you can pursue acquisitions on your own. In fact, for those of you who are so inclined to take the do-it-yourself approach, I lay out a step-by-step process, the Roadmap to Acquisitions, in my book Successful Acquisitions and regularly provide tips and tricks for free on this blog and through my firm’s educational resource M&A U™.
That being said, there are many benefits to bringing on an experienced M&A advisor. Think of it this way: Technically, you do not need a CPA to do your taxes. Depending on your situation, you may be able to go through the paperwork, file your taxes on your own and hope you don’t get audited. Or, you could consult an experienced professional and rest easy, knowing the job will be done right.
The advantage of an M&A advisor is having an expert by your side for every step in the process. Unfortunately, especially if your company has never done an acquisition, it’s difficult to tell if you are missing any important steps until it’s too late. An experienced advisor will help you navigate the process and avoid making mistakes.
Here are five advantages of using a third party:
Objective outsider to help evaluate decisions – Acquisitions can be emotional and as a third party, an M&A advisor can help facilitate discussions and resolve conflicting perspectives.
Experienced market and company research team – In addition to accessing to multiple databases of industry information, a third party can speak directly to key industry players without giving away your interest in making an acquisition.
Discreet approach to owners – One of the advantages of privately-held acquisitions is the ability to execute your strategy under the radar. An M&A advisor can approach companies – even competitors – on your behalf without exposing your plans to marketplace.
Maintain negotiation momentum and overcome roadblocks – Negotiating during acquisitions is not about “winning,” it’s about understanding the motivators that will prompt an owner to sell. It takes experience to discover these underlying desires that will help move the deal forward.
Ensure early preparation for success integration – When it comes to integration, experience has taught us that preparation begins very early in the process, well before the deal is consummated. With the help of an advisor, you can address integration issues early so that you successfully weather the challenging first 100 days of integration post-closing.
Does this sound familiar? You want to grow through acquisitions, but there are no good companies to acquire. While it may seem like there are absolutely zero acquisition prospects, usually that is not the case.
Many companies struggle to find acquisition prospects because they are focusing on only on industry partners, suppliers, or competitors they already have a relationship with. We call these companies the “usual suspects.” There’s nothing wrong with looking at the “usual suspects” for acquisition opportunities, but if you find you are hearing the same company names over and over again without getting any results, it may be time to try a new approach.
Here are four more ways to find quality acquisition prospects in addition the “usual suspects”:
Market Research – In researching the market you will naturally uncover a few potential acquisition prospects. You will also have the advantage of gaining a deeper understanding of the market which will help you select the best companies to acquire, evaluate potential acquisition candidates, and negotiate with owners.
Trade Shows / Associations – Both are an excellent source for finding many companies in your desired industry in a short amount of time. Walk the floor of a trade show and you’ll see dozens of companies all in one location and many trade associations also member companies listed on their website.
Internal Input – Use the resources you already have. Your sales team is filled with folks who have their ear to the ground and are up-to-date on key players and new developments in the industry.
For-sale Companies – Looking at for-sale companies is never a bad place to start your search. Just make sure you don’t limit yourself by only considering these opportunities. Including not-for-sale companies in your search will increase your chances for a successful acquisition. Remember, every company is for sale, for the right equation.
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.
Many company owners and executives know that M&A could hugely accelerate their growth. But they hold back for several common reasons. Let’s take a look.
1. “There Are No Suitable Companies to Buy”
You’re probably right—almost. There are no suitable companies for sale. That does NOT mean there are no great companies to buy. You just have to look beyond those that are marked “for sale”. Generally, it’s much better to pursue not-for-sale companies, for a host of reasons. The company is less likely to have problems; you won’t be competing with other buyers; and no one need know about the transaction until it’s complete.
2. “If a Company Is Not for Sale, I Can’t Buy It”
Every company is for sale… for the right equation. Note the word here is “equation” not “price”. Many owners would be glad to sell if they could find a buyer with the right vision, and who understands their unique (sometimes very personal) needs — for example to look after family members employed by the firm, or keep the company brand unchanged, or provide certain special benefits with the deal.Click to continue reading on The M&A Growth Bulletin.
This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.
Acquisitions can transform your company’s growth trajectory and set you up for long-term success. You may choose to use acquisition because your organic growth has stalled and hiring additional sales people or investing in R&D will not not help you achieve your business goals. Acquisition is fast and opens the door to many new growth options by bringing on board resources like new technological capabilities and key employees,
Capstone Vice President Matt Craft had the opportunity to speak on “Growth through Acquisitions” on the Exit Readiness Podcast with Pat Ennis. Matt explains key drivers for pursuing acquisitions and how to maximize your potential for success.
In this episode Matt and Pat discuss:
Why you should considering using M&A to grow your business
How many companies you should look at before closing a deal
One of the challenges of due diligence is that you often do not have access to all the data. Of course you want to know every last detail about the acquisition prospect so you can make the best decision. Unfortunately, the real world is never perfect. The prospect may have an incomplete or no record of the requested information or may be unwilling to share in-depth details.
In these situations, you must focus on obtaining the information that is critical to you. Think back to your one reason for acquisition. Your acquisition strategy should drive your integration strategy and the information you collect in due diligence. For example, if your strategy in acquiring the seller’s organization is to add a new technology, most of your due diligence and integration questions should be focused on technology. You may not be as concerned about gathering in-depth information on their sales department.
Quite frankly, getting all the information is unrealistic. And even if you did have access to every last detail, you have to remember that some of them are more valuable to you than others. It’s important to establish priorities and focus on what matters to you.
Due diligence will go on forever…if you let it. We once had a situation where the client had been in due diligence for over a year. At that point you have to ask yourself, “Do you really want to do a deal?” Letting due diligence drag on for months and years is can be tiresome and pointless. If due diligence lasts too long people start getting frustrated and momentum dies down. You need to strike the balance between thorough and exhaustive.
Remember, due diligence is not an academic exercise. Your purpose during due diligence is not to find 100 percent of the data for the sake of information gathering. The goal of due diligence is to learn enough about the company so you can properly evaluate it and decide if an acquisition makes sense.
Trust is everything. As leaders, we can forget this during the excitement of a deal. We can get caught up in reviewing financials, bogged down in the details of due diligence, or absorbed in mountains of research and completely forget about the humans involved in the transaction. When you take a moment to think, it’s obvious that no deal can take place without some level of trust between the two parties.
I was reminded of this a few weeks ago when I had the opportunity to participate in an event, From DoG Street to Wall Street, at the College of William & Mary. The event connects current students interested in finance and investment banking with alumni, and I was happy return to my alma mater to answer questions and discuss my experience.
Participating in the investment banking roundtable discussion at From DoG Stree to Wall Street.
During the event I shared with students was the importance of trust and relationships in mergers and acquisitions. When I speak about relationships I don’t mean relying on your friends and network to make deals. I simply mean establishing a connection with another person. Especially in the world of not-for-sale acquisitions, paying attention to the human aspect of M&A is critical. Our philosophy is built on relationships and we work hand-in-hand with our clients from initial strategy development through deal execution in order to ensure they are in the best position for long-term, strategic growth. Some of our clients have stayed with us since we were first founded in 1995.
We not only take this approach with our clients, but also with the owners of acquisition prospects. In the world of privately held not-for-sale acquisitions trust is critical. Unlike in for-sale auctions, most owners of not-for-sale companies are not looking to sell their business to anyone, let alone a stranger, and many are initially distrustful of any potential buyers. Focusing on the mechanics of the transaction and financials at the onset is a sure way to kill any potential deal. The path to a successful acquisition begins with winning the owner’s trust, sharing your strategic vision, and developing a relationship that leads to mutually beneficial acquisition.
After signing a letter of intent, you expect the deal to close, but there are a number of reasons acquisitions fail ranging from regulatory hurdles to unexpected challenges that arise during due diligence to cultural clashes. In my last post, I discussed reasons deals fall apart even after both parties sign a LOI. Here are three ways to make sure your deal stays intact and reaches the finish line.
1. Strategy First!
Using strategy as your guiding principal is helpful in all steps of the M&A process. As you finalize your deal, continue communicating your shared vision for the newly merged company with the owner. It will be easier to reach an agreement and smooth over negotiations if both parties agree on the direction of the acquisition. Make sure both you and the seller keep the big picture in mind and are aligned on strategy.
2. Understand the Seller’s Perspective
Many owners have a strong emotional attachment to their company; it’s their baby. They’ve spent their lives building the business and they are not going to sell to just anyone. Prior to signing the LOI, you had to convince the owner that you were the right home for their company. Even after signing the LOI, it’s important to continue reaffirming the seller that you are the right buyer. Remember to keep the seller’s perspective in mind rather than just barreling forward and pushing your own agenda. Remember – a LOI is not the same as an agreement and the seller can still back out.
3. Negotiate in Parallel, Not Series
During negotiations, rather than arguing each little point, gather all the points of contention and settle them together. This way, you can determine what’s really important to you and to the seller. Bringing all the issues to the table at once will reduce frustration and prevent you from getting stuck on unimportant issues that can prevent your deal from moving forward.
Have a Plan B
Even if you follow the strategies listed above, your deal may still fall apart. It’s part of the nature of acquisitions – high risk, high reward. The best way to mitigate risk and make sure you haven’t wasted all your time and effort is to have a backup plan. Have a robust pipeline of companies to consider for acquisition. This way if one deal falls apart, you can still move forward with your other options.
For an owner of a privately-held company, the business is their baby and using hard-nosed tactics to negotiate for the lowest price is ill-advised. The human factor cannot be overlooked when pursuing M&A and establishing trust with an owner is critical.
Buying a privately-held business is not like buying a car where you can negotiate the lowest possible price and then drive away and never see the salesperson again. In this case you end up driving off the lot with the salesperson in the car. Often, in a privately-held acquisition, the owner stays on and continues to work in the business for a number of years. Focusing on cost-cutting and financial engineering is no way to establish a successful (and profitable) working relationship.
Here are three ways to remember the human factor when speaking with owners:
Communicate strategic rationale – Most owners receive numerous offers for their business so it’s up to you to stand out from the pack. Clearly communicating the strategic rationale for an acquisition and prove that you’ve done your research to differentiate you from others.
Buy often, sell once – There is an asymmetry with buyers and sellers. You can buy as many businesses as you want, but the owner can only sell their business one time. It’s important to establish trust so the owner feels comfortable giving their “baby” away.
They are all for sale…for the right equation – Just because a company is “not-for-sale” doesn’t mean it’s not for a sale. It simply means the owner isn’t actively trying to sell the business. It’s up to you to find the right factors – financial and nonfinancial – that will change a “no” to a “yes.”
You’ve developed your strategy, identified the right markets, negotiated with the owner and papered the deal. If you think once you sign on the dotted line your job is done, you are mistaken. The M&A process doesn’t end when the deal closes. M&A is really a journey “from beginning to beginning” where the consummation of a deal is actually a fresh beginning for the newly merged company. Ensuring the pieces of both organizations mesh the correctly during integration is crucial to the success of an acquisition.
Poor Integration Can Ruin An Acquisition
Integration issues can plague a company long after the deal closes. Take United Airlines as an example. Although it’s been five years since the merge with Continental Airlines, the company is struggling to integrate its workforce. United’s flight attendants are still operating as if they worked at two separate companies, which has created operational challenges, damaged employee morale and company profit, and created unnecessary complications. Since the merger, about six percent of United flights have been delayed due to issues such as crew scheduling or maintenance problems. Understandably employees are frustrated. The failure to integrate effectively has eliminated the synergies – such as economies of scale and scheduling flexibility – that one might derive from having a larger workforce.
Why Do So Many Companies Struggle with Integration?
Leaders tend to think about integration as an afterthought, when really they should begin thinking about integration long before the deal closes. When it comes time to implement, they are “suddenly” faced with unanticipated challenges that could have been avoided or planned for had they started looking at integration earlier.
And as Kolko points out, if you don’t begin thinking about integrating prior to closing the acquisition, you may end up acquiring something that isn’t aligned with your strategy.
When you start thinking through integration issues and what the newly merged company will look like, you can get an idea of if and how the acquisition will operate post-closing. Will you let the company operate as a standalone business? Will you train employees to use your sales system? How will you leverage a new capability with those you currently have? Use your strategic rationale for acquisition to guide your decisions on integration.
Develop a 100-Day Plan
Thinking about integration early also allows you to be prepared and swiftly implement your plan once the deal closes. As the buyer, you only have one chance to make a good first impression with your new employees. The first 100 days of an acquisition are a critical time period when employees are less resistant to change. You have a unique opportunity to make sure everyone is in alignment during this time. Develop a 100-day plan prior to closing so you are not scrambling to put something together when it comes time to execute.
Some might say the best time to pursue an acquisition is when the right opportunity comes along, but they’re wrong. The best time to pursue M&A is whenever you are ready. The best opportunities are those that you seek out proactively. If you wait around for opportunity to come to you, you may be missing out.
To many it’s a novel approach, but we advocate pursuing not-for-sale acquisitions: that is, companies that have not advertised themselves as potential acquisition prospects, and may have not even have considered the option. The truth is, every company is for sale…for the right equation. Especially in the privately-held world, when a company is “not-for-sale” it simply means the owner is not currently considering selling, but they may be open to it if a sufficiently attractive vision is presented. It’s possible that up till now, they haven’t found the right buyer, or simply have never really thought about M&A as an option. If you only look at companies that are for sale, you drastically limit your choices.
By being proactive you can search for a company that meets your ideal profile and fits in with your growth strategy rather than accepting whatever happens to be on the market. If you were planning to buy a car, you wouldn’t wait for s salesman to knock at your door and hope you like what he offers. You’d decide on exactly the features and look that you want, and go in search of the closest match you can find.
Pursuing acquisition on your own terms starts with a carefully developed M&A strategy. This should complement your company’s overall growth strategy. The most successful acquisitions aren’t about cost-savings or financial engineering; they are about setting your company up for long-term growth. Acquisitions can be one of the fastest ways to grow your business and help you reach new markets and customers.
It usually takes at least one year to develop your M&A strategy, create a step-by-step plan, identify the right companies and execute and close the deal. Keep this timeline in mind when you start thinking about a transaction. So if you’re anticipating any challenges to your current growth, the time to start on your acquisition plan is not some future date when you run into an eager seller — it’s today!
Finding the right partner is a crucial component of successful mergers and acquisitions and pursuing a deal with the wrong company can be a costly mistake. We’ve all seen the headlines of major mergers and acquisitions that have fallen apart at some point along the deal – whether it’s before the transaction closes or during integration. On the other hand, if done right, with the correct partner, strategic M&A allows a business to grow rapidly and effectively and gain a competitive advantage.
When searching for companies to acquire, it is important to keep three things in mind: Strategy, demand, and options.
Any successful M&A process must begin with a solid, strategic rationale. Why do you want to make an acquisition? What will the acquisition accomplish? How is M&A aligned with your overall growth strategy?
It makes no sense to pursue M&A simply for the sake of it with no real plan in mind. That is like starting out on a trip without a map (or GPS or smartphone) and hoping you will arrive at the correct destination. Make sure you have a plan and strategy.
Once you have developed your strategy, you should determine the right market to focus before you being looking at individual companies. This “markets-first” approach allows you select markets that have a healthy, stable demand for your acquisition partner’s products or services. Without taking future demand into consideration, you risk acquiring a company in a shrinking market where demand for its products and services are in decline. Avoid pursuing these unqualified acquisition prospects by selecting the best markets for growth before researching acquisition prospects.
Have Many Options
While you may only be acquiring one company, it’s not enough to only pursue one acquisition prospect at a time. You do not want to spend all your time and effort pursuing one company only to risk having the deal fall apart in the end. Deals fall apart for a number of reasons – the owner get cold feet, you can’t agree on the deal terms, a competitor comes along, etc. If you have only looked at one company you will find yourself back at square one with nothing to show for all your time and effort spent chasing the deal.
In fact, it takes up to 75 to 100 candidates to identify the right deal. It’s not enough to have a plan B, you need a plan C, D, E, F, and so on. We encourage you to broaden your search for prospects to include not-for-sale companies. Not-for-sale simply means the owner is not actively considering sell – not that they will never sell the company. By including not-for-sale companies in your search you significantly expand your universe of potential acquisition prospects.
Think of your prospect pipeline as a funnel. Gradually, as you move forward in the M&A process, you will eliminate candidates that are not an ideal fit with you strategic rationale for acquisition. With the “funnel” approach you can move prospects along simultaneously, in a systematic and efficient manner.
It goes without saying that the introductory meeting is a crucial step of the acquisition process. If it goes well, your partnership could result in a successful deal. If it goes badly, you may be throwing away a great opportunity and have wasted hours of time and resources chasing the deal.
Your goal for the first meeting is to impress the owner or management team of the acquisition prospect and keep them interested in learning more. In not-for-sale, strategic acquisitions, it’s especially important to convey your strategic rationale and vision for the future. The owner is not looking for a reason to sell, so it’s up to you to convince them to even consider it — and why you would be the best buyer of their company.
I’ve found that, without proper guidance, buyers tend to make the same mistakes in first meeting with owners. Here are 5 common errors:
1. Using a Generic Presentation
Failing to customize your presentation for each target company is a huge mistake; a generic presentation is the best way to get ignored or even kill a deal. No one wants to receive a boilerplate presentation that is irrelevant to their business and current situation. Take the time to tailor the presentation to the acquisition prospect. Think about what you have learned about the company during research and your introductory call. What are the owner’s hot buttons? And what might motivate them to consider selling? Even simple touches like adding the prospect’s logo to the footer of the presentation really make a difference and demonstrate that you are serious about the deal.
2. Bringing In Lawyers Too Soon
Lawyers and advisors are necessary and important figures in M&A, but lawyers aren’t needed at a first meeting. That only elevates tensions and can close off communication with a seller who may be less experienced than you in M&A. Even if the seller decides to bring their lawyers, leave yours at home. We once had an anxious owner who scheduled our first meeting at his lawyer’s office. We agreed, but said we wouldn’t be bringing any lawyers. Upon hearing this, he changed his mind and we ended up meeting at his company and even getting a tour of his plant. Not having lawyers completely changed the atmosphere of the meeting and our conversations. Our client was able to connect on a deeper level with the owner that ultimately led to a successful acquisition.
3. Not Selling Your Vision
Even though you are the buyer, you are effectively trying to sell your vision of a successful acquisition to the owner. How would the transaction benefit both companies? Why do you want to acquire this specific company? Why are you the best buyer for their business? These questions should already be answered and your goals should be clearly defined before you even approach an owner about acquiring their company. Then, once the owner expresses interest, you’ll be able to share your vision and strategic rationale in a clear and convincing manner rather than scrambling to put together an explanation.
4. Taking Charge
Demanding the first meeting be on your terms, or on your turf, puts sellers on the defensive. Let them pick the location and allow them to be your hosts. Making them comfortable may mean they are more willing to talk openly about the possibility of an acquisition.
5. Talking too Much
One huge mistake buyers make is saying too much too soon. The introductory meeting is like a first date. Don’t spill all your secrets right away or expect the owner to tell all. It’s important to keep some information back until a later time. A great way to make sure that you don’t put your foot in your mouth is to limit the time spent during your first visit. Typically we will have a dinner the night before and a three-hour meeting the next morning. Specifically, avoid having breakfast with the owner, and do not stay for lunch. The simple rationale: If you stay too long you may be tempted to fill dead air and venture in too deep too soon. Remember, if all goes well there will be more meetings and more opportunities to share information.
Why is ConAgra spinning off this private label business so quickly after acquisition?
The many reasons include pressure from activist investors, poor performance, increased competition, and tighter margins. Ralcorp’s revenues dropped by 6 percent over the past few years.
One key reason lies in ConAgra’s original acquisition strategy. When it acquired Ralcorp after chasing the company for over a year, ConAgra focused mainly on cost savings. At the time ConAgra stated the acquisition would “provide significant annual cost synergies.”
“ConAgra Foods intends to use its strong infrastructure and productivity capabilities to drive significant cost synergies from this transaction, primarily in the areas of supply chain and procurement efficiencies. It expects to achieve approximately $225 million of cost synergies on an annual basis by the fourth full fiscal year after closing.”
Unfortunately for ConAgra, focusing on the cost synergies of the deal has been unsuccessful. ConAgra has struggled to expand its private label business despite a growing private label sector. It has been unable to respond to increasing competition and shrinking margins. Cost-cutting has a place, but it can’t grow revenues or help your business stand out from the competition. This is why I recommend against focusing on cost savings in M&A. You can only reap the benefits of cost synergies once and then you need a new plan for growing your business.
Rather than focus on cost cutting, successful acquirers target adding long-term growth to business.
There are many reasons for acquisition other than cost-cutting, including:
Adding a new technology or capability
Entering a new market or sector
Enhancing your brand and reputation with customers
Blocking a competitor
Acquisition is a costly undertaking, both in terms of finances and time. ConAgra spent about a year and a half chasing Ralcorp only to divest it less than three years later. Don’t let your acquisition efforts go to waste. Make sure you have a compelling strategic rationale for the deal — one that is focused primarily on growth.
I decided to answer a very basic, but important question about M&A, given that we often talk about strategic acquisitions.
Q: What’s the difference between a financial and a strategic buyer?
A: A financial buyer brings little inherent value to the transaction. Typically they bring capital and capital allocation knowledge, but usually no specific knowledge about the technology, application, or customers of the seller.
On the other hand, strategic buyers do have specialized knowledge about a particular market or product that will add value to the transaction, or what we call “synergies.” Synergies typically come in two forms – cost reduction or increasing revenues. Acquisitions that bring real value are focused on the revenue growth side rather than on cost-cutting. You can only cut costs once, but done right you can continue to grow revenue for years to come.
For example, although a strategic acquirer may be able to cut costs by consolidating overhead and admin expenses, that hopefully is not the only reason for the acquisition! It might be that the seller’s technology is complementary to the buyer’s and can be used to grow market share through cross-selling. In a recent example, Verizon just closed on its acquisition of AOL for its mobile advertising technology. Verizon is a huge mobile carrier and has expertise with mobile phones and an understanding of the technology and business. Adding mobile advertising is another way it can increase revenues with its current customer mix, especially as more and more people acquire smartphones.
For strategic acquirers, the focus of the acquisition should be on long-term growth for the entire business. Most strategic acquirers will buy a company and keep it rather than sell it after a few years to make a profit, as private equity groups tend to do.
Q: “What if the buyer and seller functional leaders do not match? How do you coordinate the two sides?”
We take a functional approach to due diligence where we encourage your leaders from sales, marketing, finance, operations and other functional areas to meet with their respective leaders on the seller’s side. A functional approach ensures all important aspects are covered and explored during due diligence.
Functional due diligence: Functional leaders from the buyer meet one-on-one with functional leaders from the seller during due diligence.
However, we often run into a situation where there are more functional leaders on the buyer’s side than on the seller’s because traditionally buyers tend to be larger than sellers. While you still want functional leaders from each side to meet, keep in mind you don’t want to overwhelm or intimidate the seller. I don’t mean take a soft or easy approach, but don’t have two or three of your functional leaders meeting with one leader from the seller’s side. It will feel like an ambush.
Identify which leader from your organization most closely aligns with their functional leader and pair them off one-on-one. For example, while you may have accounting, HR and tax professionals, select only one of these leaders to meet with the individual performing all of these functions at the seller’s business. This approach will allow for effective communication between buyer and seller.
On May 18, Endo announced it would acquire Par Pharmaceutical for $6.5 billion cash and $1.5 billion stock. The acquisition is the latest consolidation in a robust M&A market, especially in the healthcare sector. Endo has stated multiple reasons for the deal, including building its generic drug platform as well as significant operational and tax savings.
The transaction will save the company $175 million in tax and operational synergies the first 12 months. While these savings are an important part of the picture, they are not the primary driver for the deal.
Adding more products to build out Endo’s generic drug business is where real growth lies. The Wall Street Journaldescribes it this way: “Tax benefits are widely seen as juicing an otherwise hot deals market, particularly for health-care M&A over the past year and a half.”
Once the acquisition is completed, the expanded generic drug pipeline will be a gift that keeps on giving, unlike cost saving benefits, which can only be reaped once. New generic drugs will help Endo grow now, over the next few year, and for many years to come.
The acquisition will:
Create a generic drug business that is one of the top five as measured by U.S. sales.
Create one of the fastest-growing generic drug divisions in the industry
Add 100 products to Endo’s portfolio, some of which are more expensive, injectable medicines
Double revenue for the generic division
By acquiring Par, Endo is fulfilling one specific need – growing its generic drug business. This approach is what we call having only one reason for acquisition, which allows you to remain focused on your strategy for growth and increases your chance for success. Rather than trying to fulfill multiple needs with one acquisition, which can lead to a diluted and unfocused strategy, have only one reason for acquisition so that you have a clear path for moving forward.
If you do have multiple needs, you can always take a second bite of the apple, which is what Endo has done as a serial acquirer throughout the years. By acquiring multiple companies, Endo has grown considerably. Since 2013, the market value of the company has quadrupled.
Endo’s recent deals include:
Auxilium Pharmaceuticals, a Pennsylvania-based biopharmaceutical company, for $2.6 billion
Natesto (testoternoe nasal gel) for $25 million from Trimel BioPharam SRL
Generic pharmaceuticals company DAVA Pharmaceuticals for $575 million
Expanding in Latin America with Grupo Farmaceutico Somar, a privately owned pharmaceutical business based in Mexico City
The rights to Sumavel DosePro, a needle-free delivery system for subcutaneous use, from Zogenix Inc. for $85 million
Paladin Labs for $2.7 billion, which allowed the business to reincorporate in Ireland
Specialty generics company Boca Pharmacal for $225 million
There was a different strategic reason for each deal. For example, the Auxilium Pharmaceuticals transaction specifically focused on men’s health and urology while the acquisition of Grupo Famaceutico Somar focused on growing in key emerging markets in Latin America. Often frequent, smaller, strategic deals can help a company grow more effectively than a single large, transformative deal.