exit_strategyHere’s a recent exchange between the two principals in an acquisition we are advising on. Seller to buyer, “So what’s your exit strategy?”  An odd moment in the circumstances. Usually, the last thing M&A buyers have on their minds is offloading the newly combined entity. Seems a bit like talking about divorce at a wedding.

In fact, the seller was revealing a rare foresightedness. Wise company owners keep a constant eye on the exit, and have plans for getting out even as they appear to be getting deeper in.

Few owners I have seen actually exemplify this wisdom. They are too engrossed in the demands of growth, worrying about the next contract, the new hire, the late delivery… They are staring at the ground three feet ahead of them, not the far horizon. So when do they actually get to consider selling? When disaster strikes. A major account is canceled. A new competitor surpasses their technology. Three of their key people leave.

Well no surprise, that’s hardly the optimum time to sell! Do you really want to put your company on the market when it’s worth the least? Better to think ahead while times are good. Having an exit strategy doesn’t oblige you to leave. Planning how to attract a buyer doesn’t compel you to hang a “for sale” sign on the door.

You should not only have an exit strategy, you should keep revisiting and updating it as the market changes.  That way, you’ll be positioned to take advantage of your company’s strengths, rather than risk falling victim to its weaknesses.


In my last post I commented on the opportunity that has risen in the mid-market with the concentration of investment banking focus on major deals. There’s a chance for third-party advisors like Capstone to do more than fill the vacuum recent events have created.

However, it’s important to understand what the gap really is — and actually always has been.

The problem with investment bankers is their hunger for the deal. It’s a healthy instinct in itself, but in the world of mid-market M&A where I operate it needs to be held in check by a broader perspective. The Capstone “road map” for acquisitions comprises three major components of which “Build The Deal” is only one — the third and last. The first two components are “Build The Foundations”, which establishes the strategic objective, and “Build The Relationship”, which sets the stage for successful negotiations.

Investment bankers by training and inclination tend to rush to stage three, “Build The Deal”, without giving adequate attention to “Build The Foundations” and “Build The Relationships.”  If you want one reason why 77% of M&A transactions end in failure, this is it.

To win at this game, you must know exactly why you are making an acquisition. As I’ve written elsewhere, successful M&A deals are driven by ONE clearly defined reason. Arriving at that one reason takes a process of strategic analysis.

As soon as you have your strategic objective, and a clearly defined path to achieving it, you’ll begin exploring possibilities with a number of target companies. There is a tremendous amount of skill required in this process of courtship, which may be going on simultaneously with several potential acquisitions at the same time.

M&A consultants to the mid-market who help their clients through these two challenging stages will have far more success with third stage, closing the deal, than most investment bankers. I know this for sure, because the success rate of Capstone’s deals is so far above the average.

This is a period of enormous change in the financial, business and  worlds. With change comes opportunity for creativity and leadership. Who do you see rising to the challenge? I’d welcome your comments on this.

The short answer is: they got bought up by massive banks. The rapid consolidation of the investment banking industry is one of the most dramatic developments amidst the recent financial turmoil. The independence of the old IB firms has vanished, consumed by monolithic multi-function institutions like Bank of America.

The real question is, what does it mean for M&A?

Think of what happened as the accounting industry consolidated, gradually condensing to the Big Four that survive today. Operating on the scale they do, these institutions fix their sites on the largest possible accounts. They become almost exclusively oriented to major public corporations. For mid-market companies, they tend to provide an off-hand service, highly priced and staffed by their lowest tier consultants. We’ve seen a similar trend in the consolidation of the big law firms.

Now look for the same effect in the investment banking industry. They will continue to pay lip service to the mid-market, but the energy will shift to the corporations that are a closer match to their own scale.


For the mid-market, this will trigger a classic “creative-destructive” cycle.  It will open the way for specialist third-party advisors who are not investment bankers in the old mold. They won’t provide securities offerings or lead IPOs. They may not be so exclusively focused on the sell-side as investment bankers have tended to be. In fact, this new breed of mid-market M&A advisors will do more than fill the gap left by the investment bankers. They will provide broader strategic consulting, helping their clients

manage external growth programs that include acquisitions and other pathways of opportunity.

Full disclosure here: this is the model that my firm Capstone has been pioneering for several years.

If you’re thinking of buying another company, the scale of your projected acquisition is an important question you need to settle early on.

Your objective is growth, and it would be easy to deduce from this that the bigger your purchase, the better. Not so. You’ve heard the familiar question, “How do you eat an elephant?” with the equally familiar answer “One bite at a time.”  That’s the mindset that works best when strategizing your external growth.

It is dangerous to try to expand too far too fast and to make a quantum leap by acquiring a company much bigger than your own.  A series of small acquisitions will give you a better chance that each one will tightly fit the need it is supposed to meet.  Your acquisitions will also be easier to integrate and assimilate into your company’s culture.

This principle makes all the more sense when you combine it with my “rule # 1” — have a single reason to buy. Making several highly focused acquisitions will get you further, with more safety, than trying to meet multiple goals with one huge purchase.

Companies buy companies to grow, but that doesn’t tell the whole story. In reality, there can be multiple reasons for an acquisition. Here’s a snapshot of some of the most common:

  1. Increase Top Line Revenue – The ultimate objective in any business is higher earnings, and to reach that goal you will eventually have to raise your revenues.  Cost reduction has diminishing returns and organic growth has its limits, so acquiring a healthy, cash-flow company can lead you to positive earnings/holdings.
  2. Expand in a Declining Market – In a waning market, acquiring a bigger portion of it will allow you to maintain (or even increase) revenues while you wait for the market to rebound.  And if it does not, you will at least own a larger slice of a smaller market. 
  3. Reverse Slippage in Market Share – If your company is losing its share of an important market, making an acquisition could stop this slide – so long as you figure out why the slippage is occurring.  
  4. Follow Your Customers – Your customers may be seeking products or services that you currently do not provide.  Adding such products or services to your portfolio through acquisition gives them a “one-stop shop”.
  5. Leverage Technologies – Rather than develop a new technology to stay competitive or to spur product innovation, it may be more cost effective to acquire a company that already owns that technology.  Acquisitions give you the unique ability to pick a “winner” amongst the various versions of a particular technology.
  6. Consolidate – Acquisition of a company in the same markets with the same products or services as your business allows you to increase purchasing power or reduce redundant expenses by capturing economies of scale.
  7. Stabilize Financials – Buying and incorporating a business with higher margins will bring stability to your balance sheet.  Cash cows die and businesses are affected by cyclicality and seasonality – an acquisition lets you invest in a new breed.
  8. Expand Your Customer Base – Some corporate customers are tough to penetrate, and having your sales people try to steal them often just won’t work.  Acquiring a competitor will give you access to their customer list and the relationships they have built.  
  9. Add Talent – Bringing aboard a seasoned executive or dynamic development team from an acquisition brings fresh human resources to your business.  Acquiring for this purpose can be seen as a “group hire.”
  10. Get Defensive – The best way to fend off a competition may be to directly purchase the competitor itself or by to buy a valuable company that your rival is positioned to acquire. 

    I’ve mentioned in an earlier post the importance of having ONE reason to buy, not several. Hopefully this menu of common motivations may help you focus on your singular purpose for an acquisition

    Let me know your thoughts. Your comments are always welcome.

    I was struck by Matthew Karnitschnig’s excellent article in yesterday’s Wall Street Journal. His opening line was perhaps an overstatement — “M&A is almost dead”. But the gist of his piece is right on the money.

    Mr Karnitschnig’s theme is the one I have been pounding in this blog for the past few weeks. In the world of M&A, cash is king. He points out the shift of power from sellers to buyers, and the extraordinary advantage held by cash-rich companies right now.

    Despite that advantage, even the cash-rich players are mostly sitting on the sidelines right now.  Nevertheless, those that come out to buy are able to seize on significant opportunities that weakened companies present. The article also points out the rise in PIPEs (private investment in public enterprises), and makes an accurate observation that in the current climate, even where cash is available buyers are shifting their preference to stock purchases. Why? To hang on to the cash, of course.

    One other very striking comment: “With growth unclear, buyers are more focused on what companies are earning now than what they may earn in the future.” That is no doubt true, but it’s an alarming truth. If you are considering a purchase, this is a trap you must make every effort to avoid.

    One reason the deals we put together at Capstone are so frequently successful is that we are adamant about one principle: strategize your acquisitions in terms of future demand.

     you are contemplating growth through acquisition, let me offer one rather obvious piece of advice. Know why you are buying. 

    At Capstone, we impose a strict and simple rule. Have ONE reason, and one reason only. A single reason, a single strategy, a single company: that is the discipline of success. Trying to fulfill multiple needs through one acquisition will meet none of them particularly well. 

    Think back to the infamous AOL–Time Warner merger. The press release issued to announce the deal is very revealing. Here is what it said:

    “No company will be able to better capitalize on the convergence of entertainment, communications, and commerce… the possibilities are truly endless. The true value of this union lies not in what it will do today, but what it will do in the future.”

    While possibilities are endless, actualities can be avoided. AOL-Time Warner fell victim to an undisciplined strategic approach. Lacking a single, specific rationale, the merger became that most dangerous and wasteful animal: a solution in search of a problem.

    Here for contrast is a press release that a client of mine, a German manufacturer, released after we helped them acquire an American competitor:

    “This acquisition will allow us to accelerate our growth strategy to manufacture and distribute our products in the U.S. market.”

    No glowing rhetoric here, but the reason for acquisition is clear: expand the customer base by entering a new market.  Unlike the more spectacular AOL-Time Warner merger, this has been a successful and profitable marriage.

    Singularity gives focus, and focus generates results. You can read by a defuse light, but to cut through steel you need a laser beam.  Our German client had a focused acquisition effort and was successful because of it. If you want a profitable result, follow the Capstone rule: have only one reason to buy.

    What might your objective be? Share it here (you can disguise the details) and I’ll give you my feedback on your acquisition approach.

    My company Capstone is in the business of helping clients with external growth, and that usually means buying another company. But not always. It’s easy to miss a rich field of alternative opportunities if you just latch on to acquisition.

    Let me just focus on one of these: minority interest ownership. This surprisingly neglected tactic has many significant benefits. First of all, assuming you have a limited budget to invest in external growth, buying several minority interests allows you to spread your risks. You don’t have to put all your eggs in one basket.

    Secondly, you can purchase an interest in a company that would otherwise be too expensive, or too big for you to comfortably acquire whole.

    A third benefit is that your investment as a minority owner is unlikely to trigger the departure of a management team that you may want to see remain for some years to come.

    An instinctive objection arises when I raise the possibility of minority interest purchases with clients. “But we want to control the company we are buying” They think of minority ownership as a kind of passive investment where you effectively have no decision power over what happens.

    In reality, you can often have your cake and eat it — purchase a minority interest and exercise the control needed to achieve your goals. If there are specific results you are seeking from an acquisition, you can have these written into your minority purchase agreement. They might include customers, suppliers, technology, personnel or any other asset that is motivating you to make a purchase. If you are looking for more widespread influence, you can also stipulate a presence on the board.

    Sometimes a small piece of a big pie is all that’s needed to satisfy your company’s hunger for growth.

    Common sense suggests that growth is simply about getting bigger — having more customers, more markets, more products and more revenues. In reality, a successful growth strategy should help you become increasingly focused and effective. Of course you want to increase your profits, but higher earnings don’t automatically flow from supersizing your company. 

    In fact, the opposite can be true. 

    I prefer to see an acquisition strategy as a way to recalibrate the company, bringing it into closer alignment with its inherent purpose and current market conditions. Recalibration is an endless necessity today, because economic and technological changes are remapping the business environment at such an extraordinary rate. We could rewrite the familiar maxim “Grow or Die” as “Recalibrate or Die”. 

    Another way to put this is that “growth” can sometimes mean doing less of something. It can mean shedding customers. It can even mean divesting whole divisions of your business. In my seminars on M&A, I often refer to General Electric, an avaricious acquirer of other companies. I point out that in recent years GE has tended to sell as many companies as it has bought. A continuous process of selling and buying allows management to define and redefine what this great corporation is really about.

    Naturally any idea of contraction is counter-intuitive to the entrepreneurial owner whose eyes are fixed on a horizon of endless expansion. At Capstone, when we introduce the re-calibration concept to clients, we often meet initial resistance, but those who are willing to stay with the program see remarkable results.


    In my last post I was talking about perhaps the most fundamental strategic question: What business are you in?  This question actually goes beyond how you define your product or service. It extends to the kind of customers you are seeking. Here’s something I often ask clients who are looking to grow by acquisition:

    “Assuming the same revenue outcome, would you rather have 10,000 low-value customers or 1,000 high-value customers?” 

    The answer is always revealing. If you are inclined to take the 10,000 you are more likely to be at the commodity end of the market. Nothing wrong with that, although it definitely carries challenges. That choice may also indicate you trust your marketing more than your product. If you prefer the 1,000 high-value customers, that suggests you have the potential for a strongly branded position, and you probably see unique strengths in your product or service. To flourish at this end of the spectrum, you had better be sure of your capacity for customer retention. In that case you are really a relationship company.

    Tell me your ideal customer, and I’ll tell you what kind of business you are in.


    One of the most potent tools we use at Capstone to help our clients prepare for an acquisition is a set of seven strategic questions. They are so simple, so obvious, that you’d think them unnecessary to ask. Yet they are often skipped over in the rush to grow. Let me share with you the first of them.

    “What business are you in?”

    Of course, this is a trick question. The right answer is usually not the first answer. A classic example from the annals of corporate America: Union Pacific thought they were in the business of railroads — the commonsense answer. In reality, they were in the business of mass transportation. Had they recognized this early enough, they might today be flying planes or building hybrid cars.

    So exactly what business are you in? Amongst all the host of activities your company is engaged in, where is the beating heart? Step back, look at the big picture, and ask yourself: what is our business really about? 

    Don’t underestimate how powerful this inquiry can be. Your decision will certainly impact the trajectory of growth you choose. In a world of incessant change, you face an almost intolerable choice of opportunities. Without being anchored in a strong, unhesitant self-definition, you can be easily dragged this way and that. I see it happen, and I see the costs. 

    “What business are you in?” is a question to live with, to ponder and test and challenge. It can yield extraordinary clarity for your strategic planning.


    The statistics are frightening. By most reckonings, 77% of company acquisitions fail. That failure rate has nothing to do with luck. It is the telltale statistic of widespread ignorance. Now when I say “ignorance” I don’t mean lack of expertise. That’s the paradox. 


    I often encounter clients who tell me, “Yes, we have an in-house M&A expert…” It turns out the expert really does know a lot — about due diligence, or company valuation, or negotiation. The problem is, a chef who’s only mastered salad dressings is unlikely to run a profitable restaurant. 

    Buying a company successfully depends on knowing more than one piece well. It requires your mastery of an entire, integrated process, with all the functions working together. When I am teaching M&A — to doers, not academics — I often use the phrase “from beginning to beginning.” My point is that the end of a transaction marks the beginning of a whole new business reality, the merged entity. Between those two beginnings lies a sequence of steps, each of which must be diligently completed for a successful outcome. It’s a journey, and any journey significant requires preparation. 


    In the harsher climate we’re heading into, the risks of failure in M&A are sure to increase. At the same time, for those with the right map in their hands, the opportunities for reward may be commensurably greater.


    If you want to read a decent book on M&A, be prepared to spend $70 or $80, and set aside several days to plough through a heavy-duty tome for business students. There are exceptions, but for the average business reader there’s remarkably little to guide you through our world of deals.


    So I’m writing a book. And it won’t be 500 pages long, or cost $70! The working title is “A CEO’s Guide To M&A” and its really for the kind of people I do business with — leaders of substantial companies and divisions in the mid-market sector. 


    M&A has a peculiar aura in the business world. On the one hand, there’s the fascination of massive corporations eating each other alive. On the other hand, there’s all that dreary academic literature. The subject seems simultaneously glamorous and impenetrably dull. 


    In reality, most acquisitions are not multinational mega-deals. Every year, hundreds of transactions are consummated between companies below the $1 billion revenue level, the majority privately owned. You will rarely read about these deals in the business press, and by definition a private transaction yields less public information. Yet this activity is absolutely essential to a healthy economy. 


    One thing I’ll be emphasizing in my book:  the true function of an acquisition is not just growth, but recalibration. Buying another company will change yours, for better or worse depending on how strategic your approach. By the same token, M&A as a whole serves to recalibrate entire industries. It’s one of the market’s most effective mechanisms for self-correction and positive evolution.


    That’s why I’m hoping my work will interest the general reader, as well as CEOs. The better you understand acquisitions, the better you understand business itself.

    “Our strategic plan calls for us to double our size…” I hear it often. As a plan, it’s usually very successful in

    doubling the stress of frustrated executives. By massive efforts to improve products and smarten the marketing, they can get revenues from $100 million to $125 million. But $200 million? They pay lip service to the dream of “doubling” but in their hearts they know it’s a pipe dream.

    Which it often is, if your only engine is organic growth — that’s to say, growth from the inside of your current operations.

    The missing piece here is M&A. In many cases, the only realistic way to hit that major goal is growth through acquisition. So why don’t more companies look to M&A as a serious strategic component?

    Often the reasons are quite practical and mundane. Nobody has the time for it. The idea of an acquisition gets tossed around, and it looks quite sexy. But who will get in trouble for not pursuing it? Whereas a failure to lift those sales numbers, or shave that margin, or accelerate that product line, can hurt your career.

    Pushing the envelope of organic growth can consume all the time and energy a company has, and leave nothing to spare for M&A — ironically, the potential engine for massive expansion.

    One possible solution: enroll a third party to lead and manage your acquisitions program. You’ll still have to invest some internal time and resources, but the burden shifts to an outside expert and it will be their job to push the M&A program forward.

    Leaving you time to squeeze another inch of growth from your existing business.

    This post was contributed by Capstone’s Managing Director, John Dearing
    Photo Credit: Graham C99 via Flickr cc

    The year is closing out and it’s budget season again, a time to look ahead to 2009. Despite the chilly economic climate, there are plenty of companies doing pretty nicely thank you. At Capstone we have a number of successful clients who have their current operations nailed down. Products are selling, customers are loyal and they have their internal systems down to a science. 

    For them, the temptation now is to simply hold course and watch as weaker competitors get tossed around by the waves of fear and crisis. Conventionally, the only strategic thrust you’d see here would be for still greater efficiencies and an uptick in customer service. 

    Instead, our clients are taking a more aggressive stance and pushing for new external growth. They are in research mode, hunting for the next transformation in their industry and they are looking at acquisition as the key to expansion.

     A quote here from Peter Drucker:  “Traditional planning asks — what will happen next? Planning in times of uncertainty asks instead — what has already happened that will create the future?”

    If you spend a bit of time and energy looking around corners, you can use the current environment to plan exceptional external growth three to five years out. But why acquisitions? Because this isn’t about transforming your current success into something else. It’s about launching new initiatives in parallel with your mature operations. The right external partner can bring something new and different to your mix, protecting you from the natural decline that follows maturity and extending your company lifecycle into the next decade.

    The message I get from these forward-thinking clients of ours? Ignore the gloom-and-doom press, invest in market intelligence and look for opportunity outside your own four walls. A little time spent here could generate huge returns in the years to come.

    This post was contributed by Capstone’s Managing Director, John Dearing

    Dark times on Wall Street and gloom in the real economy… but for companies seeking external growth there are gleams of hope from distant quarters. Funds continue to pour into the US from abroad. I just spent time with an economic development group hosting a contingent of matchmakers from China — entrepreneurial types looking for the hot areas here in the US. Healthcare, medical technology, food, capital equipment… All these are getting attention for potential courtships. 

    The influx of cash was first stimulated, of course, by a weak dollar but now the greenback has leveled off there is still plenty of interest from overseas. Why? Troubled times are rich in bargains, and cash-rich buyers can smell them from far away.

    The opportunity street is not one-way, however — particularly for US companies ready to think outside the box. Obviously, troubled firms can gain liquidity by selling, but that’s not the only option. 

    It’s a common misconception that the world of M&A is neatly divided between buying and selling. In reality, there are many shades between and this is where the gold may lie for American companies. Take the trouble to research, and court, some of those hungry visitors to our shores and you’ll find opportunities for all kinds of other deals, like marketing partnerships, JVs or minority investments. 

    Rather than throw in the towel and sell, you could use foreign money as leverage for external growth.

    This post was contributed by Capstone’s Managing Director, John Dearing

    I was asked the other day what can be learned from the possible merger of GM and Chrysler. Specifically, what might this union of giants teach the M&A market lower down the food chain?

    As I’ve said elsewhere, this is a time when corporate mergers can appeal to those struggling with a hostile economic climate. Reducing competitive pressure, cutting costs, gaining market share… All seem like good outcomes when two players in the same market consider forming a single new entity.

    My concern about the GM-Chrysler engagement is that it models a marriage based on weakness. Both companies are in trouble, and in my experience two failures don’t make a success. The underlying problem is that mergers of this kind are driven by an agenda to cut costs. No company grew rich on that agenda alone. To win the business game, you have to keep developing new products or finding new markets — or both.

    On the positive side, a merger of this kind can buy you time. That may be good enough reason for the auto makers to tie the knot. But only if they immediately launch a proactive campaign of true innovation in products and/or marketing.

    And that should be happening anyway.

    When it comes to funding acquisitions, banks are still holding tight to their money — unless you count the special case of banks buying other banks, which is causing quite a stir in the wake of the government bailout. The fact is, this is still a tough time for M&A, especially in what I have called “the wedge”: M&A transactions between $1bn and $10bn. Smaller deals continue under the radar, and the mating season of the behemoths never ends. Witness the prospect of GM and Chrysler merging.

    In the wedge, a huge area of M&A activity, private equity is being told to wait. Banks aren’t playing and neither are the battered hedge funds. So we can expect a hold on most LBOs (leveraged buyouts) until at least the early part of next year. However, not all private equity firms are taking this lying down. They are turning away from traditional sources and seeking capital elsewhere — specifically, the public markets.

    The result: we’re seeing renewed interest in SPACs, or Special Purpose Acquisition Companies. These are basically IPOs launched purely for the purpose of buying companies. How quickly this trend will increase is an open question, but it’s certainly a development to watch over the coming months.

    Watch out for one defensive M&A strategy in times of financial stress. Instead of selling, weaker companies under threat may seek mergers with other victims of the crisis. Expect to see quiet talks between struggling competitors, looking for ways to wring out the costs and create a new, stronger entity.

    A short while ago, banks were pressuring struggling companies and seemed only too eager to move them into the “distressed” category, or effectively force them to sell. Recently, there’s been a dramatic reversal of attitude. The last things banks want on their hands is a host of collapsing companies. So you’ll find a very liberal attitude right now. That doesn’t mean that new credit is easy to come by, of course. As we all know that’s as rare as the unicorn right now. But if you have existing obligations to your bank, you may find new ways to work with them. They want you to stay in business, and you can use that need to your advantage.

    What does this mean for mergers and acquisitions? What does this mean for buyers? For those with a strong balance sheet, there are opportunities to work effectively not only with troubled sellers but also with the banks that service them.