With every acquisition you have a choice of how you will integrate the two entities. Often buyers assume a “winner-takes-all” approach where they impose their systems and culture on the acquired company. This is not always the best way to successful integration. In fact, it may be best to integrate some of the seller’s practices into your own organization.

In our new M&A Express Videocast, I advocate a strategic approach that leverages the best from both entities. I will also introduce the power of the 100-day plan in achieving a successful integration.

How Far to Integrate

April 5, 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
  • The Letter of Intent: A Key Milestone

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.

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.

Strategy First

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.

Be Demand-driven

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.

Learn more about Building a Robust Pipeline of Acquisition Prospects in our webinar on March 17.

Date: Thursday, March 17
Time: 1:00 PM ET
CPE credit available.

Photo Credit: Barn Images

Do you know when to walk away from a transaction?

After all that hard work putting together an acquisition —not to mention the costs in both time and money—it might seem unthinkable to give up on a deal. But you should be on the lookout for these 10 warning signs during the transaction process. They may just be telling you to walk away.

  1. The prospect does not meet your criteria. Always keep your strategic objective in sight, and if the target doesn’t serve your goal, walk away.
  2. Only your CEO believes in the deal. Your CEO’s enthusiasm for a deal is not sufficient grounds to proceed, if no one else is convinced.
  3. There is strong dissent on the acquisition team. When the acquisition team is conflicted, the transaction is likely to fail.
  4. There are glaring cultural differences between the two companies. Some cultural difference can be valuable, but a complete clash of values and business philosophies will lead to trouble.
  5. The buyer and/or seller are inexperienced, or they lack good advisors. Beware of a transaction conducted by rookies!
  6. The buyer and seller can’t close an unrealistic valuation gap. Differences of valuation are inevitable, but if there’s no hope of finding middle ground, walk away.
  7. The valuation doesn’t change…even if facts do. Due diligence may uncover facts that should change the valuation — if it doesn’t change in the light of new data, that’s a bad sign.
  8. A poorly run auction of a for-sale company. Badly run auctions are a huge hazard and a strong reason to back off from a deal.
  9. Buying a company only so your competitor doesn’t get it first. If your goal is only defensive, rethink the transaction: there’s far more value in pursuing long-term strategic growth
  10. An overemphasis on sunk costs. Remember there are few things more expensive than buying the wrong company — so be prepared to cut your losses rather than press ahead regardless.

If you are finding many of these warning signs appear in your deal, you may want to reconsider going through with the acquisition. Take some time to think about it – Is this really the best deal for your company? You never want to execute an acquisition simply for the sake of it; rather M&A should always be carefully planned and strategic in nature in order to maximize your success.

Learn more! Watch the M&A Express Videocast “When to Walk Away” for free

Photo credit: Barn Images

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

In today’s internet age it seems like information is widely and almost instantaneously available. Just open up a web browser and type your search into Google and thousands of hits show up in less than a second. But how much of that information is accurate?

Precise data is critical to every business decision, especially when determining your strategic plans for growth. When pursuing M&A, understanding the market landscape and future demand of your customers is essential for the success of the deal and the growth of your company. If you develop your acquisition strategy based on unverified or inaccurate data, you risk making an expensive mistake.

While the internet can be a good place to start your research, you really need to dig deeper to get the complete picture. One of the best ways to get an accurate picture of the marketplace is by conducting primary research, where you talk directly key players in the marketplace. We use a technique called the “Triangulation Approach.” You will be speaking with three main groups:

  1. Customers of the product or service can help you identify unmet needs. Ideally you should speak with a mix of large and small customers.
  2. Competitors will help you identify what it’s like to exist in the market what affects their business on a regular basis, and give you an about the competitive landscape. It may be a bit tricky contacting competitors, and you may want to consider using an outsider third party for this research.
  3. Suppliers are those who sell into the market and whose customers may be your future competition. For example a part maker or tire maker in the auto industry.

Lastly, to tie all your research together you will want to speak with trade associations, industry publications, government or even academia. They will generally be more objective and have a broader view of the market and can even help with market segmentation. We have found in particular magazines of trade associations can be extremely helpful. Those writers generally have a good pulse on the industry while maintaining a big picture view.

The Triangulation Approach

The Triangulation Approach

The main benefit of using the Triangulation Approach is that you obtain information from multiple sources in order to confirm or deny information found in secondary research. When speaking to customers or competitors it is impossible to get 100% information, but through multiple conversations you will be able to compare and contrast information. Using the triangulation approach, you can put together a holistic, accurate view of the marketplace.

Armed with this information you will have a clear picture of future demand and be able to make the right decisions for growing your business through M&A.

 

Photo Credit: Barn Images

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

There are many tools available to help move a transaction forward, ranging from a simple handshake agreement to a formal purchase agreement with contingencies. We have found one of the most useful tools for moving the M&A process along is the nonbinding letter of intent.

To further understand the advantages of the nonbinding LOI, we’ve outlined below a list of the most commonly available tools to express and agreement between buyer and seller.

  • Handshake Agreement. In the old days, two businesspeople could shake hands on a deal with the understanding that “my word is my bond.” This is the least formal level of commitment, and may mark the beginning of a transaction process.
  • Memorandum of Understanding. An MOU is a written version of a handshake agreement.
  • Term Sheet. A term sheet is a document, usually about a page long, that identifies the basic parameters of the proposed transaction and the likely financial picture.
  • Indication of Interest. This form of agreement is most commonly used with for-sale transactions where prospective buyers need to give some indication of their credibility and seriousness about moving forward with the transaction.
  • Nonbinding Letter of Intent. As you can see, nonbinding LOIs are near the middle of the pack when it comes to transaction agreements. They are the focus of this article.
  • Binding Letter of Intent. A legally binding version of an LOI, bringing you closer to a contract.
  • Purchase Agreement with Contingencies. These are typically used when sophisticated buyers and seller seek to complete a transaction with the caveat that certain things, such as due diligence, need to be done first.
  • Purchase Agreement without Contingencies. A purchase agreement without contingencies is the most formal and binding type of agreement. In essence it says, “This is a firm offer. We want to close this transaction now!”

With the nonbinding LOI, there is a tremendous marketing opportunity in addition to the legal aspects of moving the transaction along. You could spend a year – or even two or three – having discussions back and forth only to discover that there’s really no deal at all. The Nonbinding LOI is one of the best ways for people to understand the parameters of the deal are and how close – or how far – apart you are. It helps determine if you’ll move the transaction forward and how without locking you into a binding agreement to acquire.

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

 

Photo Credit: shankar s. via Flickr cc

We are excited to share our expertise on strategic growth through M&A with our new M&A U™ Webinar certificate.

M&A U

The M&A U™ Webinar certificate will be awarded to those who attend all 12 monthly Capstone Webinars live. Each live webinar features a seasoned M&A expert sharing practical tools and tactics to accelerate your company’s growth. CPE credits are available.

We hope these webinars are a valuable resource for you as you continue exploring strategic growth through mergers and acquisitions.

  • Subscribe to an entire year of webinars
  • 12 webinars led by experts in M&A, Valuation and Tax
  • Receive a 15% discount
  • Earn up to 12.5 CPE credits
  • Become M&A U™ Webinar certified
  • Access webinar recordings on-demand

2016 Capstone Webinar Schedule

  • Five Options for Growth – January 21
  • How to Pick Top-Notch Markets – February 18
  • Building a Robust Pipeline – March 17
  • The First Date: Contacting Owners & Successful First Meetings – April 21
  • A New Look at Due Diligence – May 26
  • Successful Negotiation Tactics – June 16
  • Mastering Valuation for M&A – July 21
  • Keys to Integration Success – August 18
  • Tax Considerations in M&A – September 15
  • Contemporary Legal Issues in M&A – October 20
  • M&A: From LOI to Close – November 17
  • Brand Integration: An Acquisition Challenge – December 15

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.

Photo credit: UnknownNet Photography via Flickr cc

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

Signing the letter of intent (LOI) launches the final phase of the M&A process, where you delve into the details of due diligence, deal structure, closing the transaction and integration. In this third phase of the Roadmap to Acquisitions, Build the Deal, maintaining momentum remains critical. Even as the finish line is in sight, there is still much to be done in order to seal the deal and it is important to remain actively involved rather than defaulting to lawyers and accountants. In this final phase you have the opportunity to strengthen your relationship with the prospect and enrich synergies that will result from the newly formed business.

If you’ve followed the Roadmap to Acquisitions, all the work you’ve done previously in developing a strong strategic plan and building a relationship with the prospect will pay off as you navigate this final phase.

In our upcoming webinar, “M&A: From LOI to Close,” I will guide you through the final steps in the acquisition process and show you how to close the transaction.

After completing this webinar, you will be able to:

  • Explain the structure of an LOI and how to make it beneficial to your situation
  • Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
  • Utilize strategies to negotiate an agreement that is beneficial to both sides
  • Identify how valuation is affected during the Due Diligence and Closing processes
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

Date: Thursday, December 17, 2015

CPE credit available.

Photo credit: Hugo 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.”

 

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.

 

What is the best way to position your company to be sold? I’ve often heard this question from owners and executives who aren’t quite ready to exit their business but who may be thinking about its future over the next five to 10 years. If you’re in this position, you’re wise to begin thinking about the process early on – planning is essential in preparing a business for sale. Spending time on preparation will increase your likelihood of selling to the right buyer.

In my experience working on the buy-side, I would say the most important thing buyers are looking for is profitable growth. They will want to know that they can take what you have built and continue to grow it; otherwise the only other synergy would be cost savings.  Therefore they want a business that does something unique that other companies, start-ups or technology can’t easily displace.

Every business is different, but here are some areas that buyers tend to focus on when looking at an acquisition:

  1. Customers — Ideally, you have lots of them because customer concentration creates vulnerabilities.  You also need a system in place to bring on new business that doesn’t require your hands-on engagement, preferably with multi-year contracts.
  2. Audited or Reviewed Financials —  Potential buyers will have a lot more confidence in your business and the numbers if you have 3 years of audited or reviewed financial statements.  It goes without saying that a high-margin business is always desirable.  Tax returns will be asked for so make sure to file them — truthfully!
  3. People – Who is instrumental in the success of your company? What is your balance of employees and 1099 contractors?  These are increasingly important factors for a buyer. You’ll need a robust HR system for recruiting, hiring, training and retaining? Buyers also look at the quality of management. Do you have a team in place to run the business for the new owner, without you? A company that’s over-dependent on one individual has lower value as an acquisition, so make sure there are others ready to take over the operation when you leave.

M&A activity in the first 9 months of 2015 remained strong reaching $3.2 trillion globally. It was the strongest first 9-month period since 2007 for global mergers and acquisitions.

The trend of large, mega deals continued in the third quarter of 2015.  Global deal value increased by 32% in the first 9 months of 2015 when compared to the same time period in 2014. On the other hand, deal volume remained relatively flat, only increasing by 2.3%. The average deal size was $103 million, a 30% increase from 2014.

In the US, there were $1.5 trillion in the first nine months of 2015, a 46% increase in value when compared to the first 9 months of 2014.  Click on our infographic for more insights on M&A activity in 3Q 2015.

M&A update 3Q 2015

 

Feature Photo Credit: Mark Dixon via Flickr cc

SABMiller has agreed to Anheuser-Busch InBev’s $106 billion offer to acquire it. Together, they will form a global beer conglomerate with $64 billion in annual revenues that is estimated to make up 29% of global beer sales. The new company would be three times bigger than its next competitor, Heineken. Given that this is such a large acquisition, the merger will of course, be subject to regulatory approval and the two companies will likely need to sell off some assets in order to gain approval.

Strategic Rationale

With this acquisition Anheuser-Busch will gain access to fast growing markets like Latin American and Africa as sales in traditional markets like the U.S. and Europe have slowed down. This trend is widespread across the beer and even the liquor industry and is forcing large companies to take action. Earlier I wrote about liquor giant Diageo’s strategy to woo African drinkers with its own brand of spirits and beer. It seems like Anheuser-Busch is pursuing a similar path to growth by following future demand. Originally founded in Johannesburg, South Africa, SABMiller is the largest brewer in Africa, with a 34% market share. An acquisition may be the fastest and safest route for Anheuser-Busch to enter into a new market and attract new customers.

Negotiations

The agreement comes just days after SABMiller rejected Anheuser-Busch’s offer. As with many publicly traded companies, there were multiple shareholders to convince which took many talks over the course of several weeks. The investment bank 3G Capital which helped put together Anheuser-Busch, negotiated with two of SABMiller’s biggest shareholders: the Santo Domingo family and tobacco company Altria.

In any acquisition, understanding the motivations of the seller is critical to the success of an acquisition. In the case of Anheuser-Busch, without the approval of the two largest shareholders, SABMiller would not have agreed to its offer. Although privately held, middle market companies typically do not need to negotiate with multiple, large shareholders, especially not publicly, you may need to negotiate with two owners or even a family. These owners may want different things out of an acquisition. As a buyer, it’s up to you to figure out what the owner or owners really want and what will motivate them to sell. In this case, SABMiller, wanted something in addition to a high premium, it wanted assurances that the deal would pass regulatory approval and a $3 billion breakup fee.

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Tax implications can significantly alter how you structure a deal and even the price of your acquisition, so it’s important to understand their effect. Join us for a webinar on Tax Considerations in Mergers & Acquisitions and uncover what you need to know about taxes in M&A and gain an understanding of tax issues.

Join Capstone for a webinar led by Alexander Lee, a Partner at Paul Hastings and head of the transactional tax practice in Los Angeles. He has over eighteen years’ experience advising on corporate tax issues and has provided tax advice on over one-thousand domestic and cross-border mergers and acquisitions transactions.

After attending this webinar you will be able to:

  • Identify the tax motivations for buyers and sellers
  • Describe the different forms of M&A (Stock, Asset, Merger)
  • Explain the tax implications for C Corporation vs. S. Corporation, Partnerships or Limited Liability Companies
  • Understand taxable transactions vs tax-free transactions

Date: October 15, 2015
Time: 2:00 PM ET

CPE credit available.

Click to learn more and register.

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