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

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

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

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

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

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

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

Valuation, establishing the financial worth of a company, is an important step of the acquisition process. People often get excited about valuation and start crunching numbers in order to reach the best deal. However, before you become too focused on the financials, remember that valuation and price are not the same. I have seen many executives spend weeks pouring over Excel spreadsheets only to arrive at precisely the wrong number.

Valuation vs. Price

Valuation is the financial assessment of a business that is calculated using an accepted methodology. Valuation can be used for many purposes including strategic management planning, gift and estate tax compliance, accounting, and M&A. In an acquisition, valuation gives you a sense for what you should pay for the prospect company.

Price, on the other hand, is negotiated in the acquisition agreement and may not be the same number at all. A number of different issues, including deal structure and other non-financial aspects, may affect the dollar value you pay for the company. If you are a strategic acquirer, you may even be willing to pay more for a company in order to swiftly execute your strategic growth plan or to block a competitor from purchasing it.

Using Valuation in Acquisitions

Valuation is both an art and a science because there are many ways to calculate a company’s value. Calculating the value of a company is much more than just plugging numbers into an equation. You must obtain the relevant financial information, apply the appropriate techniques and develop the correct estimates.

The three most common methodologies are the asset approach, the income approach and the market approach. Using each method you will arrive at a different number. In addition, when calculating the value of a company for strategic acquisitions, you are attempting to value future performance, which is only an estimate at best. Determining the appropriate valuation methodology and assumptions to use requires experience.

Join us for a webinar on Mastering Valuation for M&A with Valuation Advisor Todd Nelson. Todd is an Accredited Senior Appraiser (ASA) and Certified Valuation Advisor with more than 18 years’ experience in complex valuation matters including strategic mergers and acquisitions.

Key topics:

  • Basic theory of business valuation
  • How to gather useful data on the economy, industry and specific businesses to assist in valuation accuracy
  • Basic business valuation fundamentals and techniques
  • Appropriate methodologies for your valuation purpose
  • Developing equity and invested capital discount rates
  • Understanding the sources of variables used in the development of a discount rate
  • Common adjustments for constructing normalized income statements

Date: Wednesday, September 21, 2016
Time: 1:00 PM ET – 2:30 PM ET
CPE credit available.

Photo Credit: Horia Varlan via Flickr cc

Middle market companies have faced many challenges to growth, but the tide is now turning. Previously, we had observed the dumbbell effect, where at either end of the spectrum massive corporations and small businesses flourished while middle market companies were caught in between. Unlike large multinational corporations, many middle market companies cannot leverage the same economies of scale to deal with price cuts, consolidation, and regulatory challenges. On the other hand, middle market companies do not have the same flexibility as startups to move swiftly in the market.

The Dumbbell Effect

The Dumbbell Effect: Massive corporations and small businesses flourish at either end of the spectrum, while the middle market is squeezed in between.

 

Corporations Sell Non-core Businesses

While this environment was challenging, it also created a unique opportunity for those who could seize opportunity and fill the void. Now the market has shifted and instead of consolidating, many large corporations are shedding non-core businesses in order to focus on fast-growing, profitable business units. P&G is in the process of selling 105 brands to refocus on 10 fast-growing category-based business units. Recently P&G sold Duracell to Berkshire Hathaway, various hair care brands including Pert, Shamtu and Blendax to Germany’s Henkel, and its fragrance, color cosmetics and hair color business to Coty.

Growth Through Strategic Acquisitions

Divestments by large corporations can generate opportunities for middle market companies looking to grow rapidly through M&A. With acquisition, middle market companies have the opportunity to quickly execute their growth strategy, whether it’s by adding a new product or service, acquiring a competitor, or expanding into a new geographic or vertical market. Overall, middle market M&A has remained relatively stable when compared to global values, suggesting that although mega-deals may be slowing down, smaller, strategic acquisitions are still being executed. Now is the time to carefully consider your opportunities and execute your growth strategy.

Photo Credit: Feature Image – Barn Images, Dumbbells – slgckgc via Flickr cc

“Why should I let you buy my company?” Chances are an owner will ask you this question during the course of your acquisition and you must have a convincing answer. While the strategic fit and benefits of an acquisition may be abundantly clear to you, an owner may not share your perspective. As a leader, you have years of experience working in your organization and a deep understanding of the business, but the owner may be completely unfamiliar with your company or even have false impressions. In the world of not-for-sale acquisitions, many owners have not even considered selling their business to anyone, let alone you!

What Makes Your Company Great?

In order to build a convincing argument, start by analyzing your own company. What makes your company great? Do you have a new technological capability? Are you leveraging unique distribution channels? Do you have the leading product or service? Are you strategically positioned in the marketplace?  Clearly communicate your the advantages of working with your company and your strategic value as a buyer. Don’t assume the seller already knows everything that you know about your business.

Communicate Strategic Value

After you have an understanding of your own company, it’s time to move onto the seller. Make sure you do your homework before meeting with the owner. Obviously you may not know everything about the seller, but it’s important to take the time to be knowledgeable about the company and the owner. Even simple touches such as tailoring your presentation materials can show that you are invested in the acquisition. In your meetings with the owner, show why an acquisition with your company makes sense and how you can grow together. You must sell your vision for the newly merged company and get the owner inspired and excited to join your team. Make sure you also listen to the owner and take their perspective into account.

Capstone announced today that Green Dot, a telecommunications provider headquartered in Trinidad and Tobago, has entered into an agreement to sell a 51% stake to One Caribbean Media. The acquisition will allow Green Dot to accelerate subscriber growth and continue expanding into new markets.

Capstone Strategic, Inc. (Capstone) announced today that Green Dot, Ltd. (Green Dot) has entered into an agreement to sell a 51% stake to One Caribbean Media Limited (OCM).

Green Dot, headquartered in Port of Spain, Trinidad and Tobago, is a licensed
telecommunications operator offering wireless ISP and subscription TV services to residential and business customers in Trinidad and Tobago, Grenada, and Suriname. OCM is a regional media group quoted on the stock exchanges of Trinidad and Tobago and Barbados under the ticker symbol OCM. The acquisition will close subject to expected regulatory approval.

Green Dot was established in 2004 and under the leadership of CEO Ketan Patel has grown to be an established telecom service provider with a highly recognized brand name. Green Dot is the third largest provider of digital television services and the leading ISP provider in Trinidad and Tobago. Since its founding, the company has also expanded into Grenada and Suriname and is in the process of expanding into other countries in the Caribbean region.

The acquisition will allow Green Dot to leverage OCM’s marketing expertise and resources to continue distributing exclusive content to a growing subscriber base. With OCM’s investment, Green Dot can accelerate subscriber growth and continue expanding into new markets. OCM will use Green Dot’s robust infrastructure and bandwidth to promote new media content and continue its strategy of diversification in the region.

Capstone advised Green Dot on the agreement including facilitating discussions between Green Dot and OCM and providing negotiations assistance.

“Our partnership with OCM is the next step in growing Green Dot and expanding throughout the Caribbean,” said Green Dot CEO, Ketan Patel. “We are happy to have Capstone as our M&A advisor guiding us through the transaction. Their expertise, counsel and professionalism were instrumental in putting together the deal.”

“We are excited to help Green Dot continue expanding in the Caribbean. In partnering with OCM, Green Dot will execute on its strategic plan to grow in the region and bring innovative products and services to more customers,” said Capstone CEO David Braun.

“We are extremely pleased to invest in Green Dot and execute OCM’s diversification strategy. Working with the team at Green Dot and Capstone, we were able to put together a mutually beneficial deal that will help us grow strategically for years to come,” commented Dawn Thomas, the CEO of OCM.

About Capstone

Capstone Strategic, Inc. is a management consulting firm located outside of Washington DC specializing in corporate growth strategies, primarily mergers and acquisitions for the middle market. Founded in 1995 by CEO David Braun, Capstone has facilitated over $1 billion of successful transactions in a wide variety of manufacturing and service industries. Capstone utilizes a proprietary process, “The Roadmap to Acquisitions,” to provide tailored services to clients in a broad range of domestic and international markets. Visit the Capstone website at www.CapstoneStrategic.com.

About Green Dot

Green Dot, Ltd. was founded in 2004 and has since become the leading innovator in telecommunication solutions. Headquartered in Port of Spain, Trinidad and Tobago, the company offers wireless ISP and subscription TV services to residential and business customers in the Caribbean region. The Green Dot network has the capacity and capabilities to support today’s mission critical applications such as Virtual Private Networks, Voice and Video over IP, as well as bandwidth intensive applications such as Enterprise Resource Planning, Customer Relationship Management, and other Business to Business functions. Green Dot is committed to delivering world class solutions backed by unmatched customer support system. Visit the Green Dot website at: www.gd.tt.

About One Caribbean Media

One Caribbean Media Limited was created in January 2006 from the merger of two of the region’s most distinguished and long-standing media enterprises, the Caribbean Communications Network (CCN) Group (Trinidad and Tobago) and the Nation Corporation Group (Barbados). Today OCM is the largest and most diversified media organization in the Caribbean region with businesses in newspapers, radio and television. Visit the OCM website at: www.onecaribbeanmedia.net.

Remember that just because a deal is announced, it doesn’t mean it will go through. A record number of M&A transactions announced in 2015 have been cancelled bringing the total deal value down from $4.374 trillion to $78 billion. Unfortunately cancelled deals mean a lot of time, resources and effort were wasted putting together these transactions.

Why Do Deal Fall Apart?

Typically when you first read about a deal in the news, especially with large publicly traded transactions, the transaction has not been completed and the two companies have only agreed to a letter of intent (LOI). After signing the LOI, the two companies can iron out all the details of the final agreement and wait for regulatory approval if necessary. During this period between LOI and close, the deal may break up for a number of reasons.

1. Regulatory Hurdles

Anti-trust issues and regulatory hurdles create delays for many large, publicly traded transactions. Regulatory scrutiny doesn’t necessarily mean a transaction will be called off, but it can be a contributing factor. Pfizer planned to acquire Allergan for $160 billion and relocate its headquarters to Ireland in order to lower its tax bill. However, due to new U.S. Treasury rules aimed at curbing these types of transactions, called tax inversions, Pfizer and Allergan called off the deal earlier this year.

2. Disagreement over Deal Terms

Other acquisitions fall apart because the two companies can’t agree on deal terms. The massive $35 billion “merger of equals” between Publicis Groupe and Omnicom Group faced a number of challenges: personality clashes, cultural differences, and disagreement on deal structure and senior positions. The deal was expected to close in six months when it was first announced, but nine months later the two companies mutually agreed to disagree and went their separate ways.

3. Cold Feet

In the world of privately-held not-for-sale acquisitions, it’s not uncommon for an owner to be anxious about selling their business. Typically by the time you’ve signed an LOI, you have overcome many of these fears by ensuring that the acquisition is the right strategic fit and gaining an understanding the owner’s perspective and motivations. However, the owner could still change their mind and decide not to sell.

On the other hand, circumstances could change that make you back out of the deal. Something uncovered during due diligence or a surprising turn of events may prevent you from going through with the deal. We once had to walk away from a deal because we didn’t share the same ethical values as the prospect company; the owner had two sets of books.

In my next post I’ll go over strategies for moving your deal forward after signing the LOI.

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

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

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

Deals in the News

M&A update 1H 2016 Infographic

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.

“What almost always gets underestimated, though – and often overlooked altogether – during due diligence is the actual integration of the new capabilities and how (or whether) it will work,” says John Kolko, Vice President of Design at Blackboard.

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.

Photo credit: David Goehring via Flickr cc

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

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

Challenge or Opportunity?

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

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

Consumers Favor Independence over Bureaucracy

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

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

Take Action

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

Poll: What do you think?

What impact will Brexit have on your business?

Brexit Poll Results

The poll is now closed. Responses are displayed above.

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

Feature Photo Credit: Iker Merodio via Flickr cc

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

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

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

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

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

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

  • What is your growth plan for the next 3-5 years?
  • What are some trends in your industry?
  • How will you respond to changes in customer demand?
  • What tactics will you use to achieve this growth? Will you develop a solution in-house, partner with another firm, or acquire?
Photo Credit: Elliott P. via Flickr cc

 

Microsoft has agreed to acquire LinkedIn for $26.2 billion. This is a massive transaction in the marketplace and is the largest acquisition by Microsoft to-date. At $196 per share, Microsoft will pay a 50% premium over LinkedIn’s closing shares on Friday, June 10. LinkedIn will continue to operate as a separate entity. There is also $725 million breakup fee that LinkedIn must pay if it walks away from the deal so both companies are very motivated to see this transaction close.

Some are saying Microsoft is overpaying, but the high multiple may be justified given the strategic nature of the deal and LinkedIn’s past performance on the stock market.

The Strategic Rationale: Access to Data

Microsoft and LinkedIn have cited a number or reasons for the deal, but the most important one is that the acquisition will give Microsoft access to the data of corporate and business professionals on LinkedIn. This will provide opportunities for cross-selling and developing new products and services for professionals. Eventually these people – you and me – will get marketed to by Microsoft.

Of course, cost savings were also mentioned in the press release as one of the reasons for acquisition. They expect to see savings of $150 million a year by 2018. However, this will not generate growth long-term. What will move the dial is Microsoft’s ability to leverage the data from LinkedIn’s networking platform. Microsoft and LinkedIn will also need to focus on  retaining key talent moving forward.

Finding a Solution to the Growth Challenge

Struggling to grow is not a new challenge for business leaders and it’s a problem that even large, public companies like Microsoft and LinkedIn face. Both corporations have faced difficulties in identifying growth opportunities in the public market. On February 12, 2015 LinkedIn’s share price was $265, but one year later, it dropped to $101 per share. Microsoft has also struggled to revitalize its products and follow technology trends and has faced increased competition from other technology firms like Apple, Facebook, Amazon and Google. It was clear that the status quo was not working and both companies needed to find a new pathway to growth.

The market and your industry are always evolving and you need to be prepared to weather change, whether it’s increased competition, regulatory constraints, disruptive new technology or changes in customer demand. For some that means building a solution from the ground up, but at other times it may mean seeking growth outside your core business or turning to external growth. When faced with a saturated market and stagnation, acquisition may be the fastest way to implement a ready-made solution to generate new growth in and gain a competitive advantage.

Photo Credit: TechStage via Flickr cc

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!

Photo Credit: Insansains via Flickr cc

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

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

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

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

 

Photo Credit: Bill Damon via Flickr cc

Think about the last time that you met somebody for the first time: a coworker, a friend, a romantic interest, or even a new barista at the coffee shop.

When you first met this person, whether you consciously thought about it or not, you formed an impression of them, even though you didn’t really know them. Depending on your interaction, you may have found them kind, exciting, rude, or boring. On the other side, they also formed an opinion of you.

Once formed, a negative opinion can be very difficult to change. You only have one chance to meet someone for the first time. We can’t go back and change the past if the meeting goes poorly. That’s why we try hard to make a good first impression in a job interview or on a first date.

In acquisitions, by the time you make contact or meet with an owner, you have already dedicated significant time and resources formulating your strategy, researching markets, and identifying quality acquisition prospects. You don’t want all your efforts to go to waste because of a silly mistake.

With owners of not-for-sale companies, making a good impression is essential. It’s the first step in building a relationship that could lead to a successful deal. It’s important not to forget the human aspect during this critical first meeting.

Tips for Making a Good Impression

Here are some tips for making a good first impression when meeting the owner of a potential acquisition:

  1. Be knowledgeable – Do your research before contacting the owner so you are educated on their specific industry and company. An owner will form a better impression of someone who has invested time in understanding their business. It shows that you take acquisition seriously.
  2. Customize your materials – If you’re sharing any kind of documentation or presentation, be sure to reference the target company and add details specific to their business. This will communicate that you have particular interest in them, and they are not just one prospect on a list.
  3. Demonstrate strategic value – Why should anyone sell their company to you? Make sure you have a compelling answer in terms of a long-term strategy that shows growth for both their entity and yours.
  4. Establish trust – Understandably the owner may be wary in your first interactions, but establishing trust early on is incredibly important. By following the tips above, you’ll be on your way to developing a positive relationship with the owner.

Make a good first impression in your next owner meeting. Join our upcoming webinar on April 21 to learn best practices on approaching owners.

“The First Date”: Contacting Owners and Successful First Meetings

Date: Thursday, April 21, 2016

Time: 1:00 PM EDT

 

Photo Credit: Franklin Heijnen via Flickr cc

You may be surprised I’m saying this, but vigorous arguments in your acquisition team can be a good thing. In fact, I would be alarmed if there was never any disagreement over a prospective purchase. Either someone is lying or afraid to speak up, unless your entire team is quite exceptionally in sync.

Dissent can be uncomfortable, so it’s understandable that people tend to shy away from it. That’s why my firm has developed tools to manage these differences of opinion in a non-threatening manner.

One of the tools where we see this best played out is the Prospect Prioritization Matrix. Using objective metrics, each team member will individually rank a criterion for a prospective acquisition from 1-10. Once everyone has ranked the target company, we compare the matrices and see where there may be differences.

With this approach, you create the opportunity for a healthy, deep discussion about the company in question. Why did Susan give the company a 5 on technology while Jack gave in a 10? It’s not that one person is wrong or right; what you have now is the basis for further analysis.

The Prospect Prioritization Matrix rates companies according to criteria that you establish early in the acquisition search. But those criteria may need refining. One value of using the tool is that it makes that refinement possible. As you evaluate more and more companies, you find you’re gaining a clearer understanding of what you actually want from a deal.

One of the advantages of creating an acquisition team — an essential component of our Roadmap methodology — is the wide variety of perspectives and ideas it provides. Don’t shy away from conflicting views – you’ll be a stronger company for having these conversations, and you’ll increase your likelihood of acquisition success.

Photo Credit: Santiago Medem via Flickr cc

Do you know who will read your letter of intent? Many assume that only the owner of the company you wish to purchase will read the LOI, but often there’s a wider audience.

While the owner is your top priority, there are other likely readers of the LOI you need to consider: the board of directors, the accountants (especially those involved in taxes), the management team, and other stakeholders. Even the owner’s spouse may impact the transaction significantly.

When I put together an LOI, I try to brainstorm the likely interests of every possible reader who might influence the seller’s decision-making. When you’re composing your LOI it’s important to remember the entire audience. After all, you won’t be able to accompany the document once you send it to the seller so it’s important to appropriately address the concerns of all parties involved.

As I’ve mentioned before, the LOI is an excellent marketing tool and you have the opportunity to differentiate your business from others by considering the needs, wants and desires of not only the owner, but also anyone else who may be involved in the transaction.

Because the LOI is a relatively formal document, you might assume that it needs to be written entirely in legalese. There’s no rule that requires this. In fact, the LOI gives you a golden opportunity to make your voice heard. A good place to do this is at the beginning of the document. Start the LOI not with legalese—the wherefores and therefores—but with a conversation.

Talk about the seller’s business and your business and why bringing them together makes good sense. Try to convey your excitement about the transaction and your strategic vision. You want the owner to hear your message loud and clear, along with the other people trying to influence the decision.

Photo Credit: Pete

When speaking about mergers and acquisitions you often hear the word “synergy” used to explain the rationale of a deal.

Here are just a few examples from recent headlines:

But what exactly do these companies mean when they say a deal will generate synergies? Synergy can be defined as “the increased effectiveness that results when two or more people or businesses work together.”

With acquisitions, there are really two kinds of synergy: cost cutting and increasing revenues.

Cost Cutting Synergies

The synergy we most commonly encounter involves decreasing costs. It’s the low-hanging fruit, an easy concept to quantify and justify. However, it’s also short-sighted. It limits future growth and offers diminishing returns—you can’t cut the CFO or other positions twice, after all. There are only so many ways you can decrease costs, and once you’ve done it you won’t get any further growth.

Growing Revenues

The other type of synergy involves increasing revenues. That’s where your focus should be because it offers long-term benefits, growth opportunities, and optionality. You can get more value out of an acquisition when you look beyond cutting people, facilities, or other costs.

Is There a Lack of Synergy?

On the flipside, you should also consider the potential for a costly lack of synergy. Will the acquisition decrease revenues and increase costs? Will it provide a long-term position for growth, or is it just a distraction for our company?

It’s important to strike a balance, and that means taking a hard look at all the potential pros and cons of the transaction.  Then you’ll have a clearer picture of the true value of the company, rather than being blinded by cost savings.

 

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