Does this sound familiar? You want to grow through acquisitions, but there are no good companies to acquire. While it may seem like there are absolutely zero acquisition prospects, usually that is not the case.

Many companies struggle to find acquisition prospects because they are focusing on only on industry partners, suppliers, or competitors they already have a relationship with. We call these companies the “usual suspects.” There’s nothing wrong with looking at the “usual suspects” for acquisition opportunities, but if you find you are hearing the same company names over and over again without getting any results, it may be time to try a new approach.

Here are four more ways to find quality acquisition prospects in addition the “usual suspects”:

  1. Market Research – In researching the market you will naturally uncover a few potential acquisition prospects. You will also have the advantage of gaining a deeper understanding of the market which will help you select the best companies to acquire, evaluate potential acquisition candidates, and negotiate with owners.
  2. Trade Shows / Associations – Both are an excellent source for finding many companies in your desired industry in a short amount of time. Walk the floor of a trade show and you’ll see dozens of companies all in one location and many trade associations also member companies listed on their website.
  3. Internal Input – Use the resources you already have. Your sales team is filled with folks who have their ear to the ground and are up-to-date on key players and new developments in the industry.
  4. For-sale Companies – Looking at for-sale companies is never a bad place to start your search. Just make sure you don’t limit yourself by only considering these opportunities. Including not-for-sale companies in your search will increase your chances for a successful acquisition. Remember, every company is for sale, for the right equation.

For more tips on finding companies to acquire join our webinar Building a Robust Pipeline of Acquisition Prospects on March 23.

After this webinar you will be able to:

  • Approach the search for the right acquisition prospect systematically
  • Understand effective research methods for identifying prospects
  • Develop criteria for your ideal acquisition prospect
  • Use tools for objective decision-making during the acquisition process

Building a Robust Pipeline of Acquisition Prospects

Date: Thursday, March 23, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available.

Photo Credit: patchattack via Flickr cc

We usually think acquirers are big, multinational companies that gobble up their smaller competitors. However, that’s not always the case. Hudson’s Bay, which has a market value of $1.5 billion, is interested in acquiring Macy’s, which has a market value of $9.4 billion.

This transaction challenges common perceptions about acquirers and sellers and demonstrates that for the right strategic reasons, acquisition can be used as a growth tool by any company. While a smaller company acquiring a larger one is not the norm, it does happen. And, in this case, Hudson’s Bay could use Macy’s to expand its retail presence in the U.S. with another well-known department store. It would be difficult, if not impossible, for Hudson’s Bay to build up the reputation and name brand of Macy’s organically.

Hudson’s Bay, headquartered in Toronto, is an active acquirer and has a history of success in growing struggling retailers and optimizing value from its real estate. It acquired its affiliate Lord & Taylor in 2012 and Saks’s Fifth Avenue in for $2.4 billion in 2013. One year later, the Manhattan Saks Fifth Avenue store was valued at $3.7 billion. Hudson’s Bay has also made other acquisitions including German retailer Galeria Kaufhof for $2.8 billion in 2015 and Gilt Groupe for $250 million in 2016.

It will be interested to see how the transaction is structured and how Hudson’s Bay plans to tackle the challenges Macy’s is facing. Macy’s, like many traditional retailers, is struggling to keep up with market changes. The store is currently in the process of shutting down 100 stores and is planning to cut 10,000 jobs after facing disappointing fourth quarter sales. Perhaps an acquisition will save Macy’s? Only time will tell.

If you are thinking about growing your business, I encourage you to consider strategic acquisitions. Despite what you may think, there are many more options than just a large company acquiring 100% of a smaller company. I hope the example of Hudson’s Bay and Macy’s helps you gain a better understanding of what options might be available for you.

Learn more! Download the whitepaper Nine Pathways of External Growth.

Photo credit: Mike Mozart via Flickr cc

Capstone Vice President Matt Craft presented at the Virginia Leaders in Export Trade (VALET) program orientation in Richmond on January 19.

For 14 years, Capstone has helped Virginia companies grow through our participation in the Virginia Economic Development Partnership’s VALET program. Matt talked about how leaders can identify the best markets for growth their companies and objectively make decisions using data and tools.

Capstone Vice President Matt Craft presents to VALET companies in Richmond, Virginia.

Capstone Vice President Matt Craft presents to VALET companies in Richmond, Virginia.

As the members enter the program, we wish them the best of luck and urge them to take advantage of the resources and opportunities available for helping their company grow.

Global M&A reached $3.7 trillion in 2016, dropping 16%, and the number of deals increased slightly by 1% when compared to last year. While 2016 did not match 2015’s record-levels, activity was still robust. Compared to 2014, activity increased by 5%.

Activity in the fourth quarter reached $1.2 trillion with 13,504 deals announced, a 50% increase in deal value and 18% increase in the number of deals when compared to 3Q 2016. This year, there were a number of interesting deals to note, including the AT&T’s acquisition of Time Warner transactionVerizon’s deal with Yahoo, and GE Oil and Gas combining with Baker Hughes.

Click on the infographic for a closer look at M&A in 2016.

M&A Update Year End 2016 - Capstone Infographic

2016 continued be a strategic, rather than a financial buyer’s market and strategic buyers deployed large cash reserves to pursue growth through M&A. Unlike financial buyers, which typically look for a three to five years return on investment, strategic buyers can afford to pay more due to their long-term focus.

The middle market has been eager to use M&A as a viable tool for growth. Despite a challenging economic environment, activity in the middle market remained stable in 2016, dropping only 3.5% in 3Q 2016.

As we close out 2016 and look forward to 2017, here is a roundup of the most popular posts of the year from the Successful Acquisitions blog.

  1. The Most Important Thing about M&A According to Warren Buffett
  2. 10 Signs You Should Walk Away from a Deal
  3. M&A Activity after the U.S. Election: Analysis and Outlook
  4. 7 Strategic Questions to Ask Before Pursuing Mergers & Acquisitions – New Webinar
  5. How to Avoid Irrational Decision-Making in M&A
  6. 5 Tips for Taking a Strategic Approach to M&A in 2016
  7. Is Middle Market M&A on the Rebound?
  8. Growth Through Acquisition – Exit Readiness Podcast Interview
  9. How to Break Bad News without Sinking Your Acquisition
  10. What Is Happening with Valuation Multiples Today?

Thank you for reading and we will see you all in 2017.

Photo Credit: Barn Images

Are you thinking about growing your business? In any business endeavor, having the right questions is often half the battle.

Join us for a new webinar on “7 Strategic Questions to Ask Before Pursuing Mergers & Acquisitions” on Wednesday, December 7. We will cover 7 powerful questions that have been tried and tested with dozens of clients at the outset of their growth programs:

  1. What business are we in?
  2. What is our core competency?
  3. What are we not?
  4. Where is our pain?
  5. What are our dreams?
  6. What is our risk tolerance?
  7. What is our company DNA?

Explore each question in depth and learn how they have immediate applications and a direct impact on your growth strategy.

After attending you will be able to:

  • Establish a firm foundation for pursuing strategic M&A and external growth
  • Use tools to examine your current business situation
  • Begin to develop an action plan for growth

Date: Wednesday, December 7, 2016

Time: 1:00 PM EST – 2:00 PM EST

CPE credit is available.

Photo credit: Ryan Milani via Flickr cc

The Guideline Public Company (GPC) Method is one of the more popular valuation methodologies because people often hear about it in the news or in presentations. This method identifies prices for individual shares of publicly traded companies that are subject to the same industry dynamics as the subject company (the company you are trying to value).

The valuation multiples calculated from these companies provide an indication for how much a current investor in the marketplace would be willing to pay for similar situated company that we are trying to value. For comparison sake we might be looking at things like similar businesses, sizes, geographic regions, and other operating characteristics.

Is the GPC Method Appropriate for Middle Market Businesses?

Depending on the size of the subject company, using the GPC method can be hard to implement realistically. Many middle market companies are better suited for the completed transaction method or the Discounted Cash Flow (DCF) approach. However, for some industries such as cloud or information technology, GPC data can be very robust and indicative of what’s going on in the industry, even for smaller-sized companies.

Selecting Guideline Public Companies

There are a number of resources both paid and free that we use to identify guideline companies.

  1. Cap IQ – This is a paid resources that provides research and analysis on publicly traded companies and overall market awareness. You’ll be able to use the Cap IQ database and tools to identify a list of companies that are similar to the one you are trying to value.
  2. Securities and Exchange Commission – The SEC has a search tool called EDGAR that allows you to search by industry code and provides a list of all public companies that characterize themselves as being in that industry. This typically generates a lot of results which you’ll need to narrow down in order to make sure the public companies are really comparable to the subject company.
  3. Yahoo Finance / Google Finance – These online tools provide key data on publicly traded companies. Once you find a few good comps for your subject, you can look up their competitors on Yahoo or Google Finance and start developing your list of GPCs that way.

How Many Companies Do You Need?

For a good GPC you need at least five public companies in your comp set; we prefer to have at least 10. It provides for a lot more analysis for the range of industry multiples. I’ve seen as many as 30 companies used, but bigger is not necessarily better. When using the GPC method, you really have to ask, “Is the subject company really comparable to these public companies?” And if this causes you to whittle down your comp set to five or six companies, that’s fine.

Photo Credit: Jorge Franganillo via Flickr cc

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

Most people tend to go with their “gut” when making decisions rather than relying on the accurate data. You might think you’re the exception, but studies conducted by psychologists Daniel Kahnerman and Amos Tversky show that “when it comes to decision-making, humans are predisposed to irrationality.”

No one likes to think of themselves in this way, but the truth is that, as human beings, remaining 100% objective is very difficult. Inevitably, through the course of running your business, emotions come into play – as they should since you must have some passion to run a company and be successful. Especially in the thrill of a potential deal, facts can be brushed aside as feelings take over.

While excitement in mergers and acquisitions is important (you’re not a robot), over-reliance on your gut to process decisions can be a recipe for disaster. You need to pay equal attention to the facts in order to be sure of a successful outcome.

So how can we make good decisions and stick to the facts when it comes to pursuing acquisitions?

1. Recognize You are Human

The first step is simple enough: recognize that you are not always objective, and become an observer of your own natural impulses to emotion-driven decisions.

2. Develop Tools

Once you’ve mastered step 1, you can move on to developing tools that will help you remain objective.

Two of the tools we like to use are the Market Criteria Matrix which we use to evaluate and prioritize the best markets and and the Prospect Criteria Matrix, which serves the same purpose for identifying ideal acquisition candidates.

To use the first tool, you start by picking about six key characteristics of the ideal market in which you would want to make an acquisition.

Next, you develop metrics to quantify these criteria. For example, rather than saying your ideal market is a “high growth” market, you might say your ideal market is one that is growing at more than 5% annually. Do this for each of the criteria you’ve identified.

The Prospect Criteria Matrix works in a similar manner, but you develop and quantify criteria specific to company-level data.

By establishing quantifiable metrics to measure your criteria, you eliminate vague and emotionally loaded terms like “good,” “bad,” “large” or “small.”   You also ensure you collect equivalent information on each criterion for each market so that you can make valid side-by-side comparisons.

3. Ask Your Team

Whether it comes from your executive team, your functional leaders, or your third-party advisor, feedback from others helps your broaden your perspective and bring some balance to your decisions. Hearing a different perspective can help you take a second look at the information presented to you and either confirm or invalidate your analysis. Disagreements are sometimes necessary to arriving at the best decision. What matters is that throughout the process, you offset the inescapable impact of emotions with a good measure of fact-based analysis.

As Vice President, Matthew Craft will continue to execute strategic mergers and acquisitions for middle market companies.

Capstone, a leading management consulting firm that helps middle market companies grow through mergers and acquisitions, is pleased to announce the promotion of Matthew (Matt) Craft to Vice President.

In his new position as Vice President, Matt will expand his current role of helping clients achieve their strategic growth goals through mergers and acquisitions by applying Capstone’s proprietary Roadmap methodology. He will assist clients in clarifying their growth objectives, identifying optimum markets to enter or expand in, selecting potential external partners, and negotiating transactions.

At the same time, Matt will shoulder new responsibilities in business development for Capstone, making the firm’s services available to a broader clientele.

Matt joined Capstone in 2005, and during his 11 years at the firm has developed wide experience in helping middle market companies grow through mergers and acquisitions. He has held various positions including Marketing Coordinator, Senior Analyst and Project Manager.

In these roles, he has worked with domestic and international clients, serving both publicly held and private companies in diverse industries such as healthcare, life sciences, manufacturing, chemicals and food and beverage. In addition to his client work, Matt has also facilitated workshops, presentations, and webinars for senior-level executives on the subject of acquisitions.

“We are excited to promote Matt to Vice President. He has deep knowledge of Capstone’s Roadmap to Acquisitions methodology and wide experience in working with middle market clients. He will continue to be a great asset in helping companies execute strategic growth through M&A,” said David Braun, CEO of Capstone.

Matt received his BA from the College of William and Mary, his MA from Georgetown University and his MBA from George Mason University.

About Capstone

Capstone Strategic 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 to provide tailored services to clients in a broad range of domestic and international markets. Learn more about Capstone at www.CapstoneStrategic.com.

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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

For more than 10 years, Capstone has served as a Virginia Leaders in Export Trade (VALET) Program Partner. The program, run by the Virginia Economic Development Partnership, helps businesses expand internationally.

We are excited to continue offering our expertise in strategic planning and external growth to assist companies in realizing their international growth goals. Helping VALET members to execute strategic mergers and acquisitions is one of the key ways we implement our mission.

We also provide complimentary education on international expansion and strategic growth for VALET Program companies. For example, we presented “How to Pick Top-Notch Markets”  at the VALET Spring Meeting in 2015.

Learn more about the VALET Program from the press release.

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

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

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

Have U.S. Companies Stopped Investing In Growth?

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

Tax Savings

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

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

Invest in Growth Now

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

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

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

Photo Credit: Pictures of Money via Flickr cc

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

Aloha! We hope you have been enjoying these last few weeks of summer. Our very own Managing Director, John Dearing, recently returned from Maui, Hawaii, where he spoke at the National Credit Union Directors Conference hosted by CU Conferences on August 12 -15. John presented “Strategic Mergers and Acquisitions: Exploring External Growth” in two parts to over 100 credit union directors and executives.

FinTech Acquisitions

One trend highlighted at the conference was the focus on financial technology (FinTech) acquisitions. Banks in particular have been acquiring startups or creating their own incubators and venture capital arms.

Recent examples include:

  • Capital One acquired Level Money, a San Francisco-based money management app in January 2015.
  • BBVA acquired Simple, a banking startup, for $117 million in February 2014.
  • Context 360, Motion Savvy and Bracket Computing joined Wells Fargo’s accelerator program. The program involves direct investment in the startups and six months of mentoring for the executive teams.
  • Mastercard is using strategic M&A to build customer loyalty, data analytics and safety and security. Since 2014 it has acquired C SAM, a mobile wallet service; Pinpoint, a loyalty provider; ElectraCard Services, a payment processor; Transaction Network Services (TNS) a payment gateway service; and Applied Predictive Technologies (APT), a cloud-based analytics provider.

Mobile Banking on the Rise

Like banks, credit unions should also consider using acquisitions to build their technology. With the demand for mobile technology services ion the rise, more members are relying on smartphones to access anything and everything – including their financial data. Mobile banking is the largest banking channel. More than 25% of the world’s population will be mobile bankers within four years and organizations without a clear strategy will lose members.

Following Demand is Critical to Growth

Rather than build up this capability internally, credit unions can acquire to add unique technology products and remain competitive.

Mobile technology is just one example of how credit unions can use strategic M&A to grow. Perhaps you want to quickly expand your geographic footprint in a growing metropolitan area; acquiring another credit union would allow you to do so. Observing current demand and future demand is critical to strategic growth and may provide a competitive advantage.  As you go about developing your strategic plan, consider using acquisition to help your organization achieve its growth goals.

The beautiful view at the National Credit Union Directors Conference hosted by CU Conferences in Maui on August 12-15, 2015.

The beautiful view at the National Credit Union Directors Conference hosted by CU Conferences in Maui on August 12-15, 2015.

It seems as though the employee vs. contractor issue is popping up all over the news. Virtual assistant startup company Zirtual just fired over 400 employees by email because the company couldn’t sustain its payroll once it converted contractors to employees. The Wall Street Journal has also highlighted the many startups that are now grappling with some version of this issue.

The employee vs. contractor question needs to be considered during due diligence, especially as the issue becomes more common.

You may wonder, why does this matter? And if it’s so difficult to convert contractors to employees why are companies doing it?

“1099 Employees”

Many companies today have what we call “1099 employees,” which of course is an oxymoron. You can have 1099 independent contractors, or you can have employees. Unfortunately, some businesses have been treating contractors as if they were employees, primarily to save on costs like healthcare and benefits, which employers are required to provide for employees. It sounds like a good plan, especially for small startup companies with low margins, but you run into legal trouble when your “contractors” actually work as full or part-time employees.

If the company is employing “1099 employees” (contractors who should really be employees), and you are forced to convert them, the costs can be significant. The founder of Zirtual, Maren Kate Donovan, said in a LinkedIn post, “Simple math is add 20-30% on to whatever you pay an IC [independent contractor] to know what it will cost to have them as an employee.”

In addition, a business that is using contractors as if they were employees is exposed to myriad legal issues. Homejoy Inc., a startup cleaning company, was unable to raise more venture capital due to four lawsuits. The business was forced to close.

Take a Closer Look at Workers

A simple way to start your workforce due diligence is to find out how many contractors vs. employees work at the company. A lot of contractors at the seller’s company should raise a yellow flag. It doesn’t guarantee that something is amiss, but you should investigate further.

That’s not to say you have to walk away from a company that uses contractors, or even one that is using contractors as employees. It’s simply an area that needs to be explored. If contractors used by the company should really be re-classified as employees, what would it take to convert them? Does this change the deal for you?

One option is to convert all contractors to employees before the acquisition closes. If the problem is serious enough, you may even decide to walk away from the deal. Whatever you choose, return to your objective acquisition criteria before making your decisions.

People usually think about financial due diligence, but in light of recent news I encourage you to take a second look at the seller’s workforce. You don’t want to discover post-acquisition that all your contractors need to be reclassified as employees. Find out BEFORE you close the deal.

Global dealmaking remains robust, reaching $2.2 trillion in the first half of 2015, according to Thomson Reuters data. This is an increase of nearly 40% from the first half of 2014 and the most active half since 2007. However, the number of deals only increased slightly, by 3%. The trend of fewer, larger transactions continues: mega deals accounted for 50% of M&A value in the first half. Average deal size increased by 34% when compared to 1H 2014.

M&A is strong due to favorable market conditions: abundant cheap financing, record stock prices, and renewed confidence in the economy. The U.S. market continues to drive global activity. U.S. transactions reached a record $1.02 trillion – the first time activity passed $1 trillion in a half-year period.

Check out our infographic for more:

M&A Update 1H 2015

 

David Braun presented on mergers and acquisitions at Oleofuels 2015 in Frankfurt, Germany.

As overall energy demand increases, biofuels continue to play an important role in environmental sustainability. Global biofuel production reached 115 billion liters in 2013 and is expected to grow to 139 billion by 2020.

Despite this increase, the dynamics of the industry are changing. The geography of biofuels policy support is shifting. While policy support wanes in the US, European Union and Brazil, support in non-OECD markets and Southeast Asia is on the rise. The US, EU and Brazil still remain the top producers of biofuels, but production is expected to plateau by 2020, largely caused by uncertainty over policy, which is a critical driver of growth.

In the European Union, the Renewable Energy Directive requires that 20% of total energy needs in the EU come from renewable energy by 2020. However, no new targets for renewable energy have been set for 2020 and beyond, generating confusion in the industry. In the US, announcing new targets for the Renewable Fuel Standard were delayed in 2014. The EPA just recently released proposed targets on June 1, 2015.

In the midst of these changes, companies must discover new ways of pursuing growth. Capstone CEO David Braun presented “Strategic Alliance, Joint Venture and M&A – the Route to Success?” at Oleofuels 2015 in Frankfurt, Germany on June 11, 2015. He discussed how businesses and industry players can use acquisitions to navigate through the industry changes and pursue new options for growth.

Oleofuels 2015 brought together the leading executives and experts from across the entire value chain of the biofuel industry. In addition to mergers and acquisitions, conference topics included the EU biofuel regulations, national policy implementation, feedstock costs, availability and sustainability, emerging and new potential feedstocks, opportunities for advanced biodiesel growth, the biojet and automotive biofuels industry.