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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    In fact, the opposite can be true. 

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

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

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


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


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

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


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


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


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


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


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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    And that should be happening anyway.

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

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

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

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

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

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

    I’ve noticed some company buyers willfully slowing down the acquisition process at this time. Why? They smell bankruptcy in the air. The longer they can string out the negotiations, the more desperate the seller’s condition and the lower the price. It’s tough for sellers to defend themselves in this environment. I’ve noticed some company buyers willfully slowing down the acquisition process at this time.

    Best thing to do: let your buyer know there are other, more attractive suitors knocking at your door.

    What I called “the wedge” in my post, The Wedge: M&A from $1B – $10B, is the natural hunting ground of private equity. And this is where we can expect the least activity during a crisis of credit. These buyers hate to put in 100% equity. They like a good measure of debt in the purchase, so this isn’t their time for Mergers and Acquisitions. And what is private equity doing, meanwhile? The short answer is: hoarding cash in unprecedented amounts. The last month has seen record accumulations of private equity funds. That money represents a potent resource for future activity, and we should be prepared to see a resurgence of private equity activity the moment the financial environment shifts in their favor.

    In every crisis there are winners as well as losers. Today companies seeking growth through acquisition can pick up bargains — if they have the cash. Small, over-leveraged companies are choosing to sell rather than go to the wall. As for the publicly traded corporations, they are under pressure from shareholders to get out of business units that don’t make business sense. So there may be some attractive divisions up for grabs — the unwanted stepchildren of major corporations. From the buyer’s perspective the key is to come to market with a strong balance sheet. This isn’t the time for highly leveraged acquisitions. Cash is king and the buyer with dollars to spend can not only pay less but also command favorable terms like a quicker closer or more reps and warranties. I talk more about this in my post The Return of Simplicity in M&A.

    That doesn’t mean we should expect a huge volume of mergers and acquisitions right now. There will be a slowdown in the coming months while the current financial turbulence plays out. But watch the beginning of 2009. I have clients right now engaged in intensive planning for acquisitions early in the New Year.

    A common error in the M&A game is to over-delegate the process to the financial team. I had a highly successful client who put an entire acquisition in the hands of his CFO. Like many (but not all) of his kind, this financial executive could only see or understand spreadsheets. He had zero patience for the “soft” side of M&A, which turns out not to be so soft when it sabotages the deal.

    In dealing with the seller, our hard nosed CFO had just one focus: beating down the other side to the lowest possible price. There is one situation where this approach is legitimate – when you plan to close your acquisition and sell the assets. But more often than not, you are seeking to buy a going concern that you intend to expand after the purchase. That means you will be working side-by-side with the people that face you around the negotiating table. They will remember how you treated them once integration begins, and you will pay for your miscalculations – very likely in hard dollars. Buying a company is not like buying a car where you walk away and never see the seller again. It is more like buying a car with the driver thrown in.

    In the case of my client, the transaction never even reached a conclusion.

    The refusal to accommodate the human dimension is the root cause of many, if not most, M&A failures. Obsessive focus on negotiated wins and financial engineering can deliver you a pyrrhic victory. You get what you ask for, but not what you need.

    To be clear here, I am all in favor of vigorous negotiation and taking a stand for your goals. But in addition, you need to cultivate a breadth of awareness, and an informed understanding of the many dimensions of M&A.

    There is an old way and a new way to go about the M&A process, and it’s essential to know the difference.

    I had a client that perfectly exemplified the old way. She would be regularly approached by investment bankers hawking “the book” on a company they had for sale. She would listen to the pitch, peruse the documentation and try to figure whether the purchase was a good idea. Eventually she allowed herself to be sold on the acquisition of a small operation. The target company was losing money, but she was persuaded that she would easily be able to turn it around and generate a profit.

    Twelve months later, her acquisition was not only losing money but distracting her management team from the core business.

    What was missing here can be summed up in one word: strategy. It’s amazing to me how common this deficiency is. Many sophisticated people drift into a purely reactive relationship to growth. They talk to whoever comes to lunch. They size up whatever opportunity comes across their desk. And they do their best to match what’s new with what they already have.

    It’s to counter this tendency that I’ve developed my 14-stage “Road Map” approach to buying companies. Whether you use my approach or someone else’s, be sure of one thing: before you set out on the journey of acquisition, get yourself a map.