Acquisitions can transform your company’s growth trajectory and set you up for long-term success. You may choose to use acquisition because your organic growth has stalled and hiring additional sales people or investing in R&D will not not help you achieve your business goals. Acquisition is fast and opens the door to many new growth options by bringing on board resources like new technological capabilities and key employees,

Capstone Vice President Matt Craft had the opportunity to speak on “Growth through Acquisitions” on the Exit Readiness Podcast with Pat Ennis. Matt explains key drivers for pursuing acquisitions and how to maximize your potential for success.

In this episode Matt and Pat discuss:

  • Why you should considering using M&A to grow your business
  • How many companies you should look at before closing a deal
  • What to look for during due diligence
  • When to get advisors involved in the M&A process
  • Determining the best direction for your company
  • How long does an acquisition typically takes
  • And more!

Listen to the episode now.

Are you keeping up with industry changes fast enough? Or are you being left behind? It’s no secret that technology is disrupting industries from manufacturing to telecommunications to retail.

“…The risk of being left behind because of technological disruption and change is driving companies to make acquisitions faster,” Steven Davidoff Solomon writes in Dealbook.

For many firms, acquisitions are the only way to obtain a new technology or product and remain a competitive player in the marketplace.

Technology firms are notorious for acquiring startups or smaller firms to gain the latest talent and cutting-edge products. For example, Facebook acquired new technology when it bought potential rivals Instagram and WhatsApp. At the same time it bolstered its position against Google.

Another sector that’s facing great disruption is the financial industry. Most think of traditional brick and mortar banks, suits and ties, credit cards, debit cards, etc. The reality is FinTech (financial technology) is reshaping the industry. PayPal, Venmo and Apple Pay are growing in popularity and traditional banks need to keep up or risk losing consumers. Traditional big banks are acquiring, rather than building, FinTech capabilities. JPMorgan Chase has formed a joint venture with On Deck, an online lending platform for small businesses.

The advantage of acquisitions, especially in a swiftly changing environment, is the ability to gain a new technology or product rapidly and in some cases immediately. A well-executed acquisition brings you a “ready-made” solution where once the deal closes you have access to new technology, new technology that your customers need. On the other hand, building your own solution can take more time, but in today’s fast-paced environment, by the time you develop your own solution, the market may have moved on. In addition, you’ll likely face some teething problems or setbacks as you begin to develop a solution.

If there’s a technology or product that your company needs to stay relevant today or in the next five to ten years, I recommend you consider acquisition as an option. A carefully planned, strategic acquisition can help you stay up-to-date and relevant in your industry.

Photo Credit: Barn Images

Seeking growth amid a shifting telecommunications industry, AT&T has bet on media content. The company plans to acquire Time Warner for $85 billion in one of the biggest media acquisitions in history. The transaction will likely take over a year to receive regulatory approval, but both AT&T and Time Warner executives are optimistic. AT&T CEO Randall Stephenson has compared the deal to Comcast’s acquisition of NBC Universal in 2013, which was approved after a long period of regulatory scrutiny. This vertical merger will bring together Time Warner’s media content and AT&T’s distribution network in one company.

Consumers Dropping Landlines, Cable TV

The telecommunications market has shifted with many consumers dropping landlines and cable TV. Mobile use is increasing exponentially with mobile users representing 65% of digital media time in 2015. This means people are primarily using smartphones to read articles, play games and watch videos than are using computers.

Telecommunications and media companies are starting to take notice of these trends. Just last year AT&T’s biggest rival, Verizon, acquired AOL in a push to reach more mobile users. And earlier this year, it announced it would acquire Yahoo to boost its mobile unit.

Deal Synergies

One benefit of the deal is that AT&T will be able to provide more data to Time Warner and advertisers without raising prices for consumers or withholding the content from competitors (like Verizon).

AT&T may also plan to create original, exclusive content leveraging Time Warner’s expertise in media. Online streaming services such as Netflix and Amazon have successfully produced their own original content.

In the long term, AT&T wants to build up a robust, next-generation infrastructure in order to compete with cable providers. “I will be sorely disappointed if we are not going head-to-head” with cable providers by 2021, said Stephenson.

Growing in a Declining Market

As demand for traditional telecommunication services shrinks, AT&T and other providers must look outside their current market for new growth opportunities. In a declining marketing, consolidating, or simply gaining more market share will not help you grow in the long term. If AT&T managed to capture the entire market for landline phones, their revenues would still shrink as consumers abandon landlines.

By acquiring Time Warner, AT&T will own content including popular networks such as HBO and CNN. Organically growing its own content business would take time and be difficult given the large size of other media content producers like Disney and CBS. As an established business, Time Warner gives AT&T a foothold in the media market and immediate access to new users.

If like A&T you are stuck in a declining marketing, identifying markets with future demand for your company’s products or services is the key to growth. You can explore future demand by using our tool, the Opportunity Matrix, to understand where you want to position your company strategically looking forward.

Start exploring today 

Photo Credit: Mike Mozart via Flickr cc

Ford announced it would acquire Chariot, a shuttle-van startup based in San Francisco, in order to expand beyond auto manufacturing and become a mobility company. This is the first acquisition by Ford Smart Mobility, which was established in March of 2016 in order to focus on “emerging mobility services.” Ford reportedly paid $65 million for Chariot.

Chariot uses 100 Ford Transit vans to offer rides to commuters along 28 routes in the San Francisco Bay Area. After the acquisition, Chariot will leverage Ford’s expertise in logistics and vehicle operations as well as use data algorithms to schedule trips in real time. Together Chariot and Ford plan to expand to at least five more markets. Ford already has shuttle programs in Kansas City, Missouri, and Dearborn Michigan. Ford intends to focus on other forms of transportation including bikes, dynamic shuttles and more, according to Jim Hackett, the chairman of Ford Smart Mobility.

Ford will also partner with Motivate to expand a bike sharing program in the Bay Area. Through the partnership, the program will grow to from 700 to 7,000 bikes and be renamed Ford GoBike.

Auto Manufacturing in Decline

To put it nicely, the outlook for auto manufacturing is pretty bleak. Competitors like Zipcar, Uber and Lyft and new technologies have disrupted the traditional automotive industry. Consumers today are buying fewer cars and option for public transportation or car sharing instead. The trend is not limited to millennials, in fact, according to a study published by University of Michigan’s Transportation Research Institute, fewer middle-aged adults in their 30s and 40s had driver’s licenses in 2014 than did in 1983. Ford is by no means the only car manufacturer to see that its market is shrinking. Earlier this year GM invested $500 million in Lyft to invest in self-driving car partnership.

How to Grow in a Shrinking Market

What’s your market outlook? While your business may be profitable today, if you’re in a shrinking market, future growth will be challenging. Faced with a declining market, now is the time to consider your options and next steps to ensure long term growth. You made focus on building your own solution organically or you may decide to partner with another company to rapidly gain access to a new market. In the case of Ford, the acquisition will allow the company to rapidly gain a foothold in the growing market of ride-sharing and alternate means of transportation.

Photo Credit: Mike Mozart via Flickr cc

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.

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What impact will Brexit have on your business?

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* 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!

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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.

 

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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

 

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Pfizer and Allergan have announced that they are abandoning their $160 billion merger.

This resulted from a political storm around tax inversions, a technique whereby US companies relocate abroad to avoid the high US corporate tax rates. The Treasury department took action to insert new rules that effectively killed the financial benefits of the deal.

According to their agreement with Allergan, Pfizer will pay a breakup fee of $150 million.

Politics aside, this is just a small reminder of why acquisitions that are not carefully planned can prove to be costly errors. Could Pfizer have anticipated the government’s intervention? That’s hard to know, but in principle buyers need to be looking ahead at potential roadblocks that could jeopardize a deal.

Transactions unfold in stages, and each stage can present its own challenged. In particular, a signed letter of agreement (LOI), although an important milestone, does not ensure that the deal is done. There’s a lot of that can happen between LOI signing and the final acquisition agreement. It’s essential to make your plans with that in mind.

Assuming yours is a middle market company, you may not experience the same type of regulatory scrutiny that publicly traded companies do. However, there’s no shortage of other issues that may show up, such as owner hesitancy, problems uncovered by due diligence, cultural collisions and many more.

And the story doesn’t end when you finally ink the acquisition contract. You may “successfully” acquire a company only to see things fall apart during integration.

With every M&A transaction, there are many moving parts. It’s the task of your acquisition team, including both your own staff and your outside advisors, to consider them all. To name a few, you must consider regulations, taxes, legal challenges, due diligence, valuation, cultural integration and—never to be forgotten—your overall strategic purpose.

With any business initiative worth taking, it’s impossible to eliminate risk—but you can and should minimize it. In M&A, the best way to do this is to follow a system that’s been proven in prior acquisitions. I call this the “Roadmap to Acquisitions” and I consider it the single most decisive factor in M&A success. Take a holistic view of the acquisition process from the start to finish, and be both proactive and strategic. In other words, know your end result as best you can, and anticipate all the hurdles you may have to overcome to reach it.

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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.

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