The demand for “healthy” or “better for you” food and beverages continues as consumers become more health conscious. Following this trend, Dr. Pepper Snapple (DPS) has agreed to acquire Bai brands, the maker of antioxidant and other “all natural” drinks for $1.7 billion. Founded in 2009, Bai has about $300 million in revenue and 373 employees. The acquisition is one of the biggest for DPS and the first major one since it spun off Cadbury Schweppes in 2008.

Demand for Soda Shrinking

Soda companies are faced with shrinking demand for their traditional products and increased competition from new healthy products both from large food manufacturers and startup brands.

Many recognize the need to expand their portfolios in order to continue to grow. Recently Coca-Cola acquired Unilever’s Soy drink business and PepsiCo agreed to acquire KeVita, a probiotic drink maker. Both companies also own a number of “healthy” brands. Coca-Cola owns Dasani water, Honest Tea, PowerAde and Vitamin Water and Pepsi owns Gatorade, Tropicana, Lipton Teas, and Aquafina.

While the multiple for this transaction is on the higher end, DPS is acquiring the potential growth opportunities Bai presents.

Thinking strategically, this acquisition will add breadth to DPS’s product line. DPS hopes to grow the business by filling its existing pipeline and distribution expertise with Bai’s products. By going healthy, DPS may be able to grow despite the declining popularity of soda.

From Strategic Alliance to Acquisition

Sometimes business leaders and owners shy away from acquisition because they are overwhelmed by buying an entire company. It is important to remember that there are many options and tools available to you when it comes to external growth, from strategic alliance to joint ventures to minority interest to a majority stake to 100% acquisition. All of these options should be considered to determine which path is right for your business.

The DPS – Bai transaction did not begin at 100% acquisition. Instead, DPS began with a strategic partnership, then later acquired a minority stake for $15 million in 2014. With minority interest DPS could gain some of the upsides of Bai’s growth, while also mitigating the risks associated with a new relatively and unknown product. Once Bai continued to grow and proved its profitability, DPS decided to acquire the entire business.

Minority investment is often used as a foothold to get your toes wet with an option to acquire the entire company later, depending on what makes the most sense for your business.

Private equity firms are increasingly acquiring minority interests in public companies in order to grow, according to the Wall Street Journal. The landscape for PE is changing. Firms are facing tough competition from strategic acquirers who have cash on their balance sheets and are typically willing to spend more on an acquisition. At the same time, fewer banks are lending to private equity firms because of regulations that restrict the amount of debt allowed in acquisitions, making funding leveraged buyouts difficult.

In this challenging environment, minority interest may prove to be a path to growth. For PE firms, acquiring small stakes in public companies can pave the way to a 100% acquisition.

There are a number of advantages to minority interest for financial and strategic buyers.

1. Save Money

You have the opportunity to pursue external growth with a company that may be too expensive or too big for you to acquire in its entirety. For PE firms that are struggling to find financing, acquiring minority stakes allows them to pursue acquisitions despite limited funding.

2. Spread Risk

If you, like most business leaders, have limited financial resources to invest in acquisition, you can acquire several minority interest to spread your risk, while remaining within your budget.

3. Retain Key Management

It’s unlikely that the entire management team will leave when you acquire a minority stake. These experienced team members may stay on and continue adding value to the company for years to come.

4. Open Doors

Minority interest allows you to pursue opportunities that may not be open to 100% acquisition. It would be much more difficult for a PE firm to outright acquire a publicly traded company than it is slowly acquire minority stakes. For strategic acquirers, there may be not-for-sale owners who are not interested in giving up their entire company, but may be open to selling a piece of it.

5. Execute Your Strategy

Minority investment can be used to eventually acquire a majority stake on even the entire company. It’s common to build in options for the buyer to acquire additional stakes as time passes. For example, Disney acquired a 33% stake in video streaming company BAMTech and has the option to acquire a majority stake in the future.

Photo Credit: Joan Campderrós-i-Canas via Flickr cc

 

Minority investments are a creative way to think about transactions, one that is often overlooked. When we create a transaction with a company, there is a spectrum of possible involvements—everything from an informal strategic alliance to a 100% acquisition. A minority investment is somewhere in between these extremes.

Typically consisting of a quarter to a third of the equity position of the company, minority investments can actually include any investment up to 49 percent. In other words, it’s anything less than a majority ownership of the business.

All too often, investors want to move straight into a majority ownership of an acquisition, because they are so anxious to have control. 80 percent is a standard threshold for two reasons. First, it allows you to consolidate financials, intercompany debt, and other financial matters. Second, you have the majority right to make decisions, which is especially helpful in choosing how the transaction is completed. Of course, you can also move in at a 100 percent equity position and have complete control.

It’s a common misconception that you cannot control a company with a minority stake. When using minority investment you can still control the business if you document your desired level of control in the agreement.

As Marcus Lemonis said in an interview on Squawkbox: “I always take control, but I did not buy 51 percent. Control doesn’t have to be 51 percent. I think people get confused by that.”

Those of who you have read my blog know I am a strong advocate of using minority investment to execute a strategic growth plan. Minority investments can be a very effective tool in your toolbox and can allow you to move forward on transactions that would otherwise be impossible to approach.

I hope that by reading this post, you’ll consider minority investment when weighing your growth options.

Read more on the advantages of minority investment:

On yesterday’s M&A Express videocast, The Hidden Power of Minority Ownership, I mentioned Marcus Lemonis, a businessman who turns around struggling businesses in the CNBC show, the Profit.

I’ve written about Lemonis before on the blog, and how he really prefers to use minority ownership so that the founders or original owners of the business continue to have a stake in it. A good operating agreement and dispute resolution are key to the rules of engagement of how you’re going to do business together – whether it be with a majority or a minority investment. In my blog post, I discuss this issue more in depth. Here’s the repost for those of you who may have missed it:

Why You Don’t Need a 51% Stake to Control a Business

“I always take control, but I did not buy 51 percent. Control doesn’t have to be 51 percent. I think people get confused by that.” Marcus Lemonis comments about minority investment on Squawkbox are spot-on.

When asked to elaborate, he explained, “I just document everything: full financial control, full operational control. I can have 10 percent [invested in a company]…and I’m still going to [run it]…”

When I speak with executives or owners about minority investment as an option, I usually hear the same pushback: We don’t want to do minority investment because we want to control the business. Well, as Lemonis’ comments demonstrate, control and minority investment are not mutually exclusive. You do not need a majority stake or 100 percent acquisition in order to have control.

Perhaps you do not have sufficient funding to acquire 100 percent of a company, or you would like to diversify your investments. You may still be able to use minority investment to achieve your strategic goals. Find out what parts of the business are important to your growth strategy and write them into your purchase agreement. Perhaps you need full control over one specific product line of the business. Make sure to document your desired level of control in the agreement.

Another idea is to build an option for purchasing further shares or a complete buyout into the agreement. You can even make this option contingent on specific performance conditions.

Minority investment is one of those pathways to growth that’s often overlooked. Don’t let this opportunity pass you by because you have misconceptions about “control.”

Check out Lemonis’ full interview on Squawkbox.

On September 23 we will be launching the second series of M&A Express. The new series will feature the following videocasts:

  • The Hidden Power of Minority Ownership
  • Cultural Due Diligence



We are also pleased to announce previous videocasts from our first series of M&A Express are now available online whenever you wish to watch them. Access practical, expert advice on growth through M&A in 20 minutes or less, with CEO and author David Braun. This new resource for middle-market company owners and executives is available at no cost.

Topics include:

  • Why You Need a Roadmap
  • Where to Start Your Search
  • When to Walk Away

About M&A Express

M&A Express is a high-impact program of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle-market companies.

M&A Express is free! Learn more and register on our website.

“I always take control, but I did not buy 51 percent. Control doesn’t have to be 51 percent. I think people get confused by that.” Marcus Lemonis comments about minority investment on Squawkbox are spot-on.

When asked to elaborate, he explained, “I just document everything: full financial control, full operational control. I can have 10 percent [invested in a company]…and I’m still going to [run it]…”

When I speak with executives or owners about minority investment as an option, I usually hear the same pushback: We don’t want to do minority investment because we want to control the business. Well, as Lemonis’ comments demonstrate, control and minority investment are not mutually exclusive. You do not need a majority stake or 100 percent acquisition in order to have control.

Perhaps you do not have sufficient funding to acquire 100 percent of a company, or you would like to diversify your investments. You may still be able to use minority investment to achieve your strategic goals. Find out what parts of the business are important to your growth strategy and write them into your purchase agreement. Perhaps you need full control over one specific product line of the business. Make sure to document your desired level of control in the agreement.

Another idea is to build an option for purchasing further shares or a complete buyout into the agreement. You can even make this option contingent on specific performance conditions.

Minority investment is one of those pathways to growth that’s often overlooked. Don’t let this opportunity pass you by because you have misconceptions about “control.”

Check out Lemonis’ full interview on Squawkbox.

Related posts:

Did you know about 97% of acquisitions are small to mid-sized companies? Acquisition is an effective tool that can be used by companies of any size, not just those in the Fortune 500. To see how, watch my interview with Matthew Lesko.

When we think of mergers and acquisitions, we often only think of mergers and acquisitions as large transactions, like Hewlett Packard’s purchase of Compaq in 2001. But the truth is M&A can be used to rapidly and effectively grow a company of any size.

Acquisition does not necessarily mean buying 100% of a company. Transactions can be structured in a number of different ways. For instance, you could acquire a majority or minority interest in a company or acquire the rights to a certain brand, product or intellectual property.

When pursuing acquisition, first think about your vision for the company.  The companies that do this well understand that M&A is not just about the transaction – the legal and financial aspects – but about the strategy.

Think about how you can make your company more valuable to your existing customers. If they want to buy related products or services, you can add value by becoming an aggregator, in effect a one-stop shop. Be the “easy button” for your customers.

For example, if you sell suits you can add value to your customers by selling ties, too. This doesn’t mean you need to acquire a tie-making company; you could simply acquire the rights to sell those ties under your name. This acquisition would allow your customers to buy all they need at one convenient place.

When thinking about growing your business, don’t be intimidated by the legal or financial side of mergers and acquisitions. Remember to first focus on your vision and on providing value to your customers.

During our last webinar, “A New Look at Due Diligence,” I fielded an intriguing question I’d like to share with you. I firmly believe that due diligence and integration fit hand-in-glove, so I was excited to receive this integration query.

Q: What are the differences, if any, in integration of a 100% acquisition and a 20-40% minority investment?

In a 100% acquisition, you need to consider which areas you will integrate and how that will take place. Integration is not a one-way street. You may change the seller’s practices to your own or your practices to the seller’s. You may even choose not to integrate some aspects of your business.

Think about branding, for example. Will the seller take on your brand name? Or maybe they have much stronger brand recognition in the marketplace and you will take on theirs.

The difference between 100% acquisition and minority investment is, of course, control. In a 100% acquisition you control all aspects of the company so you have a wide range of choice and can really integrate the two entities as little or as much as you wish.

For a minority investment, we have a different mindset. The focus is not so much “integration” as maximizing your influence on the evolution of the company you have bought into.  It is particularly important to think how you will manage the investment in order to achieve the outcomes you want, even though you don’t control the company.

There are two ways you can influence this outcome.

The first is to establish a well-written contract with the majority owner. If you have a minority interest, write a contract as if you had a strategic alliance – not an equity investment – with the company. This contract should make you feel confident your relationship with the majority owner and the direction of the company would be the same even no matter what your stake.

The second way is to use your equity position to influence the strategy and path of the acquired company. For example, as an equity owner, you may be able to influence the capital structure ─ the way the company gets lines of credit or financing.  Changing the balance sheet for the organization may significantly improve the way it performs in the desired marketplace

For minority owners the two key takeaways are: 1) Be confident in your relationship by establishing a contract, and  2) Increase the likelihood of success by influencing company strategy and integrating your capabilities.

Last week Google acquired a minority stake in consumer loan company Lending Club.  The exact amount Google invested was not disclosed, but it was part of a $125 million round of financing for the Lending Club.

Lending Club is an online company that uses technology to match borrowers with lenders. Since its inception in 2007, the company has facilitated $1.65 billion in personal loans.

So why did Google opt for a minority interest rather than an outright purchase?

I see minority interest as a chance for Google to invest in Lending Club without fully committing. With minority investment, Google doesn’t have to control or operate Lending Club and the company still adds value to Google.

David Lawee, Google’s Vice President of Corporate Development, will have an observer seat on the Lending Club board, giving Google a chance to observe and see if their application of technology is complimentary to Google’s overall strategy.

Minority interest may be a gateway to later acquisition.  Google has a long history of acquisitions, buying over 100 companies since 2001, many for their technology. According to Lawee, two-thirds of these acquisitions have been successful. Depending on what Google finds, the company could acquire Lending Club for its technology, easily exit from its investment or continue to hold a minority stake. Whatever Google learns from this investment is likely to make the company more powerful and strategically focused.

The story of minority investments is one that’s rarely told, but it can prove an excellent pathway to external growth. I encourage you to consider the option of minority interest acquisitions as you develop your company’s growth strategy.

 

Photo Credit: Håkan Dahlström via Compfight cc

Although I deal primarily with mergers and acquisitions, acquisition is simply one pathway to external growth and should be considered in a broader context. One of the pathways to external growth to consider is minority interest ownership.

Microsoft’s proposed buyout of Dell demonstrates many of the benefits of minority interest ownership, a surprisingly neglected tactic.

An instinctive objection arises when we 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: You can purchase a minority interest and exercise as much control as is 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.

Take a look at Microsoft’s potential buyout of Dell. Microsoft likely sees Dell as a key component to achieving its goals.  Dell has long been a supporter of Windows products and its success is an important part of Microsoft’s strategy to promote the use of Windows software, especially Windows 8. This deal, according to Yahoo Finance, would allow Microsoft software to power the majority of Dell devices and give Microsoft influence over Dell’s future strategy and use of Windows products.

There is another way you can indirectly, but powerfully, exercise control. Build into the agreement the option for purchasing further shares or a complete buyout, and make this option contingent on performance conditions that you set.

Walmart uses this strategy extensively. It will buy 30 percent of a manufacturer in China, for example, with an option to purchase the remaining 70 percent when the manufacturer has reached certain production targets. Walmart might stipulate some quite mundane but essential ingredients like getting the factories up to fire code. That way, Walmart doesn’t have to manage a difficult situation in an alien territory: It can step in and complete the purchase when the target has evolved to a ‘‘Walmart-friendly’’ condition.

Minority ownership is one tactic to growth that you should give special attention to—either as an end in itself or as part of a broader thrust for acquisition.

Photo Credit: Robert Scoble via Compfight cc

More and more I am seeing creative deal structuring in today’s M&A market.  This comes as little surprise.  The credit markets remain quiet; companies are not growing their way out of financial stress and smaller firms often finding themselves squeezed by larger companies who offer more products and better terms.

So what is a small to midsized business CEO to do?  One suggestion us to align yourself with companies where you do not share the same customer (no need to fight over scraps) and find companies that add value to your offering and aggregate the products and service for your customers.  In some cases we are advising our clients take minority positions in critical companies. In others, we advise acquiring a majority position and in others we are structuring subcontracting agreements.  There is no silver bullet, but the key is to have some weapons on your side that can differentiate you – particularly from your fretful competitors who are paralyzed.  Keep in mind I think you are going to have a lot more buying competition in 12 to 16 months.  Time is becoming of the essence.

Photo Credit: Barn Images

Recent news indicates that the federal government will “prop up” the major banks if they continue to falter.  This has some worried that these large financial institutions will be “nationalized”.  The government says that this is not the case:

The strong presumption of the Capital Assistance Program is that the banks should remain in private hands.

Simply put, the government is making a minority investment in these banks, and there is a question of how much control the government will have in these institutions.

controlSimilarly, when we suggest to our clients the possibility of a minority investment in a company instead of an outright acquisition, we sometimes receive push-back over the issue of control.  In fact, in two separate meetings over the past month, our clients’ expressed concern that they would “lack control” even though they would have a financial stake in the company.

A minority investment in and of itself does not mean that the majority shareholder has total control over the direction of the company.  In fact, you can own only 1% of the company and still put yourself in the driver’s seat to get the strategic relationship and benefits you want. The issue of control comes down to the way the minority investment (or any deal) is structured.

It is our philosophy to first find the right strategic prospect, win them over and then find a mutually beneficial solution to the deal structure to bring the two companies together.

Concern over control should not stop you from considering minority investment, or any particular form of external growth.