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

Reflecting the growth of ecommerce, shoe retailer DSW will acquire Ebuys, Inc., the company announced on February 17.  At $62 million, the acquisition may seem tiny compared to such newsmakers as Sysco’s $3.1 billion deal to acquire Brakes Group or IBM’s $2.6 billion deal to acquire Truven Health Analytics. But there are opportunities to learn from this transaction.

DSW, which stands for Discount Show Warehouse, has 469 stores in the U.S and Puerto Rico and is known for low pricing on brand-name shoes and accessories. Ebuys also sells shoes and accessories to North America, Europe Australia and Asia through the retail sites ShoeMetro and ApparelSave. DSW will use the acquisition to increase its online presence and expand abroad.

Although bigger deals draw greater attention, companies often use smaller, more targeted acquisitions to grow strategically. Especially in the middle market, the value of many deals isn’t disclosed and the deals may not even announced. Businesses often like to move stealthily and keep their strategic plans hidden from the competition.

Strategic Rationale

An analysis of this deal with our opportunity matrix shows that it is built upon distribution – selling the same products to new markets. With Ebuys, DSW will continue to sell shoes, footwear and accessories but find new customers internationally and online outside of their traditional retail space. Looking at trends in the retail space – and quite frankly in any space – the rise of technology is here to stay. Customers, especially millennials, use the internet increasingly to research and purchase products. Rather than risk becoming obsolete like brick-and-mortar bookstores driven out of business by Amazon, retailers such as DSW must adapt to changes in market demand and increase their ecommerce capabilities.

Opportunity for More

There is more to this deal, in that Ebuys has the opportunity to earn future payments. Also known as earnouts, these are commonly used in acquisitions as a means of bridging the valuation gap between buyers and sellers. Sellers naturally have high expectations for their businesses, often called hockey stick projections, that buyers might disagree with. With earnouts, the seller will receive a future payment once they hit certain milestones. In addition to the $62.5 billion DSW will pay today for its acquisition, if Ebuys achieves the financial goals set forth in the acquisition agreement, it will have the opportunity to earn more.

With future payments, buyers are in essence saying to sellers “We love your business and want to see you achieve your projections, so prove it to us. If you do, we’ll pay you more.” This way, if the seller’s positive projections turn out to be true, the seller will be rewarded, but the buyer doesn’t risk losing money on growth that never materializes.

Photo Credit: Mike Mozart via Flickr cc

The Affordable Care Act still is impacting the healthcare industry, affecting players of all sizes from doctors’ offices, hospitals and medical device companies to large pharmaceuticals.

Mergers and acquisitions in the healthcare sector have doubled over the same period in 2014. According to Reuters data through April 24, a wave of mergers produced $193.9 billion in announced deals as drug manufacturers looked to restock their pipelines with generic pharmaceuticals.

According to the KPMG 2015 M&A Outlook, 84 percent of executives surveyed expect the Affordable Care Act to drive “significant” activity in healthcare, pharmaceuticals, and life sciences.

In the middle market, dealmakers are also expecting healthcare to skyrocket over the next 12 months. Executives cited consumer confidence, uptick in actionable leads, and urgency to close deals before a potential rise in interest rates.

Despite the wave of activity, not all of the announced deals are being executed.  Mylan has strongly rejected Teva’s $40 billion takeover bid, while Perrigo has rejected Mylan’s increased takeover mid of $33 billion.

The excitement is not limited to M&A deal-making alone. Investors also see opportunities in the industry. According to Pitchbook data, venture capital invested in the healthcare industry rose from $8.6 billion in 2010 to $13.1 billion in 2014.

Will Healthcare M&A Affect Me?

The short answer is yes.

Whether your business is directly involved in the industry or serves an adjacent market, the current wave of transactions is transforming the healthcare sector. These changes present new opportunities and challenges. We’ve found some of our clients in this space are growing at astonishing rates while others have hit roadblocks as they navigate the new regulatory and political environment.

Regardless of your situation you cannot expect to go about business as usual. If you’re involved in this space, be aware of market moves and take a close look at your business’s strategic plan.

What Should You Do?

Remain proactive and seek out opportunities for growth – either organically or externally. When thinking about your strategic plan, here are some pointers:

  • Consider future demand – What will your customers want in one, two, and/or five years? How will you fulfill this need? You may anticipate a demand in the next five years and begin internally developing a new product or service. Or you may acquire a new technology to rapidly fulfill a need. Perhaps you will pursue both strategies.
  • Adapt to changing market dynamics – How will the regulatory changes and political developments affect you? Where are new opportunities and how can you take advantage of them? What new challenges do you now face and how will you overcome them?
  • Pay attention to M&A activity – Whether or not you plan to acquire you cannot afford to ignore what is happening in healthcare M&A. What effect will consolidation or other deals by competitors or suppliers have on your business? Are you prepared for these changes?
  • Move quickly! – Develop a strategic plan and be prepared to move swiftly to execute it. Don’t act impulsively, but don’t wait around too long or the opportunity may be gone.

While it is impossible to predict the exact effect of the Affordable Care Act and robust healthcare M&A on your business, you do have the ability to study your options and remain proactive. Now is an exciting time in the industry; there are many opportunities for growth. Pursue them!

Explore your options for growth with the following tool. Download your free copy of the tool today. 

Finding Opportunities for Growth: The Opportunity Matrix

 

 Photo Credit: Commander, U.S. 7th Fleet via Flickr cc

 

John Dearing, Capstone Managing Director, was asked to write an op-ed for the Credit Union Times about the ways that credit unions can find additional sources of non-interest income. I’ve included part of John’s article below:

Every industry faces change and the credit union industry is no different. Market developments and new regulations are challenging credit unions to find new sources of non-interest income in order to grow.

While it can be difficult to thrive or even survive in an unstable environment, change also brings opportunity. One option for credit unions is using strategic mergers and acquisitions.

I invite you to continue reading the article the Credit Union Times’s focus report on non-interest income: Using Strategic Mergers and Acquisitions to Adapt.

Entrepreneurs rarely face the challenge of having too few ideas. In fact, like most entrepreneurs and business leaders you probably have a multitude of great ideas for growing your own business.

Your biggest challenge may be figuring out which of all the alternatives is the best way to get from where you are now to where you want to be.

We recommend using a systematic process to sort through all your ideas and create an action plan. Here are some steps in that process:

1. Think about your vision.

Where do you want your company to be in a year and in ten years?  All your initiatives should help you move toward this goal. If an idea isn’t helping you achieve your vision, then maybe you shouldn’t spend time on it.

2. Prioritize your ideas.

While all your ideas may seem wonderful, upon closer inspection you’ll likely find that some are more worthwhile than others. For example, if you envision taking your business national in the next five years, you may rate ideas that help expand your geographical presence more highly than those that do not. Use tools such as the Opportunity Matrix or Weighted Criteria or even a simple pro-con list to help you objectively sort through the possibilities and organize your thoughts. These tools will also give you the confidence that you are selecting the best and most important ideas for growing your business.

3. Get focused.

Without clear focus it’s difficult to move forward. If you’re all over the map, you won’t apply the time and resources needed to grow. Rather than diluting your efforts develop a plan focused on one goal and concentrate mostly on that. You can always modify your plan as time passes and your goals change.

4. Execute your plan.

As Nike puts it, “Just do it!” There comes a time when you need to move from thought to action. If you’ve done the upfront work on planning your growth strategy, don’t be afraid to pull the trigger.

By following these steps you’ll identify the ideas that will help you create a pathway for growth.

The following question was asked during our most recent webinar, “Discovering Markets.”

Q: How do you choose which quadrant of the opportunity matrix to focus on?

A: When beginning to plan for external growth, you may be blown away by the sheer number of possibilities and options. As exciting as they may appear, you’ll have to pare them down to create an actionable plan for business growth.

Choosing where to focus your external growth efforts begins internally. First, look at where your business is today and ask yourself: Where do you want it to be? Where do you see opportunity? Where do you excel and where do you struggle? Use data and criteria to evaluate how you are positioned and your capabilities.

For example, if you find your business is not reaching a high-growth market, consider acquiring a company in that market. If you find that a lack of technology prevents you from creating a product your customers want, you’ll likely be interested in acquiring a company with that technological capability. Two recent deals illustrate my point: Japan’s Suntory acquired Jim Beam for access to the U.S. market and GE acquired API Healthcare for its software to improve staffing efficiencies in hospitals.

Also consider your risk profile. Each quadrant inherently carries different levels of risk, listed here from least risky to most risky: (1) Consolidation, (2) Distribution, (3) Breadth, and (4) Diversification. Businesses can succeed in any of the quadrants; it’s all about your own level of comfort.

After your internal analysis, to further flesh out your ideas, your acquisition team should envision what your company would look like if you were to pursue each of the four paths. Would you still be aligned with your passion and your business plan? This will help you make an educated decision about your growth and create a strategic and executable plan for the future.

It’s no secret, especially in Washington, that sequestration has hurt many businesses in the defense industry.

A high-level defense official reported that military-related M&A deals have stalled due to the uncertainty. Brett Lambert, Deputy Assistant Secretary of Defense for Manufacturing and Industrial Policy, said banks are unwilling to lend to smaller defense firms over doubts such companies will remain in business, and be able to pay off their debt.

Their concern is warranted. Smaller firms are less able to recover from the loss of a contract than larger companies that can spread the costs and leverage economies of scale. Unfortunately, most defense cuts will be smaller contractors as opposed to large weapon programs, says Frank Kendall, the U.S. Undersecretary of Defense for Acquisitions Technology and Logistics. In addition, many small firms are research and development driven, and with cuts to the R&D budget the military will be unable to fund their research or buy their innovative products.

In any business, there are circumstances that are beyond your control. Changes in demand, competitors, disruptive technologies, new regulations and market conditions are a few of the factors that can affect your success.

For those in the defense industry, sequestration is an unforeseen circumstance that would have been difficult to predict before the financial crisis.

So what can you do if you find yourself in this situation? How can you thrive when markets are saturated and demand has decreased?

The key is to remain proactive and seek out opportunities for growth. At my firm, we often use the Opportunity Matrix to focus on future demand and evaluate the best options for growth. Future demand, after all, is key to company success.

The Opportunity Matrix can be used to find the optimum market where future demand will be the strongest. The grid (pictured below) allows you to assess both existing and future demand.

The Opportunity Matrix

Capstone often uses the Opportunity Matrix to focus on future demand and evaluate the best options for growth.

In light of sequestration and the expected cutbacks across the industry, many are choosing to leave the defense industry. A firm faced with declining revenues might choose “Distribution,” bringing products or services to new markets.

The most obvious choice for many is to expand to new geographic markets, and in fact firms are going overseas to sell to other governments. The Virginia Economic Development Partnership has even put together a “Going Global” Defense Initiative to help Virginia defense firms get a foothold overseas.

Another equally valuable, but less obvious opportunity is expansion to new vertical markets. By this I mean marketing your existing products in a new industry. Can your defense products be used in another industry such as oil and gas, construction or healthcare?

While you can’t always control external factors, you do have the ability to study your options. By being proactive instead of reactive, you open the door to growth, regardless of your circumstances.

Feature Photo Credit: Glyn Lowe Photoworks, 1 Million Views, Thanks via Compfight cc

The key to growth is future demand. Any acquisition you consider needs to take this factor into account. There are multiple ways to look at demand, and it’s essential to know which one is most appropriate for your company.  I use a simple but powerful tool I call the Opportunity Matrix. It’s a way of understanding where you want to position your company strategically, looking forward.

The opportunity matrix is a two-by-two grid: The vertical axis is for products and services, while the horizontal axis is for markets and customers. The grid enables you to assess both existing and future demand.

There are four quadrants in the opportunity matrix:

1.  Consolidation: selling more of the same products to the same market
2.  Distribution: selling the same products to new markets:
3.  Breadth: selling new products to your existing market
4.  Diversification: selling new products to new markets

Today I want to focus on the third quadrant, breadth, bringing new products and services to customers in the markets you are already serving.

Let’s take an example of how an acquisition can support this choice. Look at Dropbox’s recent acquisition of Orchestra, the maker of Mailbox.

Dropbox

Dropbox, as you may know is used for sharing large files and Mailbox is an email app that’s garnered rave reviews since its release in February.  Mailbox brings a complementary and unique technology that will serve Dropbox’s customer base.

Mailbox already has $5.3 million in venture capital behind it and Dropbox has also grown quickly, expanding from 100 employees last year to 250 employees this year. Through this acquisition, both companies will be able to go to the next level, by expanding the product offerings to their respective customer bases.

This is an alliance to watch. Check back in six months to a year and see what has happened. My expectation is we will see significant overall growth.

Update: Dropbox has partnered with Yahoo! Mail to make it easier to send and receive attachments. For Dropbox, this strategic partnership focuses on distribution, bringing new customers to Dropbox’s existing services.

*This post was adapted from David Braun’s Successful Acquisition, available at Amazon.com