In this article I want to start a discussion about how buyers operate and what makes a good acquisition strategy. I want to show the difference between buyers that have well thought plans and others that act more ad-hoc. The difference between possible behaviours of strategic buyers will be described in this article. I am referring to strategic buyers that look for a growth strategy via acquisitions. Private equity players’ acquisition strategies are not considered in this article.
I am very interested to hear your thoughts and opinions on a good acquisition strategy. What should buyers do in-house and what should be outsourced, how much preparation should be done, etc. What do you see as important items to differentiate a good acquisition strategy from a bad one?
An important item for a buyer is to have a clear strategy before the start of an acquisition. There is a large difference between how buyers approach an acquisition strategy. I have worked for buyers who worked very detailed. We first mapped out the full spectrum of acquisition targets in detail. After this we analysed each target in detail with a 25 pages long presentation. This presentation of a possible acquisition target included a description of the possible synergies and an allocation of a financial impact to each synergy. We even made an overview of interlopers, which are the possible competitors for an acquisition of each target. On the other end of the spectrum I also worked for a CEO/owner who gave only some concise indication on his criteria for possible targets. We also see buyers that ask us to provide any type of company open for a sale to them. They don’t pay a fixed amount and give us little insight in their acquisition strategy. In such a case it is important for a buyer to show advisors that they are serious about acquisitions elsewise an external advisor will focus often on other clients.Personally I think it is very important that the strategy is clear, fully approved and known to all the people involved in the acquisition process. In one case we were approached by a buyer and 9 months later they had still not communicated their final acquisition strategy to us, but meanwhile we were dragged into a large number of discussions and conversations with limited value add for everybody involved. It then turned out that different ideas about the acquisition strategy existed within the top management of the buyer. Needless to say it would have been better if a clear and agreed strategy was made up first before going out for acquisitions.I am very much interested in your opinion and the experiences you have with buyers doing various acquisitions. What do you see in your daily practice in regards to different acquisition strategies of buyers? What is crucial in your opinion when one wants to have a good acquisition strategy? Please reply and give your opinion below the article.
Is it wise to use advisors in the search for acquisition targets?It is important to have a good idea of all target companies available in the market. It is also a good idea to map out some possible targets and describe for each target how well it fits in the acquisition strategy. This description of company profiles helps in testing the acquisition strategy and fit of the targets. The experience gathered can contribute again to improve the acquisition strategy.Often buyers don’t know the market where they want to do an acquisition as it is mostly a new country or territory. Confidentiality or reputation in the market can also be a reason for buyers to use advisors in the search. In most cases the advisors guide the process and reach out to potential acquisition targets.
When a target is open for an acquisition it is important that all required data becomes available. If there is an exclusive sell side process the advisor of the company for sale normally has made an Information Memorandum that contains a large part of the required data. Further questions can be answered via the advisor of the seller (or the data room available later in the process). As a buyer you have to ask yourself if you want to participate in companies that are actively for sale via an advisor. These companies are normally sold via auctions where many buyers are invited. Hence, the chances of success are lower and the final price to be paid will be high compared to other deals in the market.In order to gather data it is important that you have resources available. These can be own resources if you have a large internal M&A team. It can also be external resources, M&A advisors, that know the local markets well. Most companies don’t have a large in-house M&A team as acquisitions are often projects that come up only occasionally. We also see that people from the buyer (CEO, CFO, BD) are often fairly busy as they also have their normal job to do next to the acquisition process. In practice we see that even the companies that do acquisitions on a regular basis use external resources to help in the process.
Based on all the information received it is important to determine a value to be put on the company. This valuation will be transferred into a proposal for a buying price (non binding offer). Normally larger companies have a detailed budget and plan numbers available. The buyer of course has to make up it’s own opinion on the forecasted numbers and determine what they think is a realistic forecast. A buyer will also look at the possible synergies and will include these in it’s financial forecast. Further, it is important to get a feel for what the competition is offering and what the price expectation of the seller are. Based on all this the buyer can propose an offering price. This is normally done in a non-binding offer.It might be obvious but talking to the right sellers is crucial. Understanding the playing field and which companies are out there for sale is important. We always suggest buyers to free up some funds in the beginning and make a complete overview of the market and the available companies. This market scan helps in seeing different targets and understanding the differences between them. The upfront investment will be earned back in a later stage as the better suited targets will be identified.
Once all the data has been gathered the team of the buyer normally makes a presentation for the board to get approval for the acquisition. This includes filling out a financial model to see if the internal financial requirements (ROI, ROE, payback period, etc) are met. Here assumptions for the future growth of the target company are included. These growth assumptions are determined by the acquisition team of the buyer. It is important that all this is done in an efficient way and the case to the board is presented well and approved in the first run.
Some sellers don’t only care about receiving the highest sales price. There are other criteria that are important for them. Some owners care very much about the personnel and the future of the employees. Some want to see their company continue to being run as a stand-alone entity or have the brand name continue. Others are interested in synergies that can be exploited together. In any case sellers have different wishes or items they care about. As a buyer it is always important to listen well to a seller and show your value add in the areas that are important for an owner. We have seen many cases where the personal relationship was important and the main factor that decided who became the final owner.
All buyers do their own due diligence as well as assigning parts of the DD process to external parties. For the financial due diligence almost always an external due diligence party is being hired. A financial due diligence report may often be required for bank financing. Further, it is a legal obligation of a buyer to do a diligent investigation into the buyer’s activity. For operational due diligence internal resources can be used, but often it is wise to use local industry experts that have deep knowledge in the country or industry of reference. Further details on the Due Diligence process can be found in the CFIE section about Due Diligence.
Spending a lot of time upfront helps in being ready for the integration when the time is there. A clear integration plan is required as many acquisitions fail. We see buyers that have a large team available and others that come less prepared. We have written further articles on this that you can find in the CFIE integration section so here I leave this pretty concise. Of course the integration is a major and very important part of an acquisition and it needs to be planned in detail in advance.
All together there is a lot of different ways in which one can do an acquisition. For each part of the project you have to determine the most optimal approach. What works best can depend on the structure of an industry, the experience of a buyer, it’s internal resources available etc.
Please provide your feedback and opinion on this topic. How do you see buyers operate in the area of acquisitions?What do you consider as good acquisition strategies and what are important tips or suggestions you want to give to buyers?
Paolo Pellgrini | Monday 21 December 2015 | website: www.digital360.it/p4i
To use advisors in the search for acquisition targets can be good, but can be also essential in some sectors. For example, my company supports deal in ICT market, that is full of capabilities but also very fragmented. So, a vertical advisor is really important to know of all target companies available in the market. Our knowledge is also essential to understand the right target to start a good strategical singergy.
Chris Elliott | Monday 21 December 2015 | website: www.anderson-shaw.co.uk
A fundamental question to answer is whether an acquirer is satisfied just approaching on market opportunities or whether they wish to increase the pool of availability by approaching off-market targets. In either case we would (of course!) advocate using advisers - the vast majority of the fees will be success related and should be more than offset by the ability of the adviser to improve the pool of available targets and negotiate on behalf of the buyer during the process. If helpful, our approach to acquisition work is elaborated here: http://www.anderson-shaw.co.uk/acquiring
Peter Zink Secher | Tuesday 5 January 2016 | website: www.businessmodelsinc.com
That's a great article Govert - well done! I very much agree with everything but in my mind the single most important issue is your first point "Clear strategy and acquisition criteria". WHY? - conventional wisdom has it that at least 50% of all corporate M&A activity is a failure - at least when measured against the inaugural promises of the deal. Companies need to reduce this alarmingly high M&A failure rate and CEO's should do more homework. "Acquisition Strategy" easily becomes not-so-easy but breaking your takeover decisions into smaller building blocks (Businessmodeldriven M&A) makes step one much more transparent and easy to get everyone involved particularly the people in your organisation who will actually own the new business (they also need to promise and sign up for all synergies). Sometimes the best M&A deals are the ones you don't do huh? Make sure you understand every aspect of the deal by breaking it up into 9 simple building blocks and finally lower M&A failure rate
Winfried Weigel | Tuesday 5 January 2016 | website: www.weigelcf.com
External growth is one of the most important strategic decisions for a company, and it could be successful for the company but detrimental for the shareholder value: the target must be right, the valuation must be right and the integration should be perfect. That`s all. Integration start with initial due diligence, target selection is based on clear investment objectives and a clear international roll-out strategy and valuation should be straight forward based on the other two tasks. You need to have the right people for that, internal or external does not matter. Compromising on that point is expensive.
Marios Argyris | Tuesday 8 March 2016 | website: www.dealmasters.co
Excellent points made by all colleagues above - and I agree with all, it is clear that we have very similar experiences with buyers, regardless of the country of origin or sector. One common thread, is that the M&A Advisor, almost always has to educate his client on how the M&A process should be approached. It is our policy that we will not take on a client on the buy-side, unless we are convinced that they understand and fully endorse a systematic & structured approach. If not, then it means that we have a case of shopping around:they want to see what deals are on offer and then make up their mind! Of course we will send them teasers of deals currently on offer, but will not spend time on their case and definitely will not act pro-actively to source off-market deals - which are often the best deals. There is a rather humorous article we wrote for our Newsletter about the "buffet Vs a-la-carte" approach, which can be viewed at this link. http://www.dealmasters.co/downloads/War_Stories.pdf